Shares of Callaway Golf Co. were trading up about 8 percent in early-afternoon trading Friday after the company reported first-quarter profit and sales well above Wall Street expectations.
Net earnings jumped 142 percent to $63 million, or 65 cents a share, besting Wall Street’s consensus target of 51 cents. Revenues rose 30.4 percent to $403 million, ahead of the consensus target of $372 million.
By product category globally, woods grew 19.7 percent, irons jumped 61.3 percent, putters moved up 23.8 percent, golf balls climbed 13.9 percent and gear & other, added 35.3 percent.
“Our new products, particularly the Rogue line of woods and irons, as well as our new Chrome Soft golf balls featuring Graphene, are resonating on a global basis, and our new business initiatives continue to perform at or above expectations,” said Chip Brewer, president and CEO. “We have made and are continuing to make significant investments in our business, which we believe are paying off nicely for shareholders.”
Brewer noted that the company also benefited from two “significant tailwinds in the quarter. These include foreign exchange moving positively to provide some benefit to top-line growth, although Callaway hedges at 70 percent to 80 percent, thus limiting up or down side on profitability and cash flows for any given calendar year.
Secondly, despite challenging weather conditions in North America and Europe, overall global market conditions “turned out to be quite favorable,” with significant year-over-year growth in both Japan and the U.S. markets, offsetting slower year-over-year conditions in Europe.
“We had anticipated the potential for improved conditions noting positive trends at average selling price, market dynamics, field inventories, product life cycles and that the U.S. markets had transitioned well to the disruption of the Golfsmith bankruptcy,” said Brewer. “However, the magnitude of the improvement did exceed expectations and helped us, and we believe the industry overall get off to a strong start to the year.”
In the U.S., revenues were up 31.9 percent for the quarter, driven by double-digit growth in the brand’s core business, as well as the addition of TravisMathew, which had an “outstanding quarter as well,” according to Brewer.
Callaway’s hard goods market share in the quarter approximately 26 percent, essentially flat year-over-year. According to Datatech, the U.S. hard goods market at green grass and off course grew 9.5 percent during the quarter and 21 percent during March alone. Said Brewer, “This market growth was driven by club sales. Balls were down slightly, most likely reflecting grounds played and weather.”
For the quarter, Callaway was the number one total hard goods brand, number one in total clubs, woods, irons and putters.In golf balls, we remain the number two brand with 16.2 percent dollar share, up 220 basis points year over year.
“Our club market share was down 110 basis points year over year, reflecting a more competitive market in drivers, but we remain very pleased with our industry-leading position in total clubs,” Brewer said of the U.S. market. “We are showing strength across our entire line, and we continue to have strong performance in the driver category with Rogue as the number-one selling model year to date. Additionally, field inventory levels appear to be in line for the market overall as well as Callaway.”
In other regions, Japan was up 49.0 percent and grew 42 percent on a currency-neutral basis. The gains were driven by an increase in product launches, higher selling levels due to continued brand momentum and strong market conditions.
For the quarter, hard goods dollar market share in Japan was 16.8 percent, which was down 480 basis points year over year. Said Brewer, “This decrease sounds concerning, but after digging into the numbers, we are quite comfortable with our position. Our trends were good in that our March hard goods dollar share increased to 18.4 percent, up 170 basis points versus February, and we are anticipating further improvement in April. And as in the U.S., we are seeing strength across the entire product line. We also did an extensive analysis of field inventories and concluded we are in good position with this as well.”
Korea also had a strong start to the year, with currency-neutral revenues up 26 percent for the quarter. For Asia in total, Callaway anticipates a strong year overall for its growth here, like the business overall, and this year’s product launch cadence will be front-loaded.
In Europe, revenues are up 14.8 percent in total and 2.5 percent in constant currency. The European market and especially the U.K. market were negatively impacted by poor weather conditions in Q1.
Said Brewer, “In the U.K., rounds were down 22 percent and the market was down 7 percent. However, we remain optimistic for this market as the weather inevitably improves. For Europe as a whole through February, our latest data, we remain the number-one hard goods brand, with a hard goods share of 24 percent, which was down 200 basis points year over year.”
Callaway also raised its 2018 guidance, saying it expects 2018 net sales between $1.17 billion and $1.19 billion, compared with a prior guidance of sales between $1.12 billion to $1.14 billion. The company’s EPS expectations increased to between 77 cents and 82 cents for the year, compared with a previous expectation of EPS between 64 cents and 70 cents.
For the second quarter, the company expects sales growth of 20 to 23 percent. This projected growth reflects anticipated growth in the core business, the addition of the TravisMathew business and an overall strengthening of foreign currencies. Changes in foreign currency exchange rates are estimated to positively impact net sales by approximately $5 million in the second quarter of 2018 compared to the same period in 2017.
For the second quarter, the company’s GAAP earnings per share for the second quarter of 2018 are estimated to increase to 44 to 48 cents compared to 34 cents of non-GAAP earnings per share for the second quarter of 2017. The gain is due to higher core business sales, the impact of the TravisMathew business and favorable foreign currency exchange rates.
Brewer said the stronger expectations for the first half reflect the current estimate of the brand’s product launch cadence, with more launches in the first half and less in second half compared to last year, as well as estimates of competitive launch activity.
“In conclusion, we’re excited about our start to the year and cautiously optimistic it’s going to be a positive year for Callaway and the industry as a whole,” said Brewer.
Photo courtesy Callaway Golf