Callaway Golf Posts Q2 Loss; Announces Restructuring Plan and Job Cuts

 

In a conference call with analysts, interim CEO Tony Thornley said the restructuring plan resulted in a significant reduction in personnel that affected all levels of the company and many people who had long service with Callaway.

 

In conjunction with its quarterly financial report, Callaway management announced the elimination of about seven percent of global positions. Management said the layoffs were the beginning of a restructuring plan that is expected to save the company $50 million per year. Callaway said it will invest up to half of the $50 million in annual savings to create more demand from the consumer. 

Thornley, who was named interim CEO after former CEO George Fellows resigned in June, said the restructuring plan is expected to reduce costs, simplify internal processes, and increase the focus on the company’s consumer and retail partners; realign the organization to place greater emphasis on global brand management and drive the company’s key global initiatives; and supply incremental investments in the brand and demand-creation initiatives to drive sales growth.
Thornley added that the restructuring plan was a direct response to a slow recovery for Callaway, which has lagged behind the rest of the golf industry in its recovery from the recession. Thornley pointed to poor brand marketing as a primary factor for weak sales in the most recent quarter.

Total revenues for the second quarter declined 9.8 percent to $273.8 million from $303.6 million in the year-ago period. The company posted a net loss of $63.6 million, or $1.03 per diluted share, compared with a net profit of $11.5 million, or 14 cents per diluted share, in the year-ago period. The companys bottom line included several one-time items, including $57 million related to a deferred tax assets and a $5.4 million impairment charge taken against the companys Top Flite intangible assets and a $5 million charge related to the aforementioned restructuring plan. Excluding items, the company posted a loss of a penny per share.

Gross margin for the quarter contracted 320 basis points to 37.5 percent of sales, which management attributed to higher raw material costs associated with increased oil prices as well as lower volumes and the related negative impact on manufacturing absorption, particularly in the ball business. Expenses also increased due to an unfavorable foreign exchange impact and a slight increase in marketing expenses as the company shifted more spending to the second quarter compared to last year.

By product category, sales of Woods improved 3.1 percent to $65.3 million compared to $63.3 million in Q2 last year, although management noted a decline in the overall first half business was due to the timing of the Octane launch in December of 2010 versus the first quarter of 2011 as well as a sharp decline in sales in Japan due to the effects of the tsunami.

Irons category sales fell 14.2 percent in the most recent quarter but improved by about 2 percent for the six-month period. Management said the company has seen strong sales of the RAZR line, which has been partially offset by the fact that the company didnt launch a model this year to anniversary against last years X-24 launch.

Putter sales were down 29.1 percent for the quarter, respectively, due to the fact that the company launched a new platform of White Ice putter sin the year-ago period compared with a few new model updates in 2011.

Golf ball sales slipped 5.8 percent for the quarter, as the company has not launched a new premium model this year and they have not invested heavily in the promotion of existing tour models.

Accessories sales were down 11.0 percent for the quarter, due to lower sales of package sets and GPS devices, which was partially offset by increase in apparel and footwear sales.

Regarding outlook, management confirmed that the company expects to report a loss for full-year 2011, but does not intend to provide further specific financial guidance for the balance of the year as it works through its restructuring.

In related news, the company said it entered into a new $210 million, 5-year credit agreement to replace one that was due to expire in six months.