Callaway Golf Company increased the company’s full-year guidance after reporting first-quarter earnings more than doubled on a 36 percent revenue gain.
In the first quarter of 2018, as compared to the same period in 2017, the company’s net sales increased $94 million (31 percent) to $403 million, and earnings per share increased $0.38 to $0.65. These record financial results were driven by increased sales in all operating segments, all major product categories and all major regions.
For the first quarter of 2018, compared to the first quarter of 2017, net sales increased as follows:
As a result of this better-than-expected first quarter, the company increased full year 2018 sales guidance to $1,170 million-$1,185 million as compared to prior guidance of $1,115 million-$1,135 million. The company also increased full year 2018 GAAP earnings per share guidance to $0.77-$0.82 compared to prior guidance of $0.64-$0.70.
“It has been a strong start to 2018,” commented Chip Brewer, president and chief executive officer of Callaway Golf. “Sales across our entire product line, including the Rogue line of woods and irons, as well as the new Chrome Soft golf balls, are off to a strong start, and we also benefitted from improved foreign exchange rates and market conditions. As a result, our EBITDA increased 95 percent during the first quarter. Business around the globe remains strong, with all major regions reporting significant sales growth, and our new businesses are performing at or above plan. While I am mindful that the first quarter generally represents the initial sell-in for the new golf season, I am pleased overall with how our business is performing and am cautiously optimistic for the balance of the year.”
Summary of First Quarter 2018 Financial Results
The company announced the following GAAP and non-GAAP financial results for the first quarter of 2018 (in millions, except EPS):
For the first quarter of 2018, the company’s net sales increased $94 million (31 percent) to $403 million, compared to $309 million for the same period in 2017. Net sales increased in all operating segments, in all regions and across all major product categories. The increase in net sales is attributable to the strength of the company’s 2018 product line and continued brand momentum, to an $11 million favorable impact resulting from changes in foreign currency rates, an increase in product launches during the first quarter of 2018 versus 2017 and improved market conditions. In addition, first quarter net sales of gear and accessories increased significantly as a result of the company’s acquisition of TravisMathew in the third quarter of 2017.
For the first quarter of 2018, the company’s gross margin increased 190 basis points to 49.7 percent compared to 47.8 percent for the first quarter of 2017. This increase reflects an overall increase in average selling prices, the addition of the TravisMathew business, which is accretive to gross margins and the net favorable impact of changes in foreign currency rates.
Operating expenses increased $10 million to $114 million in the first quarter of 2018 compared to $104 million for the same period in 2017. This increase is primarily due to the addition in 2018 of operating expenses from the TravisMathew business as well as some variable expenses associated with higher core business net sales.
First quarter 2018 earnings per share increased $0.38 (141 percent) to $0.65, which is a record first quarter for the company, compared to $0.27 for the first quarter of 2017. On a non-GAAP basis, 2017 first quarter earnings per share was $0.30, which excludes $0.03 per share related to the impact of the non-recurring OGIO transaction and transition expenses. The increased earnings in 2018 reflect the increased sales in the core business, the addition of the TravisMathew business, improved gross margins and a lower tax rate due to the tax reform in 2017.
Business Outlook for 2018
Basis for 2017 Non-GAAP Results. In order to make the 2018 guidance more comparable to 2017, as discussed above, the company has presented 2017 results on a non-GAAP basis by excluding from 2017 the non-recurring expenses related to the OGIO and TravisMathew acquisitions ($0.07 per share for the full year and $0.01 for the second quarter). Furthermore, the company excluded from full year 2017 earnings per share certain non-cash, non-recurring tax adjustments ($0.04 per share).
Full Year 2018
Given the company’s financial performance during the first quarter of 2018, the company is increasing its full year 2018 financial guidance as follows:
The company’s revised 2018 net sales estimate of $1,170 million-$1,185 million represents an increase of $50-55 million over its prior estimate. This would result in net sales growth of 12 percent-13 percent in 2018 compared to 2017. The estimated incremental sales growth versus previous estimates is expected to be driven by further increases in the core business (currently estimated at 4-6 percent full year sales growth compared to 2017, on a currency neutral basis), foreign currency exchange rate impacts and increases in the TravisMathew business. The increases in core business are expected to be driven by the Rogue line of woods and irons; the new Chrome Soft golf balls, including continued success of the Truvis golf balls and healthier market conditions. In addition, the company is currently estimating that year-over-year changes in foreign currency exchange rates will have a more positive impact than originally estimated. As a result of an overall strengthening of foreign currencies during the first quarter, the company currently estimates that changes in foreign currency rates will positively impact 2018 full year net sales by approximately $19 million.
The company currently estimates that 2018 gross margin will improve 50 basis points from the prior estimate. This increase is expected to be driven by foreign currency exchange and the increase in the core business sales.
The company estimates that 2018 operating expenses will increase $18 million compared to prior estimates. This increase in operating expenses reflects increased variable costs related to higher sales and performance, the impact of changes in foreign currency exchange rates and targeted investments in the core business.
The company increased GAAP earnings per share guidance to $0.77-$0.82, primarily due to the projected increase in net sales, an overall strengthening of foreign currencies, improved gross margins and a lower estimated tax rate. The company’s 2018 earnings per share estimates currently assume a tax rate of approximately 23 percent and a base of 97 million shares.
The cadence of the company’s golf equipment launches in 2018 is skewed toward the first half of the year compared to 2017. As a result, all of the company’s projected sales and earnings growth for 2018 is expected to occur during the first half of the year. Consistent with the company’s expectations at the start of the year, the second half of the year is planned to decrease compared to the same period in 2017. The company’s full year guidance includes this projected second half decrease.
Second Quarter 2018
The company currently estimates the following results for the second quarter of 2018 compared to 2017 non-GAAP results:
The company expects sales growth of 20 percent-23 percent in the second quarter of 2018 compared to the same period in 2017. This projected sales growth reflects anticipated growth in the core business, the addition of the TravisMathew business and an overall strengthening of foreign currencies. Changes in foreign currency exchange rates are estimated to positively impact net sales by approximately $5 million in the second quarter of 2018 compared to the same period in 2017.
The company’s GAAP earnings per share for the second quarter of 2018 are estimated to increase to $0.44-$0.48 compared to $0.34 of non-GAAP earnings per share for the second quarter of 2017. GAAP earnings per share for the second quarter of 2017 were $0.33. This projected increase is due to higher core business sales, the impact of the TravisMathew business and favorable foreign currency exchange rates. The company’s 2018 second quarter earnings per share estimates assume approximately 97 million shares, which is consistent with the second quarter of 2017.
Photo courtesy Callaway Golf
