Callaway Posts 9.5% First Quarter Sales Increase

Callaway Golf Company reported a 9.5% increase in first quarter net sales to $366.5 million from $334.6 million for the same period in 2007.  Net income rose 20.8% to $39.7 million from $32.8 million for the year-ago quarter. Fully diluted earnings per share rose to 61 cents from 48 cents last year.

“While cautiously optimistic given our first quarter results,” continued Mr. Fellows, “it is important to remember that the second quarter is generally when the consumer purchase cycle begins and it is a critical quarter for us in achieving our targets. We remain optimistic that we can achieve our full year guidance range, although given current macroeconomic and market conditions, we believe our results will most likely be at the lower end of our original range.”

Gross margins as a percentage of net sales were 48% for the first quarter, the same as for the first quarter of 2007. Charges related to the company’s gross margin improvement initiatives did not have a significant effect on gross margins in either period.

The company continues to benefit from the gross margin initiatives implemented in 2007 which had a positive impact of 130 basis points during the quarter. This benefit was primarily offset by i) an unfavorable shift in product mix due to expected lower second year sales of premium drivers and X-series irons which generally have higher margins than the 2008 new products and ii) higher fixed cost absorption charges related to lower golf ball production volumes during the fourth quarter of 2007. The lower production volumes were consistent with the company’s inventory reduction initiatives and the recent improvements in inventory management and planning, which enables the company to operate its golf ball business with less inventory on hand. The effect of the fourth quarter production volumes on first quarter results was consistent with the company’s expectations and should not affect the balance of the year. The company estimates full year gross margins to improve at least 200 basis points compared to 2007.

Operating Expenses

Operating expenses for the quarter were $111 million, an increase of $6 million when compared to 2007. The increase is primarily due to higher advertising and promotion expense to support the new products launched during the quarter, an increase in costs due to the effect of foreign exchange rates on non-U.S. expense, and general inflation. As a percentage of sales, operating expenses declined to 30% compared to 31% in 2007.

Business Outlook

The company originally estimated in January that its full year 2008 net sales would be in the range of $1.145 billion to $1.165 billion and that its full year pro forma fully diluted earnings per share would be in the range of $1.08 to $1.18 on an estimated 67 million shares. Pro forma earnings exclude charges related to the company’s gross margin improvement initiatives, currently estimated at 8 cents per share for 2008. While the company still estimates its financial results will fall within this range, given uncertainties surrounding the economy, second quarter sell-through, and competitive actions, these results are projected at this time to be at the lower end of this range on a base of 66 million shares.