Bidding adieu to a 2009 that management said was “without a doubt the most challenging 2024 in recent history,” Callaway Golf Company said it was looking forward to a capitalizing on a much brighter outlook for 2010.


 

“The actions we took in 2009 to manage those difficult conditions not only allowed us to weather 2009, but also put us in a good position to take advantage of what we expect will be improving economic and market conditions in 2010,” explained president and CEO George Fellow in a conference call with analysts.

 

Fellows added that positive customer and media feedback on 2010 product, along with conservative inventory at retail, improving economic and foreign currency trends and decreasing promotional activity in the marketplace, would help Callaway put behind it a year that was especially tough for the highly-elastic golf market. Fellows maintained that the company’s Asia and South Pacific business was “clearly on the upswing” and that pre-booking of Callaway’s new products are in-line with expectations. Likewise, Fellows admitted that although the company doesn’t believe inventories will return to pre-recession levels, overall retail inventories are in “very healthy shape” and some build-back of major brands could occur in 2010.

 

In reaction to a fiscal 2009 that saw sales fall 15.0% and a net loss of $20.9 million, compared to a net profit of $66.2 million in 2008, management cited several key factors that hindered results for 2009.
Most notably, management said a stronger U.S. dollar had negatively impacted currency translation of the company’s international businesses while retailers had contracted inventory orders in light of a struggling global economy. The weak economy also dampened consumer demand for golf products, resulting in a highly-promotional retail environment that sank margins even more. Lastly, management said retailers reacted to a tough environment by reducing the amount of inventory they purchased compared to prior years.

 

Despite rosy forecasts for 2010, the company ended a dreadful 2009 with a fourth quarter that exceeded most analysts forecasts, but saw net losses widen nearly five-fold on various charges associated with the company’s gross margin initiatives and energy derivative gain.  The pro forma net loss for the quarter was $17 million, or 27 cents per share, as compared with a pro forma net loss of $15 million, or 24 cents per share, in the year-ago period. Excluded from the 2009 results were charges associated with gross margin initiatives of 2 cents per share. Excluded from the 2008 results were a charge of 3 cents per share for the gross margin initiatives, and a benefit of 22 cents per share related to an energy supply contract.

 

Consolidated sales for the quarter were $185.9 million, up 8.5% from sales of $171.2 million in the year-ago period. On a currency-neutral basis, sales grew 3% for the quarter.  Regionally, U.S. sales slipped 14.0% to $76.5 million from $89.0 million a year ago. International revenues grew 32.9% to $109.4 million from $82.3 million a year ago. Management said full year revenues were impacted by the “translation effect” of the strengthening U.S. dollar and a weak global economy.  On a currency-neutral basis, international sales were down 9% for the year.

 

By product category, Woods and Accessories and Putters exhibited growth of 2%, 9%, and 109%, respectively, while Irons and Golf Balls declined 2% and 18%, respectively. On a quarter-by-quarter basis, sales by product category showed marked improvement following a third quarter that saw all but Woods post a loss.

 

For 2010, the company expects full year net sales to range from $990 million to $1.05 billion, or growth of 4% to 10% versus 2009. Management said they took several factors into consideration when developing the estimate, including foreign currency rates that are expected to improve and favorable comparisons of spot rates from low-single digits to mid-teen percentages. The company also cited a report by the International Monetary Fund, which indicated recently that China, India and other emerging Asia economies are leading the global recovery and returning to pre-crisis growth levels. The company also said its 2010 product line has seen a favorable reception by trade publications and customers.

 

Finally, the company expects its new apparel arrangement with Perry Ellis to boost results while the recently acquired uPlay product should help sales in India and Southeast Asia.


Gross margins for the year are expected to improve from 42% to 44%, driven by less discounting, the favorable impact of a weaker dollar, improved manufacturing leverage from higher volumes and continued savings from margin initiatives.