Callaway Golf Company reported first half and second quarter 2014 financial results, demonstrating its turnaround is well underway and positioning it for a return to profitability for the full year.
Despite softer than expected market conditions, Callaway reported for the first half of 2014 a 9 percent increase in sales driven by growth in all product categories: woods (+8 percent), irons (+14 percent), putters (+9 percent), golf balls (+7 percent) and accessories and other (+5 percent). Additionally, income from operations increased 40 percent to $72 million and fully diluted earnings per share increased 12 percent to $0.66. These increases were driven by the increased sales and improvements in gross margins of 170 basis points, which more than offset a planned increase of $9 million in operating expenses and a $14 million decrease in other income due to adverse changes in foreign currency contract values. The 2014 results also benefitted from a $9 million decrease in pre-tax charges related to the cost reduction initiatives that were completed in 2013.
For the second quarter, the company had previously provided guidance that its sales and earnings would show a decrease versus the second quarter of 2013 as a result of a late start to the 2014 golf season, high retail inventory industrywide, and anticipated promotional activity during the second quarter. The company's second quarter results reflect those market conditions with sales being down 7 percent, slightly more than the company's prior guidance of flat to down 5 percent, and with earnings declining to $0.04 per diluted share compared to $0.12 per diluted share in 2013, which was slightly better than the company's prior guidance of breakeven to slightly profitable.
These second quarter results were consistent with the company's prior full year guidance and the company today has confirmed its full year guidance, estimating full year net sales of $880 to $900 million and diluted earnings per share of $0.12 to $0.16.
For the second quarter of 2014, the company reported the following results, as compared to the same period in 2013:
For the first half of 2014, the company reported the following results, as compared to the same period in 2013:
“We are pleased with our results for the second quarter in that we were generally able to achieve our financial guidance while continuing to build brand momentum and improving field inventory levels in key markets such as the U.S. and Europe,” commented Chip Brewer, President and Chief Executive Officer. “We achieved these results despite more challenging market conditions worldwide than we had anticipated. We are also pleased with our results for the first half of the year. Our continued brand momentum and the strength of our 2014 product line enabled us to grow sales for the first half in each of our product categories despite a decline in industry sales due to a late start to the 2014 golf season, high industrywide retail inventory levels, and an increase in promotional activity. As a result, we gained market share in each of our key markets around the world, positioning us well for the balance of the year.
“Looking forward, we expect market conditions will remain challenging for the second half of the year,” continued Mr. Brewer. “However, we believe our brand momentum and product strength will enable us to overcome these market headwinds and achieve the full year financial goals we set at the beginning of the year. We remain pleased with the state of our turnaround and the direction of our business.”
Business Outlook for 2014
Given the company's increased sales, earnings and market share during the first half of 2014, the company is maintaining its full year guidance despite an anticipated decline in the golf industry in 2014. The full year guidance the company provided at the beginning of the year is as follows:
- Net sales for the full year 2014 are estimated to range from $880 to $900 million, compared to $843 million in 2013. The company believes this growth rate will exceed the overall market and be driven by brand momentum and market share gains.
- Gross margins are estimated to improve to approximately 41.7 percent, compared to 37.3 percent in 2013. This improvement is expected to result from the positive full year impact of the many supply chain initiatives implemented as part of the turnaround strategy as well as an estimated improved mix of full price product sales.
- Operating expenses are estimated to be approximately $345 million, compared to $326 million in 2013. The increase in operating expenses is due to a planned increase in investments in tour and marketing, higher variable sales related expenses, and modest cost of living increases.
- Pre-tax income is estimated to range from $15 to $19 million, with a corresponding tax provision of approximately $6.5 million. Pre-tax income in 2013 was a loss of $13.3 million with a corresponding tax provision of $5.6 million.
- Fully diluted earnings per share is estimated to range from $0.12 to $0.16 per share on a base of 78.0 million shares, compared to a 2013 loss per share of $0.31 on 72.8 million shares. If the company is successful in achieving these results, it would be the company's first net profit since 2008 and would represent a significant milestone in the company's turnaround.