Callaway Golf Co. on Thursday increased its earnings per share guidance for the first half and full-year 2019 after posting record revenue in the first quarter. The company’s net sales increased $113 million (28 percent) to $516 million, and adjusted EBITDA increased $4 million (4 percent) to $93 million.
These results were achieved despite an estimated $15 million negative impact from changes in foreign currency rates and reflect the acquisition of Jack Wolfskin in January 2019, which contributed $93 million in net sales in the first quarter of 2019. These first quarter 2019 results, compared to the first quarter of 2018, also reflect increased sales in both the Golf Equipment segment (+3.6 percent) and the Apparel, Gear & Other segment (+112 percent), as well as in all major product categories and in all major regions as follows:
“We are pleased with our first quarter 2019 results and the strong start to the year in both our golf equipment and soft goods businesses,” commented Chip Brewer, president and CEO of Callaway Golf. “These results reflect the addition of our Jack Wolfskin business as well as strong growth in all major product categories and regions. We are especially pleased to be able to deliver these results despite foreign exchange headwinds and flat golf market conditions in the first quarter.”
Brewer continued, “We remain excited about the long-term prospects for the Jack Wolfskin brand and the growth and scale opportunities it presents for our overall apparel portfolio. In the short-term, however, we are lowering our outlook for this business for 2019 due to lower than anticipated pre-books for the fall/winter season as a result of the much reported softer market conditions in Central Europe and China. We firmly believe that this will be a short-term issue and we remain excited about this business over the long-term. Fortunately, given our brand momentum and the success of our 2019 product lineup, our golf equipment and TravisMathew businesses are exceeding our expectations, allowing us to confirm our full year net sales and adjusted EBITDA guidance despite stronger foreign currency exchange headwinds.”
Summary of First Quarter 2019 Financial Results
For the first quarter of 2019, the company’s net sales increased $113 million (28 percent) to $516 million, compared to $403 million for the same period in 2018. Net sales increased in all operating segments, in all major product categories and in all major regions. The Jack Wolfskin business, which was acquired in January 2019, contributed $93 million in net sales in the first quarter. Excluding the Jack Wolfskin business and a $8 million negative impact on the core business, first quarter net sales increased 7 percent on a constant currency basis. The 7 percent increase in constant currency core net sales is attributable to the strength of the company’s entire 2019 golf equipment product line and continued brand momentum in the TravisMathew business despite a flat golf market in the first quarter of 2019.
For the first quarter of 2019, the company’s gross margin decreased 350 basis points to 46.2 percent compared to 49.7 percent for the first quarter of 2018, which is slightly better than the company’s expectations. Excluding non-cash purchase accounting adjustments related to the Jack Wolfskin acquisition and a 70 basis point negative impact from changes in foreign currency rates, gross margins were 47.9 percent, a decrease of 180 basis points. This decrease is primarily attributable to the seasonality of the Jack Wolfskin business as well as the current year product mix of higher priced products which typically have lower gross margins due to more advanced technology, partially offset by the TravisMathew business, which is accretive on a gross margin basis.
Operating expenses increased $55 million to $169 million in the first quarter of 2019 compared to $114 million for the same period in 2018. Excluding one-time costs related to the Jack Wolfskin acquisition, operating expenses were $163 million, an increase of $49 million in the quarter. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, and investments in the TravisMathew business and the golf equipment business.
First quarter 2019 earnings per share decreased $0.15 to $0.50, compared to $0.65 for the first quarter of 2018. On a non-GAAP basis, 2019 first quarter earnings per share was $0.63, which excludes $0.13 per share related to the non-cash purchase accounting adjustments and the non-recurring transaction and transition expenses related to the Jack Wolfskin acquisition. The non-GAAP earnings in 2019 includes an $8 million increase in interest expense related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin. This increased interest expense was substantially offset by hedging gains recorded in the quarter and a lower tax rate.
Business Outlook for 2019
Basis for Full Year 2019 Non-GAAP Estimates. The company currently estimates that non-cash purchase accounting adjustments will have a negative impact on 2019 earnings per share in the amount of $0.09 to $0.16. The non-cash amortization expense related to the purchase accounting for the OGIO and TravisMathew acquisitions will have a $0.01negative impact on earnings per share in 2019, consistent with 2018. Both of these estimates are unchanged from the company’s prior estimates.
