Callaway Golf Sees Decreased Q2 Sales, Record First Half

Callaway Golf Company reported Q2 earnings rose 1.4% to $37.1 million, or 58 cents a share, from $36.6 million, or 53 cents, a year ago. Sales reached $366 million, a decrease of 4% versus $380 million a year ago. Fully diluted earnings per share for the quarter include after-tax charges for gross margin improvement initiatives of 5 cents per share in 2008 and 2 cents per share in 2007.

Gross profit as a percentage of net sales for the second quarter of 2008 increased to 46.7% from 46.1% in the second quarter of 2007. Excluding the impact of the gross margin initiatives charges, gross profit percentages for the second quarter of 2008 increased 140 basis points to 48.0% versus 46.6% in the second quarter of 2007.

Operating expenses for the second quarter of 2008 were $110.8 million (or 30% of net sales) compared to $113.0 million (or 30% of net sales) in 2007.

The company repurchased 1.5 million shares of stock for $20 million for the quarter at an average price of $13.59 per share.

Callaway’s first half saw record net sales of $732.5 million, an increase of 2% versus last year’s record of $714.6 million.

Fully diluted earnings per share were a record $1.19 (on 64.4 million shares outstanding), an increase of 18% as compared to $1.01 (on 68.8 million shares outstanding) in 2007. Fully diluted earnings per share for the period include after-tax charges for gross margin improvement initiatives of 6 cents per share in 2008 and 3 cents per share in 2007.

Gross profit for 2008 was $346.6 million (or 47.3% of net sales) compared to $335.8 million (or 47.0% of net sales) for 2007. Excluding the impact of the gross margin initiatives charges, pro forma gross profit percentages for 2008 would have been 48.1% compared to 47.5% in 2007.
Operating expenses for 2008 were $221.4 million (or 30% of net sales), compared to $217.9 million (or 30% of net sales) for 2007.

“We continue to make excellent progress on our gross margin improvement initiatives and are on track to achieve our original two year commitment of $50 to $60 million in savings,” said president and CEO George Fellows. “While product mix and to a lesser extent commodity costs will work against us this year, we currently estimate our full year gross margins will still improve at least 100 basis points compared to 2007. In addition, we are on track to achieve our inventory reduction initiatives announced earlier this year.”

Callaway reiterates its full year guidance of $1.145 to $1.165 billion in net sales and pro forma fully diluted earnings per share of $1.08 to $1.18 per share. The company estimates that its full year net sales will be toward the higher end of the guidance range as it anticipates that it will continue to benefit from foreign currency exchange rates and intends to release some new products on a limited basis during the fourth quarter.

Pro forma full year diluted earnings per share are estimated to increase by more than 20% compared to 2007 and to be at the lower end of the guidance range, due to the adverse effect of product mix and commodity costs on 2008 gross margins, as well as additional marketing investment for the new product introductions.

The pro forma earnings guidance for 2008 excludes charges of approximately 11 cents per share for Callaway’s gross margin initiatives. The company had previously estimated that the charges for the gross margin initiatives would be approximately 8 cents per share for 2008 but has accelerated the commencement of some of the gross margin initiatives that previously had been planned to start in 2009.

As a result of the second quarter share repurchases, the pro forma earnings per share estimates are now based upon an estimated 64.5 million shares.