Callaway Golf's expansion drive helped the company achieve strong results for the past year, driven by strength in its Epic line of woods, continued growth in golf balls and the successful integration of its new business ventures.
Early in 2017, the group bought Ogio International, a brand of golf bags and accessories, for $75.5 million. In the third quarter, it purchased Travis Mathew, an upmarket ten-year-old U.S. golf apparel brand, for $125.5 million in cash. The buyer said the two acquisitions led to an increase in net sales of more than $100 million in the Gear and Accessories operating segments.
Revenues were also boosted by the company's apparel joint venture in Japan, which was formed in July 2016. Callaway's management said that investments outside its core areas are all meeting or beating its expectations and should provide incremental growth and profitability over the coming years.
Sales for the 12 months ended Dec. 31 rose by 20.4 percent from the previous year to $1048.7 million, reflecting increases in all reporting regions, as well as market share gains in those regions. The growth was fueled by increases of 42.5 percent to $307.9 million in sales of woods and 6.8 percent to $162.5 million in golf balls. In the Gear and Accessories segment, revenues soared by 78.0 percent to $243.1 million. Meanwhile, sales of irons and putters dropped by 9.2 percent and 2.7 percent, respectively.
The U.S. market generated the largest increase, up by 26.5 percent to $566.4 million. The company noted that Callaway has been the U.S. market's number one golf equipment brand every month for 35 consecutive months. It credited this performance to the significant investments made over the last two years, including capital projects in its ball plant as well as the sales force, marketing and R&D.
Callaway's strong performance in its domestic market compares with a sales rise of 13.6 percent to $139.5 million in Europe, up by 16.9 percent in constant currencies, in spite of a dip in the fourth quarter. The management said that the European market was remarkably strong in 2017, delivering record revenues as measured in pounds sterling, which is the currency of record for its European subsidiary, based in the U.K. It noted that its European team was aided by favorable market conditions, as well as strong market share growth, which was partially offset by currency.
According to the group, its market share in golf equipment Europe was 24.3 percent, 2 percentage points higher than in the previous year. It finished the year as the number one hardgoods brand in the region - driven by being number one in drivers, fairway woods, and putters - and as the number 2 brand of golf balls, with continued growth in market share.
Callaway's turnover firmed up by 16.7 percent to $199.3 million in Japan, or by 21.3 percent in constant currencies, driven by the addition of the Callaway apparel joint venture and strong market share performance in its core equipment business. The company believes that on a market share basis, it ranks as the number one brand for golf clubs and drivers in the U.S., U.K., Europe and Japan. Sales in other Asian countries advanced by 14.1 percent to $76.5 million, and sales in other foreign countries inched up by 6.5 percent to $77 million.
Callaway's gross margin was up by 1.6 percentage points to 45.8 percent, primarily due to a favorable shift in product mix toward the higher-margin Epic woods and irons combined with overall higher average selling prices, less discounting and lower promotional activity. The adjusted Ebitda, which excludes the non-recurring Ogio and Travis Mathew transactions, increased by 72 percent to $100 million. The group's net income declined by 78.4 percent to $41 million, due to the impact of the new acquisitions.
In the seasonally small fourth quarter, the group posted a 17.1 percent increase in revenues to $192 million, while the gross margin jumped by 3 percentage points to 41.6 percent. It recorded a net loss of $19.4 million, against a net income of $123 million for the year-ago quarter. Excluding one-time items, it had a net loss of $15.2 million, up from $8.6 million.
Moving forward, the company expects growth of between 6 and 8 percent in 2018. This assumes a flat to slightly improving overall market and slightly favorable foreign currency rates. Callaway also estimates that its 2018 gross margin will be about 0.5 percentage points higher than in 2017.