Callaway Golf Companys efforts to compensate retailers for new lower prices on clubs by shipping additional goods at no charge put a major dent in margins in the third quarter, pushing the company deep into the red for the period even as a new CEO searches for ways to get the business back on track. The move to lower pricing on some key metalwoods product (SEW_0430), coupled with actions to push Top-Flites Infinity balls through the retail channel, were the main contributors to the impact on margins. Even after excluding integration charges gross margin fell more than 21 percentage points to just 24.6% of sales.
The reported decline in sales for the period was actually much worse than it appeared on the surface as Callaway brand sales fell 41.5% to $89.8 million versus $153.6 million in the year-ago period. Golf Club sales fell 37.4% to $87.3 million, while Golf Ball sales increased 191% to $41.1 million. Callaway brand ball sales increased roughly 50%, with the balance coming form the inclusion of Top-Flite in the numbers.
Sales in the Woods category fell the most in the quarter, coming from a reduction in average selling prices and lower unit sales due to shipping goods at no charge to net down retailer inventories. The Irons/Wedges category was also hit by lower unit sales and average selling prices, most notably the Big Bertha product relative to the higher-priced X16 product. Putter sales also fell, due mostly to declines in the Odyssey 2-Ball line.
On a regional basis, U.S. sales were down about 39% when excluding the upside from the inclusion of Top-Flite and International sales fell 40% when excluding TF. With Top-Flite in the mix, sales in Japan still fell more that 56%, while the Rest of Asia decreased more than 35%. Europe sales declined nearly 27%, but the Other International business nearly doubled with a 95% increase in sales off of a low base.
The integration of the Top-Flite operations included charges of $4.4 million, or seven cents per diluted share. On a pro forma basis, which excludes these charges, the ELY reported a net loss of $31.5 million, or a net loss of 46 cents per fully diluted share, a penny more than analysts estimates.
The action to clean up pricing at retail has also hit the A/R line, as DSO swelled to 96 days from 71 days in Q3 last year. Top-Flite DSO was 63 days. The increase was due to new 120-day dating programs.
Callaway brand inventory was said to be “flat” to last year, while Top-Flite added $18 million to the total.
Chairman and CEO William C. Baker has decided to remove the word “interim” from his title and will serve for the foreseeable future. He said the Board has decided not to conduct a search for a new CEO as was previously expected.