The company’s non-GAAP guidance for 2019 excludes the impact of the purchase accounting adjustments related to the Jack Wolfskin, TravisMathew and OGIO acquisitions mentioned above as well as $0.07 of non-recurring transaction and transition expenses related to the Jack Wolfskin transaction. For consistency and comparability purposes, the 2018 non-GAAP adjusted results presented below also exclude the non-cash purchase accounting amortization for the OGIO and TravisMathew acquisitions discussed above as well as the $0.01 of non-recurring transaction income related to the Jack Wolfskin acquisition.
Full Year 2019 Guidance
The company reiterates its previous guidance for full year 2019 net sales growth of 34 percent – 37 percent. Due to softening market conditions in Europe and China, the company now expects that Jack Wolfskin’s full year 2019 net sales will be 4 percent – 6 percent (or 2 percent – 3 percent on a constant currency basis) lower than the previous estimate of $382 million. Given the strong 2019 first quarter growth in the company’s other golf equipment, apparel and accessories businesses, the company anticipates that growth in those other businesses will offset the expected lower sales in the Jack Wolfskin business. These estimates assume no further material changes in foreign currency exchange rates in 2019, which are expected to have a negative $35 million impact on 2019 full year net sales compared to 2018.
The company reiterates its previous guidance of 47.0 percent for 2019 gross margins, which are estimated to be approximately 50 basis points higher than 2018. The anticipated negative impact of changes in foreign currency exchange rates on gross margins for the full year are anticipated to be offset by continued improvements in operating performance.
The company reiterates its previous 2019 operating expense guidance of $630 million.
The company increased its non-GAAP earnings per share guidance to $0.96 – $1.06 driven by lower interest costs and a lower effective tax rate, which is currently estimated at 20.5 percent for full year 2019. These estimates still assume a base of 97 million fully diluted shares.
The company reiterated its full year 2019 Adjusted EBITDA guidance to $200 million – $215 million which is consistent with prior guidance. The Adjusted EBITDA in the core golf equipment, apparel and accessories businesses is expected to be offset by lower expected Adjusted EBITDA for the Jack Wolfskin business. The company now expects the 2019 Adjusted EBITDA contribution of the Jack Wolfskin business to be $20 million – $26 million, compared to prior guidance of $33 million. The decrease is due to softer market conditions in Central Europe and China, particularly in the second half of 2019. Adjusted EBITDA excludes non-cash stock compensation expense, as well as purchase accounting adjustments and non-recurring transaction and transition expenses related to the Jack Wolfskin acquisition.
First Half 2019
In order to make the 2019 guidance more comparable to 2018, as discussed above, the company has presented 2019 first half guidance, as well as the comparable period in 2018, on a non-GAAP basis. The non-GAAP presentation excludes non-cash purchase accounting amortization and non-recurring transaction and transition expenses related to the Jack Wolfskin, TravisMathew, and OGIO acquisitions in the amount of approximately $0.19 for the first half of 2019. The effect of these items on the first half of 2018 was nominal.
The company revised first half 2019 guidance for net sales, non-GAAP earnings per share, and Adjusted EBITDA. The company now expects first half net sales growth of 17 percent – 19 percent compared to 2018 driven by increases in the core golf equipment, apparel and accessories businesses despite an estimated negative impact of $24 million related to changes in foreign currency exchange rates compared to 2018.
The company increased its non-GAAP earnings per share guidance to $0.84 – $0.89 driven by net sales increases in the core golf equipment, apparel, and accessories businesses, a lower estimated tax rate and hedging gains recorded in the first quarter. These estimates still assume a base of 97 million shares.
The company increased first half 2019 Adjusted EBITDA guidance to $142 million – $148 million. The increase is driven by net sales increases in the core golf equipment, apparel and accessories businesses, and hedging gains recorded in the first quarter. Adjusted EBITDA excludes non-cash stock compensation expense, as well as purchase accounting adjustments and non-recurring transaction and transition expenses related to the Jack Wolfskin acquisition.
Photo courtesy Callaway Golf Co.