Callaway Golf Co. seems to be shooting under par on its comeback course.
The Carlsbad-based maker of golf clubs, balls and accessories reduced its traditional third-quarter loss, increased its yearly revenue forecast and said it might even turn a profit for 2013 — at least on a non-GAAP basis. Investors responded by sending shares almost 20 percent higher after Callaway (NYSE: ELY) reported financial results. Shares hit a three-year high on the following trading day.
Callaway executives attributed the company’s improved performance to added market share, good golfing weather during the quarter, operating efficiencies and cost management.
“From our perspective, [the turnaround] is going better than expected,” said Patrick Burke, vice president for global finance and investor relations with Callaway.
Callaway announced plans to cut staff and change business processes in mid-2011, after CEO George Fellows resigned citing personal reasons. Board member Tony Thornley served as CEO until February 2012, when the board hired Chip Brewer for the job. Brewer came from Plano, Texas-based Adams Golf.
Making and Anticipating Change
Callaway Golf is a leaner company today than the one Brewer inherited.
Callaway sold two of its brands, Ben Hogan and Top-Flite, in early 2012 to concentrate on its core Callaway and Odyssey brands. And it entered into a licensing arrangement for apparel and footwear in North America.
As for its staff cuts, Callaway reported 1,500 full- and part-time employees globally at the end of 2012, down from 1,800 at the end of 2011.
Despite such changes, the mood at Callaway under Brewer is “100 percent flipped from one or two years ago,” said Burke, who described the CEO as a passionate golfer, very decisive and a good planner.
The vice president credited Brewer with knowing the workings of the golf equipment market and being able to anticipate its reactions. For example, if Callaway gains market share, competitors might introduce new products, cut prices or have promotions to gain it back. But Brewer plans for such scenarios, Burke said.
Beating Expectations
The first and second quarters are normally strong for Callaway, and the company typically posts a loss in its third quarter. But July, August and September went better than expected. Weather was good during the quarter, and golfers played more rounds in Europe and the Americas, Brewer said in a statement. The United States, Europe and Japan all came in ahead of projections, Burke said.
Callaway reported a net loss of $22.9 million on net sales of $178.2 million during the third quarter, a marked improvement from its net loss of $89.2 million on net sales of $147.9 million in third quarter 2012.
For the nine months that ended Sept. 30, Callaway reported net income of $27.2 million on sales of $715.6 million, up from a net loss of $59.9 million on sales of $714.1 million during the comparable period in 2012.
Better-than-expected third-quarter results prompted Callaway to increase its revenue forecast for 2013 to $836 million. Previously the company said it expected $810 million to $820 million.
Callaway released its financial results after the market closed on Oct. 24. Company stock, which closed at $7.26 that day, got a lot of attention the following day. Some 9.6 million shares traded hands; the stock’s normal trading volume is in the six-figure range. Callaway shares closed Oct. 25 at $8.70 and hit a three-year high of $8.97 on Oct. 28.
Also in the third quarter, Callaway successfully avoided price cuts. The company sold less merchandise at a discount, and retailers made fewer demands for money back because of discounted merchandise, resulting in gross profit of $59.4 million — up substantially from its gross profit of $3.8 million in the same quarter of 2012. Selling expense fell from $60.3 million in third quarter 2012 to $49.9 million in the recent third quarter.
Selling Golf Globally
Callaway does business globally, and foreign exchange swings affect financial results. The company reported that changes in currency rates cost it $14 million in sales during the quarter and $32 million during the first nine months. During that period, Callaway did 49 percent of its business in dollars and 51 percent of its business in foreign currencies.
The Asian market is Callaway’s most profitable one, Burke said. A driver that would sell for $399 elsewhere can sell for $799 in Asia, the company has observed. Callaway is able to market a premium line, called Legacy, in the region.
Shortly after it reported earnings, Callaway said it would complete a plan to retire its preferred stock.
The company announced in August that it struck deals with certain holders of its convertible preferred stock to exchange those preferred shares for common shares. Callaway said it would issue about 3.39 million shares of common stock and exchange them for about 234,000 shares of its outstanding 7.5 percent series B cumulative perpetual convertible preferred stock. The company also promised to continue dividends on the preferred stock through Dec. 15.
At the time, Brewer said retiring the preferred stock was an important part of Callaway’s turnaround plan.
On Oct. 28, Callaway went a step further, saying it would redeem the rest of the convertible preferred stock — roughly 184,000 shares — and finish the process by mid-November. Chief Financial Officer Brad Holiday said the business was in a good position to make the move.