Boosted by a strong response to the launch of its EPIC driver and Chrome Soft golf ball franchises, Callaway Golf Company reported operating earnings in the second quarter more than doubled as sales ran up 24 percent. The company also announced its intention to acquire TravisMathew, an apparel brand based in Huntington Beach.

The strong performance prompted the company to hike its earnings and sales guidance for the year. The company’s full year sales guidance was lifted to $980 million to $995 million as compared to its prior guidance of $960 million to $980 million. Its full year non-GAAP earnings per share guidance was increased to 40 to 45 cents a share, up from prior guidance of 31 to 37 cents.

Revenues in the quarter reached $305 million against $246 million in the same period a year ago.

The sales gains were led by a 64 percent increase in sales of woods, primarily due to strong sales of the EPIC line of woods, and a 74 percent increase in gear, accessories and other, primarily due to the addition of the new business ventures, OGIO and the Japan apparel joint venture. The gains reflected increased hard goods market share, as well as increased sales in all operating segments and in all reporting geographic regions.

“I believe it’s fair to say that Q2 was another epic quarter for our company,” said Chip Brewer, president and CEO, on a conference call with analysts. “We are pleased to announce results that exceeded our expectations based on an outstanding reaction to the Jailbreak Technology and our EPIC driver, continued growth in our golf ball business, and the successful startup of our new business ventures, Callaway Apparel Japan and OGIO.”

On a market share basis, for both the quarter and year to date, Callaway said it believes it has the number one driver and number one hard goods brand in the U.S., UK, Europe and Japan.

Added Brewer, “In addition to the strong revenue and market share performance, I believe we have strengthened our brand partially by developing products like EPIC and Chrome Soft which consumers rave about and also reinvested back into the business in areas such as R&D, operations, marketing and tour, and thus building a stronger foundation for the future.”

By region, sales in the U.S. ran up 32.4 percent during Q2, driven by the “outstanding market reaction” to our EPIC woods, strong performance at green grass and in custom products, and the acquisition of OGIO. Callaway’s hard goods market share year-to-date through June was 26.4 percent, up 400 basis points year-over-year, and the brand held the number one dollar market share position in total clubs, driver, fairway, hybrid, and irons, as well as the number one unit position in putters.

Callaway’s year-to-date ball market share in the U.S. was 13.4 percent, up 50 basis points versus last year, driven by growth in the green grass channel. The U.S. market for balls and clubs combined was down slightly year-to-date, with balls up slightly and clubs down slightly, Brewer noted. He added, “We are anticipating improving market conditions through the balance of the year.”

In Asia, revenues from the Japan market were up 18 percent during the quarter, driven by the addition of its Callaway Apparel JV and strong market share performance in its core equipment business, and partially offset by soft market conditions in Japan. Callaway’s year-to-date hard goods dollar share was 20.5 percent in Japan, up 510 basis points year-over-year, and the company scored both the number one hard goods and the number one driver brand in the region.

In Europe, currency-neutral year-over-year revenues rose 24 percent for Q2. The gains were driven by favorable market conditions in this region and strong market share growth. Year-to-date market share data through May for Europe shows Callaway at 25.8 percent hard goods share, up 470 basis points year-over-year with the number one driver, wood, and hard goods brand in that market. Callaway is also seeing “considerable growth” in golf ball share.

For the quarter, gross margins improved 370 basis points to 48.7 percent due to a favorable shift in product mix toward the higher margin EPIC woods and irons combined with overall higher average selling prices, less discounting and lower promotional activity. The increases were partially offset by the different economics of the Japan apparel joint venture and the OGIO business, which have lower gross margins and lower relative operating expenses as compared to the company’s golf equipment business.

Operating expenses increased $9 million to $99 million due to the addition in 2017 of operating expenses from the Japan joint venture and the consolidation of OGIO, as well as $2 million in non-recurring OGIO transaction and transition expenses.

Operating income climbed to $49 million from $21 million while adjusted EBITDA grew to $54 million from $23 million.

Net earnings declined 8.8 percent to $31 million, or 33 cents a share, from $34 million, or 36 cents. The decrease on a GAAP basis was caused by the $2 million OGIO transaction and transition expenses in the second quarter of 2017 and a year-ago gain of $18 million from the sale of a small portion of the company’s Topgolf investment. The year-ago period also included a deferred tax valuation allowance that significantly lowered the tax rate.

Excluding the impact of the non-recurring OGIO transaction and transition expenses, the Topgolf gain and applying an estimated tax rate of 38.5 percent to 2016 pre-tax income, the company would have reported EPS for the second quarter of 2017 of 34 cents compared to earnings per share of 12 cents for the second quarter of 2016.

Commenting on the acquisition of TravisMathew, Brewer said, “It’s a brand based on quality product with a distinct Southern California vibe. We believe the acquisition fits well with our business, brand and culture.”

Callaway entered into a definitive agreement to acquire TravisMathew for $125.5 million in an all-cash transaction. Once completed, on a financial basis, the acquisition is expected to provide attractive revenue growth and enhance Callaway’s gross margins, operating margins, EBITDA and free cash flow. Brewer sees synergies in brand development, operations, distribution, growth in golf channels, and international presence.

“We spent considerable time getting to know the core management team at Travis and we’re looking forward to partnering with them to continue to develop their business,” said Brewer. “Given our confidence in their team, we have no plans to consolidate the operations of this business, but will instead continue to operate it as an independent brand and subsidiary. They have been growing at double-digit rates and we believe are well positioned to continue on this path. The vast majority of their current revenue comes from inside the U.S. and primarily in golf distribution channels. We believe there is ample growth opportunity in these channels, as well as significant potential outside of the U.S. and outside of golf-specific product and channels.”

Photo courtesy Callaway Golf