The difficulties of the general economy got to Callaway during the third quarter as the company posted its second consecutive year-over-year quarterly sales decline. Sales were down in nearly every region of the world with the exception of Japan, while all product categories, with the exception of accessories, saw sales declines.
The declines caused the company to post a quarterly net loss after a profit in the year-ago quarter. However, company management said it does have plans to turn things around before the end of the year. Callaway will move forward several product launches to have new product on shelves in time for Holiday, a move it feels will help to capitalize on sales that had previously been left on the table. Bring the launches forward will also help to pad Q4 sales.
Internationally, Callaways only real strength came from Japan. Sales to the country jumped 30.5% to $32.8 million from $25.2 million last year due to continued strong sales of a region specific driver introduced in 2008 as well as an overall increase in demand of other golf products.
However, sales to the rest of Asia declined 9.9% to $18.5 million from $20.5 million for the year-ago quarter. Management said that sales in China had more than doubled as the company focuses its efforts on the country. However, the small sales base there was not enough to offset declines in other countries in the region. Sales to Europe dropped 18.6% to $33.4 million from $41.0 million last year.
Poor weather conditions and general economic woes were called out as drivers of the regional decline. However, management said that “Eastern Europe held up quite well.” Germany was also called out as performing well despite the economic downturn. Sales to the rest of the world declined 1.6% to $24.2 million.
Overall, second quarter Clubs sales declined 11.4% to $165.0 million from $186.2 million last year. Operating income for the Clubs division dropped 83.1% to $2.8 million from $16.8 million last year. This decrease is primarily attributable to the sales decline as well as a decline in gross margin partially offset by a slight improvement in operating expenses.
For the second quarter running, Callaway saw the steepest sales declines in Woods as it tried to compare against the year-ago launch of the FT-i product. In a filing with the SEC, the company reported that the 40% drop in Woods sales was attributable to a decrease in sales volume and in average selling prices in the third quarter of 2008 compared to the same period in the prior year.
The end of the lifecycle of the FT-i and FT-5 both contributed to the volume decrease, though the continued success of the Legacy product in Japan offset that somewhat. The decrease in average selling prices was driven by a less extensive line of drivers launched during 2008 compared to 2007 as well as price decreases on older models.
Irons also saw both sales volume and average selling prices. Many of the same issues that plagues Woods hampered Irons sales as the X Series irons were in the second year of their product lifecycles slowed volume and closing out the last of the Big Bertha irons caused a decline in ASPs. Putters also saw units sold decline, though average selling prices were relatively flat.
The 1.9% decrease in net sales of Golf Balls to $48.4 million for the quarter was due to a decrease of $2.3 million in sales of Top-Flite golf balls partially offset by a $1.5 million increase in Callaway golf ball sales. The decrease in Top-Flite golf ball sales is primarily due to a decrease in both sales volume and average selling prices.
The decrease in sales volumes was largely due to a decline in sales of the older generation XL golf ball models and D2 golf balls, introduced in the first quarter of 2007. The increase in Callaway Golf ball sales is due to increases in both average selling prices and sales volume. The company reported an operating loss of $2.7 million for its golf balls business, slimming slightly from a loss of $2.8 million last year due to a favorable shift in ball product mix as well as improved ball manufacturing efficiencies.
The only category to see sales improve was Accessories, which was boosted by the introduction of the Top-Flite packaged recreational sets as well as an increase in sales of the Callaway Golf Collection line of accessories and golf bags.
The company reaffirmed its recent guidance of net sales for the fiscal year in the range of $1.125 billion to $1.145 billion with earning per share in the range of 92 cents to $1.02.
