Callaway Golf continues to suffer from a weak market that has seen consumers continue to cut discretionary spending, a new reality that has had a profound effect on all golf manufacturers — especially high-end vendors like Callaway. Management for the Carlsbad, CA – based manufacturer noted, however, that there has been a “lessening of the slope” as steep revenue declines from the front half of the year slowly taper as the economy continues its sluggish rebound. 


Sequentially, revenue declines have continued to soften from 26% and 17% declines in the first and second quarter, respectively, to an 11% decrease in the third quarter.

 

Revenues declined to $190.9 from $213.5 million in the year-ago period. “Some of the improvement is undoubtedly a function of the aggressive promotional activity undertaken by the golf industry – we being front and center,” said President and CEO George Fellows in a conference call with analysts, “but some as well due to a slowly improving economic picture in the U.S. and some other regions…” Fellows continued to say that the company retains a cautiously optimistic outlook for 2010 as the negative impact of foreign currency lessens in the second half.


Callaway reported a third quarter net loss of $13.4 million, or 25 cents per share, compared to $7.4 million, or 12 cents per diluted share, in the year-ago period. Management said the loss per share for the third quarter of 2009 was adversely affected by 1 penny per share associated with the company’s gross margin initiatives and 4 cents per share dilution related to the company's preferred stock issuance. The loss per share for the third quarter of 2008 included after-tax charges of 4 cents per share for the gross margin initiatives.  Operating expenses for the quarter declined 8% to $85 million, compared to $93 million last year.


Regionally, U.S. sales declined 10.3% to $93.9 million as compared to $104.6 million in the year-ago period. International sales declined 10.9% to $97.0 million from $108.9 million in Q3 last year. Sales for international markets were down 19%, 11%, and 18% for Europe, Japan and other foreign companies, respectively, while the rest of Asia (including China) saw sales surge 13%.


By product category, sales of Woods benefited from promotions, increasing 3.6% to $35.7 million from $24.5 million in the year-ago quarter. Irons were down 22.6% to $49.4 million in Q3 from $63.8 million a year ago, while Putters fell 19.7% $17.1 million from $21.3 million in Q3 last year. Golf Ball sales were down 15.5% to $40.9 million from $48.4 million in the prior-year period, a decline management attributed to increased promotional activity and the fact that the company’s premium ball segments are in the second year of their life cycle compared to several new competitive offerings in 2009.


Callaway continued to see overall softness in retail as customers shift to lower price points as they took advantage of highly-promotional activity, management said they expect said activity to “lessen dramatically” in the fourth quarter, despite the holidays. Margins, which declined 630 basis points to 31.2% of sales versus 37.5% of sales in last year’s third quarter, are expected to improve significantly as the company exits the promotional environment.


Fellows estimates that sell-through to the individual consumer is down 15% to 20%, but said that the company is hoping some of the stimulus programs the company has implemented will have a positive effect on sell through.


Regarding outlook, the management estimates full year sales will be down approximately 16% compared to last year, with margins expected to be approximately 37% of sales, lower than the company’s original forecast due to accelerated promotions that were in place during the second and third quarters. Operating expenses will reflect cuts in non-essential spending while still investing in programs and initiatives to position it for growth.


Callaway estimates a full year loss of 30 cents to 35 cents per share, which includes after-tax charges of 5 cents per share for its gross margin initiative, and dilution of approximately 9 cents per share associated with its preferred equity issued earlier this year.