Callaway Golf Company (NYSE:ELY) yesterday announced that it expects revenues and earnings for the third quarter ending September 30, 2002 to be lower than current Wall Street projections. Positive developments such as the launch of a new premium titanium driver are not expected to be enough to offset a general softening in the golf equipment business in the United States and elsewhere. In addition, barring unexpected strengthening in the golf equipment market in the fourth quarter, the Company announced that it currently expects that revenues and earnings for the full year 2002 will be below last year’s results.
Reflecting a general softness in consumer spending in the United States, Japan and elsewhere, the Company expects to report revenue of about $155 to $160 million and earnings per diluted share (EPS) between $0.13 and $0.15 for the third quarter, and revenue of $750 to $760 million and EPS between $0.85 and $0.90 for the full year.
Included in the third quarter and full year results will be a reversal of approximately $17 million of warranty reserves pursuant to a review announced and commenced by the Company in July, which was partially offset by the establishment of additional inventory reserves of approximately $3 million on ERC II and Big Bertha C4 premium drivers.
In the Company’s opinion, the lower than expected revenues are due to a number of factors:
A weak U.S. economy has resulted in reduced consumer spending on discretionary purchases.
Further declines in the U.S. stock markets, widespread corporate lay-offs, and general economic uncertainty has impacted all consumer goods, including the Company’s products, in the second half of the year. As a result, the Company is not seeing products it sold into the retail channel in the first half of the year liquidating at the pace previously expected and re-orders have been at a lower pace.
On August 6, 2002 the United States Golf Association reversed its position regarding the allowance of high COR drivers such as the Company’s ERC II Driver for handicap purposes in the United States. In a proposal announced on May 9, the USGA had suggested that such drivers be allowed in the U.S. beginning January 1, 2003. The USGA’s reversal three months later confused consumers, causing them to postpone or even eliminate purchases of new equipment.
In addition, expected sales of the Company’s ERC II Driver in the U.S. during the latter half of the year in anticipation of the rules change did not materialize as would have been otherwise expected.
Japan’s economic slump has continued into the second half of the year, and the Company’s year-over-year decline in metal wood sales in that country is no longer being offset by better than expected results in other markets.
Rounds of golf played in the United States have declined for the second year in a row, contributing to reduced demand for golf clubs and golf balls.
“We have not seen participation levels in the game of golf grow for at least five years,” said Ron Drapeau, chairman, president and CEO of Callaway Golf. “This core group of golfers has not been immune from the economic forces that have wreaked havoc on consumer wealth in the United States, resulting in a significant reduction in demand for our premium golf products. In light of this situation, it is especially troubling to see a lack of vision on the part of golf’s rulemaking body in the United States contributing to the ills affecting the game and the industry.”
While the Company achieved better than predicted results in the first and second quarters of 2002, those early season successes have been stalled in the third quarter for the reasons noted above. Early season sell-in of product has not resulted in sufficient sell-through to generate re-orders at expected levels. Normal seasonality in the Company’s major selling areas limits any ability to revive sales excitement in the remaining months of 2002. Thus, while the Company expects the recent launch of its new Great Big Bertha II Titanium Driver to be successful, it does not expect late season sales of this product will be enough to offset the other factors affecting the second half of the year.
Mr. Drapeau stated further, “Without a major shift in the current economic environment it is reasonable to expect that our earlier expectations and current Wall Street estimates for 2003 are also too high. We are in the midst of our planning and budgeting process for 2003, and expect to have additional guidance later this year.”
“Given the current environment and our 2003 economic outlook,” Mr. Drapeau added, “the Company will continue to review its cost structure in the fourth quarter of 2002, including all available actions to eliminate the losses in its golf ball business. With our strong balance sheet and the ability to generate about $75 million in free cash flow annually, we view ourselves as well positioned to withstand these challenging times, protect our business, and grow where opportunities present themselves.”
The Company plans to announce results for the third quarter on October 17, 2003, and will hold a conference call to discuss those results on that day.
Callaway Golf Company www.callawaygolf.com