CALLAWAY GOLF CO.
CEO: Anthony Thornley (interim CEO).
Revenue: $967.7 million in 2010; $950.8 million in 2009.
Net loss: $29.3 million in 2010; $20.9 million in 2009.
No. of local employees: Undisclosed. Callaway employs 2,100 worldwide.
Headquarters: Carlsbad.
Year founded: 1982.
Stock symbol and exchange: ELY on the New York Stock Exchange.
Company description: Manufacturer of golf equipment and apparel.
Key factors for success: Gaining more market share while maintaining product quality.
Callaway Golf Co. will have to market itself better and operate with fewer employees if it is to forge ahead in the sporting goods business, the company’s new chief executive officer says.
And it would do well to think like a startup, said Anthony Thornley.
Thornley, the Callaway board member who took over as interim CEO after the resignation of Callaway CEO George Fellows on June 29, made his comments one day later in a conference call with analysts, where board Chairman Ron Beard voiced displeasure at the company’s performance.
When an analyst asked how the company could operate with such “a significant reduction in overhead,” Thornley brought up the model of a startup company. “I think if you view operations as more of in the startup manner, then you can do a lot with less,” the former Qualcomm Inc. executive said. “The fundamental thing is focus and simplification of business process.”
Making Changes
Thornley, Beard and Chief Financial Officer Brad Holiday gave few details of the layoffs and cost cuts ahead, saying plans were not yet complete. The company, which employs 2,100 worldwide, said it will take an $8 million charge related to organizational changes in the second-quarter. Executives promised further details when Callaway releases its second quarter earnings on July 26.
It is apparent now, however, that the company is facing financial headwinds.
KeyBanc Capital Markets analysts Scott Hamann and Lisa Brozewicz said in a June 30 research note that they expected $304 million in second-quarter revenue, slightly less than the consensus estimate of $307 million.
That followed a surprising announcement from Callaway.
The company said June 29 that second-quarter revenue will be more along the lines of $270 million. The KeyBanc note blamed a loss in U.S. market share.
In addition, Callaway said it expects to take several charges. The largest will be a noncash, $46 million valuation allowance related to the company’s U.S. deferred tax assets. “We expect to be able to reverse this allowance in future periods as the company’s U.S. business returns to profitability,” Holiday told analysts.
The company said it expects a second- quarter net loss of $55 million.
Carlsbad-based Callaway markets golf clubs, balls, and soft goods such as bags and apparel under the names Ben Hogan, Callaway, Odyssey and Top Flite. Sales have been pummeled by the recession as well as disasters, particularly those in Japan.
Callaway is in the middle of an initiative to move production to Mexico.
Going in the ‘Right Direction’
The KeyBanc analysts said Callaway was headed in the right direction and reiterated their “buy” rating on Callaway shares, which trade on the New York Stock Exchange as ELY. (KeyBanc also said that it does business with Callaway and that, together with affiliates, it owns more than 1 percent of ELY shares.)
The market as a whole reacted favorably to the changes that Callaway announced. Shares closed at $6.33 June 29, just prior to the wave of company announcements. They opened at $5.82 the following day, but found their footing and closed the week’s trading July 1 at $6.42.
Cost-cutting measures could yield up to $50 million in savings, which Callaway could invest in getting the word out about their products, Thornley said.
“Our competition has been investing considerable amounts of money — particularly recently in media advertising and tour expenses — and certainly that has had an impact on our business,” Thornley said. “We’re going to look at increasing our investment in that area. We’re also going to look at improving the way that we deliver the message.”
San Diegans may know Thornley better as an executive with Qualcomm, the chip-maker and communications technology developer. He was Qualcomm’s CFO from 1994 to 2002, and was president and COO from 2002 to 2005.
Thornley joined the Callaway board in 2004 and is considered the board’s financial expert, executives of the golf company said.
A Record of Accomplishment
Fellows, the outgoing CEO, said in a company-issued statement that a commute to New York and other demands on his personal life had spurred his decision to step down. He said that he was proud of what he had accomplished in his six years with Callaway. A Callaway statement credited Fellows with driving record sales and earnings prior to the economic downturn of 2007.
Athletic and sporting goods manufacturing is an $8.7 billion business, according to Santa Monica-based IbisWorld. For its part, Callaway Golf has an 11.5 percent share of the sporting goods market, the consultants said in a March report. Golf manufacturers make up 25 percent of the sporting goods market.
The same report predicts the market for sporting goods in general will grow by 1.2 percent annually between 2011 and 2016.
During the June 30 call, analyst Dan Wewer of Raymond James Financial Inc. said his firm was “getting a lot of questions” from Callaway shareholders, and asked executives why they didn’t just sell the business.
Thornley responded that the executives would not comment on mergers and acquisitions.