Callaway Golf saw second quarter sales inch up slightly and profits edge past expectations, but company management said they were disappointed in the continued lethargy of the golf industry as the brand wrapped up its all-important second quarter.
In June, Callaway management issued conservative guidance, saying that although management anticipated a “solid recovery” from the recession, there were indications that it would be delayed longer than originally expected.
The updated guidance turned out to be mostly in line, as the Carlsbad, CA-based golf manufacturer reported only slightly improved results from a year-ago period that saw sales and earnings freefall amidst dreadful market conditions. In a conference call with analysts, Fellows said along with the many economic factors, “horrendous” weather and a roughly 3% drop in rounds played during the quarter reduced cautious optimism for 2010 to “just plain cautious.”
“I think clearly, our expectation was that the recovery this year was going to be better than we are seeing,” said George Fellows, company president and CEO. Fellows added that while the early part of the season started off with off-course specialty shops yielding to strength from green grass operations, that pattern reversed as the year progressed, with product in Golf Galaxy and Dick’s SG “doing quite well.”
At the end of the day, however, Callaway still reported growth across most major business segments – and profits soared. Net sales for the company improved slightly to $303.6 million from $302.2 million in Q2 last year.
Management said foreign exchange rates favorably affected revenues by about $6 million as compared to the year-ago period. Earnings jumped 65.9% to $11.5 million, or 14 cents per diluted share, compared with $6.9 million, or 10 cents per diluted share, in the year-ago period.
By product segment, Putters (+26.9%) and Accessories (+11.5%) exhibited the only significant growth, while Woods (-16.7%) and Irons (-1.0%) each regressed during the quarter. Management said putter sales benefitted from increases in both volume and average selling prices which were associated with the launch of the Odyssey White Ice line. Accessory sales were boosted by the company’s new partnership with Perry Ellis, strong golf ball sales and the launch of Callaway’s Women’s Solaire Club line. For the struggling Woods segment, management said the sizeable decline was due largely to a decrease in promotional activity at the retail level compared to last year, when the company sponsored several “Buy One, Get One Free” promotions. For the Irons and Wedges categories, sales slipped on lower volumes that were a result of the timing of product launches and lower average selling prices due to the mix of lower-priced Diablo irons compared to the X-22 line last year. For Golf Balls, sales were essentially flat, but management said the launch of a new premium ball led to increases in buying and average selling prices, which effectively offset fewer rounds played.
By region, sales to the International business improved 9%, boosted by “solid growth” in Korea, China and South Pacific markets, which offset declining sales in the Europe (-2.4%) region and the Japan region (18.6%). Sales to the U.S. segment slipped 0.8% in Q2.
Regarding outlook, management declined to give specific guidance due to a lack of visibility into sales, but said ELY expects full year gross margins to improve compared to last year with full year operating expenses remaining “approximately flat.”
In related news, Callaway management noted that the company will be restructuring its global operations over the next 18 months as part of its Global Operations Strategy that is designed to add speed and flexibility to customer service demands while optimizing efficiencies and facilitating long-term margin improvements. This initiative will include the reorganization of the company's manufacturing and distribution centers located in Carlsbad, CA and Toronto, Canada and the creation of third party logistics sites in Dallas, TX and Toronto, Canada as well as the establishment of a new production facility in Monterrey, Mexico.
The company previously estimated that charges for 2010 for its overall Global Operations Strategy initiatives would be approximately 10 cents per share, but management said the initiatives have been expanded and the company now estimates that charges will be approximately 16 cents per share. ELY now estimates the savings from its overall Global Operations Strategy initiatives will be approximately $45-$55 million from 2010-2013 as compared to its prior estimate of $25-$45 million through 2012.
