Callaway Golf Company reported preliminary third quarter results, expecting net sales to range from $193 million to $195 million, down from $221 million during last year's third quarter. The company expects to post a net loss of 17 cents to 19 cents per diluted share including after-tax charges of 3 cents per share related to employee equity-based compensation associated with FAS 123R. It also includes after-tax charges of a penny per diluted share associated with the Top-Flite integration and a penny per diluted share for the restructuring initiatives announced in September 2005. Excluding these charges, the pro forma loss per diluted share is expected to range from 12 cents to 14 cents, while diluted earnings per share for the same quarter last year were a loss of 7 cents or a net profit of a penny per share excluding a 2 cent charge for the Top-Flite integration and a 6 cent charge for restructuing initiatives.


Business Update

“Sales of the Company's core brands, Callaway and Odyssey, have gained market share and top-line momentum in 2006,” commented George Fellows, president and CEO of Callaway Golf. “Over the first nine months of this year, sales of these products have increased 7% adding to the double digit growth experienced in 2005. Sales of the Top-Flite and Hogan products, however, have not performed to expectations and have offset the gains in our core brands. As discussed last quarter, we are in the process of restoring these brands, targeting a formal re-launch of Top-Flite in 2007.”

“In terms of profitability,” Fellows continued, “the two-staged approach we announced a year ago is well underway. The first stage, which targeted a gross reduction of operating expenses of $50 to $60 million in the first year, or $25 to $30 million net of reinvestment, has been more successful than initially expected. In fact, over the last twelve months we have realized approximately $44 million in savings net of reinvestment. The second stage will target gross margins, which have been at unacceptable levels in recent years. This margin performance was further impacted this year by some additional factors related to the Top-Flite business, including an inventory reduction initiative of older Top-Flite products in preparation for the re-launch of the Top-Flite brand. We recognize the importance of improving gross margins as it relates to our overall profitability, and have already begun implementing initiatives which are expected to significantly improve gross margins in 2007 and beyond, as we will discuss in greater detail on our upcoming conference call.”


Details of Third Quarter Results


Sales

The estimated reduction in sales for the third quarter was attributed in a release to several factors including:

  • The planned timing of new product launches adversely affected third quarter 2006 sales by approximately $30 million as compared to the third quarter of 2005. More specifically, the third quarter of 2005 included the introductions of the FT-3 driver, Fusion fairway woods, X-18 driver in Japan, and HX-56 golf ball. This compares to no major introductions in the third quarter of 2006.
  • The June 2006 free-product-offer was more successful than originally anticipated. This resulted in higher market share along with an increased level of retailer product compensation, which in turn, impacted wholesale re-orders during the third quarter.
  • Lower in-store traffic at key golf retailers during the June through September season. This resulted in lower retail sales and a related decrease in wholesale re-orders for the company. The decline is consistent with recent national retail trends.


Gross Margins

The company also estimated that its gross margins as a percentage of net sales would be approximately 35% for the third quarter. Excluding charges related to equity-based compensation, the Top-Flite integration and the September 29, 2005 restructuring initiatives, Callaway estimated that pro forma gross margins would be approximately 36%. In the third quarter of 2005, the company's gross margins were 40% and excluding integration and restructuring charges were 41%.

The third quarter decline in pro forma gross margins was attributed by the company to:

  • Approximately -3 to -4 margin points due to a lower mix of higher margin woods products sold during the quarter compared to last year related to new product launches.
  • Approximately -1 to -2 margin points due to a lower margin associated with this year's BB-06 iron model compared to last year's higher margin iron models which included X-18 and X-Tour models.
  • Approximately -2 to -3 margin points due to initiatives to clear Top-Flite golf ball inventory as well as higher golf ball costs associated with increased raw material and energy costs. As previously noted, the timing of these cost increases precluded any pricing actions during 2006, but will be included in 2007 product pricing.
  • Approximately +1 to +3 margin points due to higher volumes and margins of Odyssey putters, X-Tour wedges, and Callaway Golf accessories.


Operating Expenses

The company estimates that its operating expenses for the quarter will be approximately $85 million. Excluding charges related to equity-based compensation, the Top-Flite integration and the September 29, 2005 restructuring initiatives, pro forma operating expenses are estimated to be approximately $81 million, a reduction of approximately $10 million when compared to last year's third quarter. The reduction is primarily due to the restructuring initiatives that were announced on September 29, 2005.


Business Outlook

The company estimates its full year 2006 pro forma earnings will be over 20% higher than pro forma earnings in 2005. Pro forma earnings exclude non-cash charges related to employee equity-based compensation, as well as charges related to the Top-Flite integration and the September 2005 restructuring initiatives. It would also exclude any charges incurred related to the implementation of the gross margin initiatives.