Callaway Golf Company (NYSE:ELY) today announced its first nine months and third quarter 2014 financial results, reflecting its continued improvements in market share, tour success, and operating efficiencies, as well as its anticipated return to profitability for the full year, which would be the first time since 2008.
Despite softer than expected market conditions, Callaway reported for the first nine months of 2014 a 5% increase in net sales driven by growth in woods (+6%), irons (+9%), golf balls (+5%) and accessories and other (+3%). In addition, the Company’s improvements in gross margins (+280 basis points) and effective cost management (operating expenses were flat despite incremental investments in tour and marketing) allowed the Company to offset an almost $10 million increase in other expense, resulting primarily from adverse changes in foreign currency contract values. The 2014 results also benefitted from a $10 million decrease in pre-tax charges related to the cost-reduction initiatives that were completed in 2013. As a result, during the first nine months of 2014, income from operations doubled to $70 million and fully diluted earnings per share increased 83% to $0.66.
For the third quarter of 2014, sales were $169 million, a decrease of 5% compared to last year due to continued industry softness and the timing of new product launches compared to the same period last year. This decline in net sales, however, was more than offset by a 540 basis point improvement in gross margins, an $8 million improvement in operating expenses, and a $5 million improvement in other income due to positive changes in foreign currency contract values. As a result, income from operations improved to a loss of $3 million compared to a loss of $17 million for the third quarter last year and loss per share improved to a loss of $0.01 compared to a loss of $0.32 for the same period last year.
- 2014 first nine months sales increased 5% to $752 million, compared to $716 million in 2013; income from operations increased 100% to $70 million, compared to $35 million in 2013; earnings per share increased 83% to $0.66, compared to $0.36 in 2013.
- 2014 third quarter sales decreased 5% to $169 million, compared to $178 million in 2013; loss from operations improved to a loss of $3 million compared to a loss of $17 million in 2013; earnings per share improved to a loss of $0.01 compared to a loss of $0.32 in 2013.
- Callaway raises full year 2014 earnings guidance, estimating fully diluted earnings per share of $0.15 to $0.18 compared to prior guidance of $0.12 to $0.16; estimates net sales of approximately $890 million, consistent with prior guidance of $880 million to $900 million.
- Callaway estimates continued net sales growth in 2015 of 1%-2% on a consolidated basis, reflecting an estimated 5%-6% sales growth in its core channels, anticipated adverse effects from foreign currency exchange rates, first half retailer conservatism, a strategic change in product launch timing, and a reduction in certain closeout sales; Callaway also estimates further increases in profitability in 2015.
“Overall, we are pleased with our results for the third quarter and first nine months,” commented Chip Brewer, President and Chief Executive Officer. “While challenging market conditions have made sales growth in the first nine months of this year more difficult than we would have liked, we are encouraged by our market share gains and are confident that we are outperforming the industry. We are also benefitting from the many actions we have taken these past two years to improve our operating efficiencies, as we have been able to achieve significant improvements in profitability despite the effect of the headwinds on top-line performance.”
“We believe we are well-positioned for the balance of 2014 and for 2015,” continued Mr. Brewer. “Our brand continues to build momentum, our organization is strengthening, and we have an incredible product pipeline, including the Big Bertha Alpha Drivers, the Big Bertha Irons and Hybrids and our new Japan line of Big Bertha Beta Irons and Hybrids that are launching in the fourth quarter. As a result, we expect our recovery to continue with steady improvement in profitability.”
Outlook for 2014
Given an improving industry outlook for the fourth quarter, coupled with the Company’s planned new product launches, the Company is increasing its full year earnings guidance and updating its other guidance. The revised full year guidance is as follows:
Net sales for the full year 2014 are currently estimated to be approximately $890 million, an increase of 6% compared to $843 million in 2013. The Company’s prior guidance was $880 million to $900 million. The Company believes this growth rate will exceed the overall market and be driven by brand momentum and market share gains.
- Gross margins are currently estimated to be approximately 41.0%, compared to prior guidance of 41.7%. This decrease is primarily the result of unfavorable changes in foreign currency exchange rates. Gross margins were 37.3% in 2013. This anticipated improvement in 2014 is expected to result from improved operating efficiencies, improved pricing and mix of product sales, and the decrease in charges related to the cost-reduction initiatives.
- Operating expenses are currently estimated to be approximately $336 million, an improvement compared to previous guidance of $345 million due to the favorable impact of foreign currency exchange rates and lower stock price as well as effective cost management. The 2014 estimate is an increase compared to $326 million in 2013 due to a planned increase in investments in tour and marketing, higher variable sales related expenses, and modest cost of living increases.
- Pre-tax income is estimated to range from $18 million to $20 million, with a corresponding tax provision of approximately $5.6 million. Pre-tax income in 2013 was a loss of $13.3 million with a corresponding tax provision of $5.6 million.
- Fully diluted earnings per share is estimated to range from $0.15 to $0.18 on a base of 78 million shares, compared to a 2013 loss per share of $0.31 on 73 million shares. If the Company is successful in achieving these results, it would be the Company’s first full year net profit since 2008 and would represent a significant milestone in the Company’s turnaround.
Preliminary Outlook for 2015
The Company believes that it will continue to grow market share in 2015 and that industry conditions will improve. The Company, however, is anticipating continued headwinds from adverse changes in foreign currency exchange rates and retailer conservatism during the first half of 2015, as well as a reduction in closeout sales in 2015 compared to 2014. The Company believes that these factors will be offset by full year sales growth of 5%-6% in the Company’s core channel business in 2015. The Company further cautioned that the strategic change in product launch timing will adversely impact its first quarter 2015 sales comparisons to 2014, although it will benefit the Company in the long-term. Considering all of these positive and negative factors, the Company is currently estimating that its net sales will grow 1%-2% on a consolidated basis in 2015. The Company also expects steady improvement in its profitability in 2015.
Conference Call and Webcast
The Company will be holding a conference call at 2:00 p.m. PDT today to discuss the Company’s financial results, outlook and business. The call will be broadcast live over the Internet and can be accessed at www.callawaygolf.com. To listen to the call, please go to the website at least 15 minutes before the call to register and for instructions on how to access the broadcast. A replay of the conference call will be available approximately three hours after the call ends, and will remain available through 9:00 p.m. PDT on Thursday, October 30, 2014. The replay may be accessed through the Internet at www.callawaygolf.com
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