Callaway Golf Company (NYSE:ELY) has announced its financial results for the first quarter ended 31st March, 2008, reporting significant improvements in sales and earnings over the same period a year ago.
Highlights for the quarter include:
• Record net sales of $366.5 million, a 10% increase as compared to $334.6 million for the same period in 2007.
• Fully diluted earnings per share of $0.61 on 64.8 million shares as compared to $0.48 on 68.3 million shares in 2007. This represents a 27% increase in diluted earnings per share.
• Fully diluted earnings per share for the first quarter of 2008 and 2007 include $0.01 of after-tax charges for gross margin improvement initiatives announced in November, 2006.
“We are pleased with our results for the first quarter,” commented George Fellows, President and CEO. “The improvements made in our product development process and supply chain have positively contributed to our ability to achieve record first quarter sales.”
“While cautiously optimistic given our first quarter results,” continued Mr. Fellows, “it is important to remember that the second quarter is generally when the consumer purchase cycle begins and it is a critical quarter for us in achieving our targets. We remain optimistic that we can achieve our full year guidance range, although given current macroeconomic and market conditions, we believe our results will most likely be at the lower end of our original range.”
Details of First Quarter Results
The increase in sales for the first quarter is primarily attributable to:
• increased fairway wood sales associated with our FT and FT-i product launches
• increased sales of Odyssey putters driven by our Black Series, Divine Line, and sell-in of our new products
• increased sales of golf balls driven by HX Hot Bite and HX Tour ix products
• increased accessories sales associated with packaged club sets and headwear
• foreign currency exchange rates
Gross margins as a percentage of net sales were 48% for the first quarter, the same as for the first quarter of 2007. Charges related to the Company’s gross margin improvement initiatives did not have a significant effect on gross margins in either period.
The Company continues to benefit from the gross margin initiatives implemented in 2007 which had a positive impact of 130 basis points during the quarter. This benefit was primarily offset by i) an unfavorable shift in product mix due to expected lower second year sales of premium drivers and X-series irons which generally have higher margins than the 2008 new products and ii) higher fixed cost absorption charges related to lower golf ball production volumes during the fourth quarter of 2007.
The lower production volumes were consistent with the Company’s inventory reduction initiatives and the recent improvements in inventory management and planning, which enables the Company to operate its golf ball business with less inventory on hand. The effect of the fourth quarter production volumes on first quarter results was consistent with the Company’s expectations and should not affect the balance of the year. The Company estimates full year gross margins to improve at least 200 basis points compared to 2007.
Operating expenses for the quarter were $111 million, an increase of $6 million when compared to 2007. The increase is primarily due to higher advertising and promotion expense to support the new products launched during the quarter, an increase in costs due to the effect of foreign exchange rates on non-U.S. expense, and general inflation. As a percentage of sales, operating expenses declined to 30% compared to 31% in 2007.
The Company originally estimated in January that its full year 2008 net sales would be in the range of $1.145 to $1.165 billion and that its full year pro forma fully diluted earnings per share would be in the range of $1.08 to $1.18 on an estimated 67 million shares. Pro forma earnings exclude charges related to the Company’s gross margin improvement initiatives, currently estimated at $0.08 per share for 2008. While the Company still estimates its financial results will fall within this range, given uncertainties surrounding the economy, second quarter sell-through, and competitive actions, these results are projected at this time to be at the lower end of this range on a base of 66 million shares.
A replay of a company conference call will remain available until 9:00 p.m. PDT on Thursday, 8th May. 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 920536.
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