Callaway Golf finished a strong 2007 with a rather lackluster fourth quarter as net sales decreased and the quarterly loss widened considerably. However, the soft quarterly results came in the company’s smallest and slowest quarter, which allowed ELY to still see double-digit gains in annual sales and triple-digit growth on the bottom line.

For the fourth quarter, net sales totaled $174.4 million, decreasing 3.0% from $179.9 million for the same period last year. Domestic sales decreased 11.2% to $85.1 million in the quarter from $95.8 million last year. International sales, however, increased 6.2% to $89.4 million from $84.1 million in the year-ago quarter. Sales in Europe decreased 0.8% to $26.1 million, but were more than offset by gains in every other region. Sales to Japan grew 4.0% to $23.2 million from $22.3 million as that consumer base begins to buy in anticipation of the new driver rule in 2008. Sales to the rest of Asia jumped 16.2% in the quarter to $17.3 million, while Other International sales grew 10.5% to $23.0 million.


The company said it feels that it has increased its market share in both the European and Japanese markets. The strong growth in the rest of Asia was driven by China where the company has expanded its distribution base from just a couple of cities that were serviced by a distributor network to 25 different cities to-date. The company has seen its distribution grow from approximately 20 outlets to over a couple of hundred outlets today.


On a conference call with analysts, Callaway president and CEO, George Fellows, disclosed that foreign exchange rates benefited sales for both the fourth quarter and full year. FX Rates boosted Q4 sales by approximately $5 million and boosted annual sales by approximately $22 million. Without the benefit of the weakened dollar, sales would have decreased 5.8% for the quarter and grown 8.3% for the year.


For the quarter, Callaway saw sales decreases in woods and golf balls offset increases in irons, putters and accessories. Sales of woods decreased 17.9% to $32.3 million from $39.3 million in the year-ago quarter as the company shifts its product introductions away from the fourth quarter. Irons sales increased 1.2% for the fourth quarter to $45.8 million driven mainly by the X20 irons line; putters sales increased 16.9% to $20.5 million; and accessories sales jumped 24.9% to $38.1 million as the company continues to benefit from bringing its footwear business in-house. Golf ball sales dropped 20.2% to $37.7 million from $30.5 million for Q4 last year.


For the club business as a whole, sales increased 3.1% to $136.7 million, but not enough to offset the double-digit decline in ball sales. The net operating loss for both clubs and balls widened for the quarter, to a loss of $4.1 million for clubs and a loss of $7.7 million for balls. Operating income for the club business for the full year increased 49.0% to $151.8 million, while the balls segment switched to an operating income of $902,000 from a $6.4 million operating loss for 2006.


Gross profit for the fourth quarter of 2007 was 36% of net sales compared to $33% of net sales for the fourth quarter of 2006.  Callaway said the increase was primarily the result of gross margin improvement initiatives announced in 2006, as well as an increased mix of higher margin drivers and X-20 irons.


Callaway saw its net loss for the period widen considerably to $16.2 million, or a loss of 25 cents per diluted share, compared to a net loss of $10.2 million, or 15 cents per diluted share, in the fourth quarter last year.


The 2007 Q4 loss per share included an after-tax charge of a penny related to gross margin improvement initiatives announced in November 2006. The fourth quarter of 2006 also included after-tax charges of a penny for gross margin improvement initiatives and a penny for the restructuring charges announced in 2005. Excluding these charges, the company’s pro forma loss per share for the fourth quarter of 2007 would have been 24 cents, as compared to pro forma loss per share of 13 cents in the prior year period.


The company estimates that its full year 2008 net sales will be in the range of $1.15 billion to $1.17 billion. The company also estimates that its 2008 full year pro forma fully diluted earnings per share will be in the range of $1.08 to $1.18, which represents an estimated increase of 21% to 33% as compared to the company’s pro forma fully diluted earnings per share in 2007 of 89 cents. Estimated pro forma earnings for 2008 exclude estimated charges of approximately 8 cents per share related to the company’s gross margin initiatives.