Callaway Golf Working to Keep Up with Fusion Demand…

Though it is still early in the year, especially for the golf industry, Callaway Golf Company saw strong enough results and consumer demand to raise guidance for the rest of the year. The company saw sales gains come from all regions and from all product categories except for golf balls, which likely were hampered by a decrease in rounds played as much as anything else.

While ball sales were slow, management said on a conference call with analysts that “the Top-Flite ball shares have been increasing each month since January.” Callaway ball sales were said to be up year-over-year, with the HX Hot called out as providing particularly strong results. Margins in the ball business were described as “healthy” by company President and CEO George Fellows on the call, with the Top-Flite margins “lower than the Callaway line.” However, he said the decrease to margins from Top-Flite was actually offset by the “very low margin stuff” that the company cleared out last year.

The softness in Ball sales was more than offset by Club sales, which increased 13.9% to $281.1 million on an aggregate basis for the first quarter from $246.7 million during last year’s first quarter. On the call, Fellows pointed to market shares that were the company’s “highest shares in most categories in recent years,” especially in March. Share in Woods for the month was 22.9%, “up a point from February, but up a full 6.2 points March last year,” said Fellows. “Iron share of 29.3% was up 2.5 share points from February, up a full 5.2 share points from March of '06. In Putters, [the company’s] share was 42.7%, 3.6 share points up from February and a full 10.3 share points up from March of a year ago.”

The big story on the call and the main focus of questioning, remains the Fusion line of drivers, especially the square-headed FT-i. The company said that “while our supply chain responsiveness is markedly better and much more reliable, we have had problems keeping up with the very high demand” for the new driver. Management reiterated the supply chain issues that plagued the company in ’05 and ’06 have been resolved and that they are actually “ramping up their capabilities at a remarkable rate,” but that the consumer demand is “outstripping even their ability to ramp up production.” Fellows said that June is the currently quoted catch-up date, but that he does not have huge confidence in that date due to demand continuing to increase.

Growth in Irons was attributed to the new X20 line, while Putters benefited from the introduction of the XG and Black lines.

The Accessories category grew as a result of Callaway ending its licensing agreement for footwear and taking that category in-house for the U.S. As a result, all footwear sales are included in Accessories and not just the royalties gained. In addition, management said that sales growth in both Callaway bags and gloves spurred the category’s high-20’s sales gain. Fellows said that in March, the “bag business took over the Number 1 slot in the United States,” in market share, possibly the company’s first time in that position.

Regionally, the International business trended well ahead of domestic for the quarter, with increases in all regions. Foreign currency gains positively impacted sales by $6 million, resulting in a 20% increase in International sales on a currency-neutral basis. Japan was particularly strong, up 45.3% to $37.9 million as pent up consumer demand was finally unleashed following worries over a rules change creating a dichotomy between conforming and non-conforming product. Europe was up 11.9% to $56.0 million, but flat on a currency-neutral basis.

Fully diluted earnings per share for the first quarter of 2007 include a penny of after-tax charges for gross margin improvement initiatives announced in November, 2006. Also, the first quarter of 2006 includes a penny of after-tax charges for the integration of Top-Flite operations. Excluding these charges, the company's pro forma fully diluted earnings per share for the first quarter of 2007 would have increased 44% to 49 cents, as compared to pro forma fully diluted earnings per share of 34 cents for Q1 2006.

The company estimates that its full year 2007 net sales will be in the range of $1.05 billion to $1.07 billion compared to the previous estimates of $1.04 billion to $1.06 billion. Full year pro forma fully diluted earnings per share will be in the range of 72 cents to 82 cents, compared to 66 cents to 76 cents per share last year.

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