2002; Callaway blames economy, USGA for 3Q woes
Wednesday, November 16, 2011
A battered U. S. stock market, fretful consumers and a struggling Japanese economy were just some factors that conspired against Callaway Golf Co. and caused its net sales to drop 18 percent during the third quarter.
Such external issues along with aging clubs and lackluster introductions, like the C4 driver, contributed to sales declines in three of Callaway’s four major product categories: woods, irons and balls. Among the few bright spots, Callaway’s putter sales, fueled by the continuing success of the White Hot 2-Ball, posted three-month and year- to-date gains of 38 percent and 43 percent, respectively.
Callaway officials have similar high hopes for its new Great Big Bertha II driver, but its recent debut meant it had little bearing on third-quarter results.
“Despite a solid first half of the year, the softness in the U.S. and Japanese economies and the reversal of the USGA’s proposal regarding high COR drivers negatively impacted sell-through and re-orders from our customers in the third quarter,” said Callaway CEO Ron Drapeau in a written statement. “Moreover, titanium driver and fairway wood sales continue trailing last year due to normal product cycles as both our ERC II and Hawk Eye VFT titanium wood models are in their second year of production.”
For the three months ended Sept. 30, the Carlsbad, Calif.-based company reported net sales of $160 million compared with $195.8 million for the same period a year ago.
Callaway posted net income of $12.4 million for the quarter compared with $6.5 million in 2001. But Callaway officials advised analysts and investors that earnings for the most recent period were “positively affected” by a “$17 million, non-cash, pre-tax reversal in the company’s warranty reserve.” They also noted that 2001 third quarter net income was adversely affected by a charge associated with a long-term electricity supply agreement that has since been terminated.
Excluding the effects of these two items, Callaway posted earnings of $1.9 million versus $14.3 million in the third quarter of 2001, according to Tim Conder, an analyst who follows Callaway for A.G. Edwards & Sons.
Regarding the warranty reserve, Conder explained that it is common practice for manufacturers to set aside money to cover anticipated product warranty claims. But because of quality improvements, Callaway has had fewer claims, and as a result, had been setting aside an excessive sum in its reserve, which the company “recaptured” and applied toward its third-quarter earnings.
“It just shows you how difficult the environment is right now,” Conder said. “Other than the 2-Ball putter, they haven’t had a blockbuster. But on the other hand, the USGA and what’s going on in Japan haven’t helped them. To their credit, their inventory is in reasonable shape. Overall, I give them a ‘C.’ ”
Callaway reported the following sales breakdown by product category:
• Woods, $55.7 million (down 31 percent)
• Irons, $50.7 million (down 30 percent)
• Golf balls, $11.3 million (down 8 percent); operating losses increased to $17 million year-to-date compared with $14 million in 2001, as a result of price reductions, purchase of ball equipment and increased marketing and advertising expenses.
• Putters, accessories and other, $42.3 million (up 38 percent)
By geographic region, the company reported third-quarter sales of $80.1 million in the United States, down 22 percent; and $79.9 million in international markets, down 14 percent. Sales in Japan alone, fell 30 percent, which were partially offset by growth in Europe, Canada and Australia.
For the nine months ended Sept. 30, the company generated sales of $668.6 million, down 6 percent compared with $710.9 million for the same period in 2001.
The company reported net income of $80.2 million vs. $67.6 million for the nine-month period a year ago. But taking into account the effects of the warranty reversal and the electricity contract, Conder said net income for the nine months decreased to $69.8 million from $79.8 million in 2001.
Year-to-date, all of Callaway’s product categories posted gains, except woods, which fell 28 percent to $257.8 million.
Asked to comment on the C4 driver during an Oct. 17 conference call with analysts, Drapeau responded: “Not every product is a homerun product . . . It doesn’t appeal to everyone as you well know because of a lack of an explosive sound, but it is a great performing product.” He said the C4 will be repositioned to go after “the segment it was initially designed for” – players with slow swing speeds.
Drapeau also expressed his determination to improve his company’s fortunes. Part of his plan calls for increased tour exposure to generate sales of the Great Big Bertha II.
“For players who are not on our professional staff it is very common to pay ‘tee up,’ a weekly stipend, especially on the PGA Tour, to have people put the product in play,” he said.
“We are taking some aggressive actions to go back after the shares that we once had.”