For the second consecutive first quarter Callaway Golf Company took a hit on its share price after pre-announcing expectations for the period. Management apparently expected a different reaction this year than last year when it pre-warned that sales and earnings for the first quarter would fall well short of expectations. George Fellows, the president and CEO of the company that was not in the position at the same time last year, fell on his sword during a conference call with analysts and investors, taking full responsibility for what he said was lack of clarity about how the pre-release was related to the overall three-year plan. ELY shares fell sharply two weeks ago on the guidance note that suggested a 20%+ increase in earnings on flat sales.

Last year, the company had warned that both club and ball sales had taken a dive during the period. This year, the downward momentum continued in balls, irons, and putters, but the driver business appears to be on the mend, increasing more than 48% for the period, and International also helped keep the top line positive.

FX rate fluctuations had a $6 million negative impact on revenues for the period. In constant dollars, revenues would have increased three percent for the quarter.

Fellows said it is very difficult for any business dependent on new products and timing of shipments to forecast the business by quarter and that annual guidance was the “most prudent” level of guidance to deliver to investors and hoped to get to that level by 2007. Currently, the company has only provided the three-year outlook that has kept the market guessing and apparently drawing their own conclusions. Fellows reiterated that he felt that the Q1 results were “very much” on plan to achieve those three-year goals.

Management said that a timing difference in irons and putters was the culprit in declining sales in those categories. A new 2-ball SRT putter that Mickelson used at the Masters won’t be available until at least June. The woods business benefited from an expanded range, including three drivers and a line of fairway woods. The ball business was impacted by continued weakness in the Top-Flite brand, offset a bit by strength in the Callaway brand ball product.

Mr. Fellows said the Top-Flite brand had been “badly neglected prior to Callaway acquiring it in 2003. He said they are now seeing increased competition in the $15 to $20 segment of the business.

In the U.S., the gains in the woods category nearly offset sharper declines in the Top-Flite and Ben Hogan brands, which was also apparently hurt by the timing of new products. In the International business, ELY saw “strong results” in all regions except Europe, which was down four percent year-on-year. Asia was the strongest region, with “good growth” cited in Japan, Korea described as “particularly strong,” and Rest of Asia as “very strong.” On a currency-neutral basis, sales in Europe grew four percent and the International business increased 11% for the period.

>>> What appears to be missing from the conversation is that last year’s Q1 miss was all about a shift in product launches as well. There didn’t appear to be a flow plan then either…

>>> In the absence of any real guidance, analysts will be expected to triangulate their own estimates of the business. There must be a plan for product launches and the expected revenues somewhere. It can’t all be left up to chance…

Callaway Golf Company
First Quarter Results
(in $ millions) 2006 2005 Total Change
Total Sales $302.4  $299.9  +0.9%
U.S. Sales $181.3  $185.1  -2.1%
Int’l Sales $121.2  $114.8  +5.6%
Woods $97.1  $65.5  +48.4%
Irons $86.6  $107.9  -19.8%
Putters $24.9  $31.8  -21.9%
Golf Balls $55.7  $59.0  -5.6%
Access., Other $38.2  $35.6  +7.3%
GM % 43.5% 44.2% -70 bps
Net Income $22.9  $18.4  +24.5%
Diluted EPS 33¢ 27¢ +22.2%
Inventories* $247.4  $172.5  +43.4%
Accts Rec.* $245.2  $227.8  +7.6%
* at quarter end