Reuters reports that Callaway Golf has posted a lower-than-expected rise in quarterly profit, as cost increases and other issues weighed on margins.
Net profit in the quarter ended June 30 was $22.5 million, or 33 cents per share, compared with $18.4 million, or 27 cents per share, a year earlier.
Excluding charges for the integration of the Top-Flite golf ball operations into its business and for cost-cutting measures, earnings were 35 cents a share. Analysts on average forecast 45 cents a share, according to Reuters Estimates.
Gross margin fell to 41 percent in the quarter from 45 percent a year earlier.
“Our second-quarter gross margin results did not meet our expectations due to some unanticipated execution issues and cost increases,” George Fellows, chief executive, said in a news release. A spokesperson could not be reached to elaborate,
Fellows said steps to improve margins would not help results until late in 2006.
Sales rose 6 percent to $341.8 million.
Callaway shares closed 16 cents, or 1.3 percent, lower at $12.51 on Wednesday on the New York Stock Exchange, before earnings were reported.
Highlights for the quarter include:
- Net sales of $341.8 million, an increase of 6% as compared to $323.1 million for the same period in 2005.
- Fully diluted earnings per share of $0.33 on 68.6 million shares, an increase of 22%, as compared to $0.27 on 68.7 million shares in 2005.
- Fully diluted earnings per share include $0.03 of after-tax charges for employee equity-based compensation associated with FAS 123R as well as charges of $0.01 for the integration of Top-Flite operations and $0.01 for the cost-reduction initiatives announced in September 2005.
- The second quarter of 2005 included after-tax charges of $0.03 for the integration of Top-Flite operations. Excluding these charges, the Company’s pro forma fully diluted earnings per share for the second quarter of 2006 would have increased 27% to $0.38, as compared to pro forma fully diluted earnings per share of $0.30 for the second quarter of 2005.
- Gross profit for the second quarter of 2006 was $140.1 million (or 41% of net sales), a decrease of $6.6 million from $146.7 million (or 45% of net sales) for the second quarter of 2005.
- Gross margins in the second quarter of 2006 were negatively affected by approximately $3.3 million (or one percentage point) due to a golf ball work-in-process inventory adjustment.
- Operating expenses for the second quarter of 2006 were $101.3 million, a decrease of $17.7 million compared to $119.0 million in 2005. A majority of the decrease is due to the cost-reduction initiatives announced in September 2005. This decrease also includes a $7.0 million reduction in accrued employee incentive compensation compared to last year.
Highlights for the first six months include:
- Net sales of $644.3 million, an increase of 3.3% as compared to $623.0 million for the same period in 2005.
- Fully diluted earnings per share of $0.65 on 69.4 million shares, an increase of 20%, as compared to $0.54 on 68.6 million shares in 2005.
- Fully diluted earnings per share include $0.05 of after-tax charges for employee equity-based compensation associated with FAS 123R as well as $0.02 for the integration of Top-Flite operations and $0.01 associated with the cost-reduction initiatives. The first half of 2005 included after-tax charges of $0.06 for the integration of Top-Flite operations.
- Excluding these charges, the Company’s pro forma fully diluted earnings per share for the first half of 2006 would have increased 22% to $0.73, as compared to pro forma fully diluted earnings per share of $0.60 for the first half of 2005.
- Gross profit for the first half of 2006 was $271.6 million (or 42% of net sales), a decrease of $7.7 million from $279.3 million (or 45% of net sales) for the first half of 2005.
- Operating expenses for the first half of 2006 were $196.5 million, a decrease of $23.5 million compared to $220.0 million in 2005. A majority of this decrease reflects the cost-reduction initiatives announced in September 2005. This decrease also includes a $4.5 million reduction in accrued employee incentive compensation.
“Shortly after joining the Company we announced in September 2005 the implementation of several business improvement and cost-reduction initiatives to improve the manner in which we bring products to market as well as reduce our overall operating expenses,” commented George Fellows, president and CEO of Callaway Golf Company. “Our second quarter results reflect the success of these initiatives. Sales of our Callaway and Odyssey brands continue to gain momentum in both revenue and market share which indicates that our product line for 2006 is being well received by both our customers and consumers in a very competitive marketplace.
“In addition, we are also delivering the anticipated savings in operating expenses from our cost-reduction initiatives and expect that a majority of those savings will positively impact earnings with the balance being reinvested in demand creation initiatives, consistent with our commitment. Performance in these two areas is critical to achieving our three year targets.
“We also previously announced we would focus on reversing the decline in gross margins that we had been experiencing over the last several years. Our second quarter gross margin results did not meet our expectations due to some unanticipated execution issues and cost increases. Initiatives are in process to begin improving gross margins, but they will not impact results until late 2006 and into next year.
“In addition to the gross margin initiatives, we are also focused on restoring the Top-Flite brand business. We believe that this brand can succeed in the market place and are implementing several initiatives designed to stabilize this important brand. I can assure you that these and other such initiatives are a top priority and I hope to share more details by the end of the year.
“In summary, we are comfortable with our three year corporate targets. I am pleased with our progress to date, with sales and earnings up for the first half, but recognize there is more to do. Our core brands are performing well and we are aggressively focused on improving our overall profitability.”
The Company held a conference call at 2:00 p.m. PDT yesterday. A replay of the conference call will remain available until 9:00 p.m. PDT on Wednesday, August 2, 2006. The replay may be accessed through the Internet at www.callawaygolf.com or by telephone by calling 1-800-475-6701 toll free for calls originating within the United States or 320-365-3844 for International calls. The replay pass code is 837120.
Callaway Golf www.callawaygolf.com