Callaway Golf got off to a disappointing start in the first quarter of 2009, as revenues fell 25.8% and net income plummeted 82.8% compared to the first quarter last year. The company attributed the drop in sales to the widespread global economic downturn that accelerated from the fourth quarter of '08 into the first quarter of '09, resulting in reductions in retail traffic of greater magnitude than anticipated.
But management said the declines were not only a reflection of a reduction in traffic at retail, but also reluctance on the part of many retailers to load in normal inventory levels prior to the opening of the golf season. Also impacting the quarterly results were the negative effects of a stronger dollar, which accounted for approximately $22 million of the year-over-year variance.
Regionally, U.S. net sales were $141.3 million, a 23.4% decrease from $184.0 million in sales in Q1 2008, while International net sales were $130.6 million, a 28.3% decrease from net sales of $182.1 million in the year-ago quarter.
Gross margins decreased 520 basis points to 42.7% of sales in the first quarter, compared to 47.9% of net sales for the comp period in 2008. The company said gross profit was adversely affected by the first quarter decrease in sales volume, overall lower average selling prices, and by changes in foreign currency rates. Slipping margins were partially offset by the benefits from the companys gross margin initiatives.
Operating expenses for the quarter were $102.7 million, or 37.7% of net sales, compared to $110.5 million, or 30.2% of net sales, for the first quarter of 2008. The $8.1 million decrease in operating expenses was attributed primarily to a decrease in employee compensation costs as well as changes in foreign currency exchange rates. This was partially offset by incremental spending associated with the uPlay acquisition made at the end of 2008 along with new market support in Asia and incremental Tour expense.
By product segment, Wood sales for the quarter were $79.9 million, compared to $116.6 million in 2008. In addition to the poor economic climate, the drop was also due to lower volumes and lower average selling prices as consumers continued to shift to lower price point products. Competitive pricing in the marketplace also played a large part in the drop.
Accessory sales were $51.8 million for the quarter compared to sales last year of $60.4 million. This decrease was driven primarily by a reduction in package club sets, lower golf bag and footwear sales, and was offset partially by incremental sales associated with the uPLay acquisition. Putter sales were $27.7 million compared to $35.6 million in sales last year, due primarily to fewer putter models launched during this year and a shift in product mix from higher priced models last year to lower priced models such as this year's Crimson Series putters.
“We are clearly disappointed in the manner in which the year has started,” stated George Fellows, President and CEO at Callaway Golf. “However, we firmly believe that the golf industry will recover as the economy recovers. Rather than approach the balance of the year from a purely defensive posture, we not only will continue to aggressively manage costs and focus on liquidity. But, we will also concentrate on positioning Callaway to emerge this trying period in a stronger position when the industry does recover. In this regard, we will continue to invest in additional gross margin initiatives to further improve our cost structure, as well as spend behind the strength of our 2009 product lineup in order to continue to gain market share.”
Net inventories as a percent sales increased to 25.6% for Q1 compared to 22.9% for the same period last year. ELY said the metric was higher than they had anticipated coming into the year, but reasonable given the decline in sales and the lead times necessary to support a typical year's shipping seasonality. Management noted that they expect to be back in the low 20% range by the end of the year.
Regarding outlook, the company expects industry-wide sales to decrease by approximately 15% to 20% compared to 2008, assuming reasonable retail inventory levels as the year progresses. Based on recent market share gains, Callaway expects annual sales will decrease at a rate less than the industry. ELY estimates full-year gross margins as a percentage of net sales to be in the range of 40% to 42%, due to the lingering effects of economic and foreign currency headwinds combined with product mix and pricing trends.
Operating expenses are estimated to decrease to a range of $375 million to $390 million, as the benefit of cost reduction actions begin to take effect, including moves related to the recent 10% cut in the company's worldwide positions.
