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Callaway Golf Strikes Hopeful Tone for Industry

Callaway Golf Co. struck a hopeful note on April 27 as it gave a preview of its first-quarter financial results and updated its response to COVID-19.

Revenue and earnings were down, but the business did not tip into loss territory.

The golf equipment maker, which has made several apparel acquisitions in recent years, also announced a bond issue on April 30. The company said it sold $225 million in 2.75% convertible senior notes in a private offering. Callaway (NYSE: ELY) said it plans to use proceeds for working capital and general corporate purposes, as well as to pay the cost of capped call transactions.

“The strength of our brands, geographic diversity and the strong operational steps we’ve taken to date affirm the ability of Callaway to navigate through this crisis,” CEO Chip Brewer said in a statement.

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Retail sales slowed because of shelter-in-place orders, but e-commerce exceeded expectations, the company said.

Lower Revenue, Still Some Profit

The business estimated net sales in the quarter ended March 31 will be in the range of $438 million to $443 million, and that earnings per share will be in the range of 27 cents to 31 cents.

That compares with $516 million in net sales in the same quarter of 2019, and earnings of 50 cents per share. Though it had a strong start in January and February, COVID-19 and foreign currency exchange rates weighed on the results, Callaway said.

Analysts had expected revenue of $482.4 in the quarter, according to Alex Maroccia, who covers Callaway Golf for Berenberg Capital Markets.

“… [W]e believe we underestimated the importance of brick-and-mortar retail for Callaway’s sales and are negative on the short-term impact for the company in Q2 due to extended retail store closures, at least through mid-May in many states,” Maroccia wrote in a research note. “We remain positive on Callaway’s long-term prospects due to its product focuses and lack of liquidity or debt concerns.”

Callaway shares rose in the two days that followed the earnings preview. They went from a closing price of $10.63 on Friday, April 24 to $12.31 on April 27, an improvement of 16%. Shares closed the next day at $13.80, according to Yahoo Finance.

The business has yet to finalize its first-quarter earnings and said it will release them later in May.

Cutting Costs

Callaway said it was working to maximize liquidity and reduce costs. As of March 31 the company had more than $250 million in cash and available credit.

The Carlsbad business said it reduced planned operating expenses and capital expenditures by almost 20%. It said it is reducing discretionary spending and infrastructure costs worldwide.

Callaway’s board has given up its annual cash retainer fees and top executives have voluntarily given up compensation. According to securities filings, CEO Brewer gave up his base salary of $900,000, starting with the first pay period after April 6. He is eligible for other compensation.

Pent-Up Demand

Summarizing Callaway’s business outlook, Brewer spoke of the desires of a quarantine-weary populace.

“Although the full impact of the COVID-19 outbreak on society, the economy and our businesses remains unclear, we are confident that our principal businesses (golf equipment, golf apparel and accessories as well as outdoor apparel and accessories) position us well for a world of social distancing and a ‘new normal,’” the CEO said in a statement.

“The joy of being outdoors, whether hiking, camping or simply taking a walk in nature, has never been more evident and is both logically and emotionally appealing today more than ever. At the same time, we expect the sport of golf to come back quickly as it is commonly viewed as a relatively safe and healthy outdoor activity that one can enjoy while still observing social distancing guidelines.

“This theory is supported by high usage rates of many golf courses that are open in North America as well as the reported usage rates as markets opened up post COVID-19 outbreaks in both [South] Korea and China. It is also supported by third party National Golf Foundation research which indicates a pent-up desire to play the game. Furthermore, while many portions of our business are currently operating on a limited basis due to various government orders, which will significantly impact our second quarter financial results, we are starting to see some signs of recovery, particularly in the regions that were first affected by COVID-19 and are in the process of recovering.”

Maroccia, the analyst, said that while COVID-19 was putting pressure on working class people, it is not putting as much pressure on the demographic that plays golf.

Foreign markets are also helping the business. Brewer said the company experienced year-over-year growth in Japan and South Korea.

Callaway Golf plans to hold its annual meeting May 12.

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