More efficient operations and an increase in average selling prices enabled Callaway Golf to sharply raise its profit margins in the first quarter, although its turnover contracted by 3.6 percent to $274 million, with a decline of 2.6 percent in constant currencies.
The Californian golf company attributed the drop in sales to exchange rate changes and its strategic decision to adjust the timing of product launches, meaning that most of the projected sales increase for the year should occur in the second half. Callaway emphasized that it remains the supplier with the largest share in the U.S. golf clubs market and it has reinforced its position as the second-largest player in the U.S. golf balls business.
Callaway suffered the sharpest sales decline in Europe, with sales down by 9.2 percent to $37.9 million and a drop of 5.9 percent in constant currencies. Sales shrank by 5.1 percent to $160.0 million in the U.S. market, due to the shift in launches and some unfavorable weather in Florida and California. However, sales increased in constant currencies in all other markets, up by 1.1 percent in Japan, by 2.9 percent in other Asian countries and by 13.0 percent in other markets.
Chip Brewer, Callaway's chief executive, said in a conference call with analysts that the company had been faced with unfavorable weather in the U.K. but the group raised its quarterly U.K. market share in hard goods by 2.7 percentage points to 19.3 percent. Brewer added that he was upbeat about prospects in northern Europe, after changes in sales leadership in the last years, and he pointed to outstanding market share expansion in central Europe, mostly in Germany.
Among other encouraging factors, Brewer said Callaway saw improvements in the broader golf market, with lower inventories, growing average prices, fewer promotions and the Japanese market moving in Callaway's favor.
The drop in the group's turnover affected all categories for the quarter, from woods to irons, putters, golf balls and other gear and accessories. Sales of golf clubs were down by 3.5 percent to $232.6 million and golf balls by 3.7 percent to $41.4 million. Callaway's turnover was down by 3.8 percent to $86.1 million for woods and by 3.8 percent to $59.2 million for irons.
Efforts to make the company more efficient and reduced promotional activity have continued to pay off with an increase of 3.5 percentage points to 48.3 percent in the gross profit margin for the quarter. As part of these efforts, Brewer pointed to a shift from a third-party warehouse to a company-owned facility in Swindon, near London, which enabled Callaway to lower costs and improve service for distribution in Europe.
After a decrease of $3 million in operating expenses, the group's operating income advanced by 22.7 percent to $45.3 million. The company ended the quarter with a net profit of $38.4 million, up by 7.2 percent.
Brewer said that the company would use the increased profitability and its stronger financial condition to spend more on business development in its core business and in tangential areas. Callaway already announced a joint venture with Groove & Sports for the production and distribution of Callaway branded apparel, footwear and headwear in Japan.
Callaway's projections for the full year have been adjusted due to a pre-tax gain of $18 million on the sale of about 10 percent of its investment in Topgolf International, a U.S. company specializing in gamified golfing ranges, in a transaction that was finalized in the second quarter. Callaway still has a stake of just under 15 percent in Topgolf.
The joint venture in Japan should not strongly impact net sales and gross margins this year, because it should not become operational until the second half of the year, but it should have an impact on operating profit, due to the costs of forming and integrating the joint venture.
Taking all of this into account, the company's latest guidance is that sales should reach about $238 to $245 million in the second quarter, up from $231 million for the same months in 2015. Earnings per share are estimated to reach $0.33 to $0.37 for the quarter, up from $0.15, with the gain on the Topgolf divestment accounting for $0.18 of the predicted increase. The remainder comes from continued improvements in gross margin, and in spite of a shift in marketing costs from the first to the second quarter.
For the full year, Callaway is projecting sales of $855 to $880 million, which is $10 million above its previous forecast and compares with $844 million in 2015. The gross profit margin is projected to increase to 44.5 percent, up by 2.1 percentage points against last year and by 1.0 percentage points against the previous guidance. With operating expenses in the range of $348 million, Callaway is projecting pre-tax income of $45 to $55 million, up from $20 million last year. Earnings per share are set to reach between $0.40 and $0.50, compared with $0.17 in 2015.
