Callaway Golf suffered a sharp decline in its turnover for the first quarter but the company says it has become more cost-efficient and the brand's impetus is strong. The performance led Callaway to reduce its sales forecast while upping its profit estimate for the full year.
Chip Brewer, the company's chief executive, took the unusual step of ending a quarterly conference call with a list of encouraging factors for the golf market, such as growing sell-through, some increases in the number of rounds played and the stabilization of U.S. participation numbers.
The company's sales were down by 19 percent to $284.2 million for the quarter, which was still a drop of 16 percent in constant currencies. The company attributed this chiefly to its own strategic decision to shift the timing of product launches, and to the 4 percent consumption tax that was applied in Japan from April last year.
Japanese sales were down by 28 percent in yen for the quarter, which had much to do with the extra tax. Callaway explained that Japanese retailers purchased more abundantly than usual in the first quarter last year, as they assumed that consumers would rush to buy before April. Callaway said the Japanese golf retail market declined by 14 percent for the quarter but the brand raised its share of equipment sell-out by 1.5 percentage points to 16.6 percent.
Callaway's turnover for the quarter was also badly hit in other Asian countries, where its sales shrank by 37 percent in constant currencies. Callaway continues to perform strongly in India but the company said that some Asian markets had not been developing as encouragingly as predicted, despite their strong prospects. The comment came just a few days after the closure of 66 “illegal” golf courses in China, which has been interpreted in some reports as part of the drive against conspicuous spending among Chinese officials.
Meanwhile, Callaway's sales fell by 9 percent in the U.S. and 11 percent in Europe in constant currencies. Both of these markets were estimated to be roughly flat in terms of sell-out for the quarter. Callaway said its share in the U.S. golf equipment market reached 20.6 percent, an increase of 1.3 percentage points, while its share dropped by 0.8 percentage points in the U.K. The group's turnover was also down by 22 percent in constant currencies in other foreign countries.
By product categories, sales of woods shrank to $89.5 million, down by 28 percent in constant currencies, as they were most affected by the change in the timing of product launches. Two families of Callaway woods hit the market in the first quarter of last year, Big Bertha and X2HOT, while the company had only one such launch this year with the XR, replacing the X2HOT. The Big Bertha was already replaced last fall. Callaway split launches to drive more efficient execution around them, and to explain the distinctive aspects of each family more clearly.
Meanwhile, sales in constant currencies dropped by 12 percent for irons and by 4 percent for gear and accessories. Sales of golf balls plummeted by 16 percent, as the launch of the Chrome Soft could not make up for two launches last year. Putters managed a sales increase of 2 percent.
The company's sales forecast for the full year has been adjusted to integrate the weaker turnover in the first quarter, but Callaway Golf still predicts ample sales increases for the next three quarters in constant currencies. Brewer said he was cautiously optimistic for improved market conditions later this year, as retailers are helping to clean up inventories and to recalibrate the market. The impact of the shift in product launches and the Japanese consumption tax issue should lessen as the year progresses.
Callaway thus predicts that its sales will reach between $840 and $860 million for the full year, which would be a decline of roughly 3 to 5 percent compared with 2014. Sales would reach between $890 million and $910 million in constant currencies, meaning flat sales to an increase of about 3 percent. For a start, sales in the second quarter are predicted to increase by about 8 percent in constant currencies.
While the sales drop was sharp for the quarter, the company's gross profit margin was more robust than anticipated. It reached 44.8 percent, down by 2.1 percentage points, as the currency issues were mitigated by improvements in manufacturing and supply chain, as well as a more favorable sales mix.
Callaway predicts that its gross margin will reach about 41 percent for the full year, which would be an improvement of 1.0 percentage point compared with 2014. In constant currencies, the increase would amount to 3.5 percentage points, with a gross margin reaching 43.5 percent for the year.
Operating expenses decreased by $13 million to $90 million for the first quarter, as Callaway continued to tightly manage costs. It ended the three months with income of $35.8 million, down from $55.3 million the previous year but higher than the company's estimates. So it raised its earnings per share estimate for the full year to a range from negative $0.03 to positive $0.04, compared with a previous estimate in the range of negative $0.09 to positive $0.01 and actual earnings per share of $0.20 last year.