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Callaway Golf Company (ELY)Stock (Consumer Products Industry, Retail Industry, Sporting Goods Industry)
 Callaway faces pressures from a shrinking market. As the Baby Boomer generation that fueled the sport's popularity ages and a younger, less active generation finds its entertainment elsewhere, fewer people are playing fewer rounds of golf.[3] The number of golfers in the U.S. has declined steadily since 2000, reaching 26 million in 2008, down from 30 million in 2000.[3] Furthermore, the amount of golfers that play at least 25 times a year has dropped about 33% since 2000.[3] However, Callaway's sales have maintained strong as of 2007, increasing 38% since 2003.[4] Callaway depends on continual new product launches for its success, as customers come back to buy the latest technology. In 2007, the company's product launches had mixed results - sales of a new line of Top Flight balls called the Xtreme flopped, but the popular release of the Big Bertha 460 driver spurred a 15% increase in driver sales.[5] [edit] Business OverviewCallaway manufactures clubs, including drivers, woods, irons, wedges, and putters, under their brands Callaway and Ben Hogan, while developing golf balls under the names Callaway, Ben Hogan, and Top Flite. In addition, the company produces putters through their Callaway and Odyssey lines, and retail apparel (hats to shoes) and accessories (bags, umbrellas, other forms of gear) primarily through its Callaway logo.[6] Callaway, Ben Hogan, Top Flite, and Odyssey are all well known to the golfing community because of endorsements by top professional golfers, like Phil Mickelson, Arnold Palmer, and Annika Sorenstam. The company retails goods worldwide, with international sales of 47%.[2]  [edit] Business Segments  [edit] Irons (28% of Revenue)The company sells irons and wedges under the Callaway Golf, Top-Flite, and Ben Hogan names. Callaway earned $309.6 million in revenue from iron sales in 2007, which represented a 8% increase from a year earlier.[5] The company attributes several new successful product launches, including the X-20 series irons, for the rise in sales. [edit] Drivers and Fairway Woods (27% of Revenue)Callaway designs and sells drivers and fairway woods under the Callaway Golf, Top-Flite, and Ben Hogan brand names. The company earned $305.9 million in revenue from the sales of drivers and fairway woods, or 27% of its total 2007 revenue.[9] Sales of drivers and fairway woods increased 15% during 2007 mainly because of higher prices associated with new product sales like its Big Bertha 460.[5] [edit] Golf Balls (19% of Revenue)Callaway earns 19% of its revenue from sales of golf balls under the Callaway Golf and Top-Flite brand names.[5] Golf ball sales declined 1% during 2007 because of decreased sales of Top-Flite golf balls that was partially offset by an increase in the sales of Callaway Golf balls.[10] [edit] Accessories and Other (17% of Revenue)This segment includes Callaway's sales of golf-related accessories like golf bags, footwear, gloves and umbrellas as well as royalties earned through licensing of the company's logo on apparel, watches, and travel gear. Together, accessories sales reached $186.9 million in 2007, or 17% of the company's revenue.[5] This represents a 17% increase from 2006 which was mainly due to higher sales of Callaway footwear.[5] [edit] Putters (10% of Revenue)Callaway also sells putters under the Odyssey, Callaway Golf, Top-Flite, and Ben Hogan brand names. Putter sales accounted for 10% of the company's revenue in 2007, reaching $109.1 million.[5] Sales of putters increased 6% during 2007, which was mostly due to slight price increases that were partially offset by decreases in units sold.[5] [edit] Financial AnalysisCallaway earned $1.12 billion in revenue in 2007, a 10.5% increase from 2006.[11] Callaway's revenue in 2007 also marked a 38% increase in sales since 2003.[4] The company's increase in revenue was primarily driven by a 13% increase in overall golf club sales and a 17% growth in international sales that was partially offset by a 1% decline in revenue earned from golf balls.[11] Regionally, Europe led the company's growth, increasing 21% in sales, compared to 14% in Japan, and 5% increase in revenue in the United States.[11] Beginning in November 2006 and continued throughout 2007, Callaway implemented several initiatives in order to improve its gross margin. During 2007 the company focused primarily on reducing raw materials costs, streamlining its product distribution process, and installing new machinery to make its manufacturing more efficient and less costly.[12] These initiatives helped Callaway improve its gross margin to 44% in 2007, up from 39% in 2006.[12] Callaway's net income totaled $54.6 million in 2007, a 134% increase from 2006.[13] However, net income was a mere $23.3 million in 2006[4] mainly because of one-time costs associated with the company's gross margin improvement initiative as well as after-tax charges because of the company's Top-Flite purchase in 2003. The company's growth in net income is attributed primarily to its increase in gross margin (5% increase) as well as increased sales worldwide. Furthermore, the company's SG&A and research and development expenses as a percentage of revenue remained constant during 2007, which added to Callaway's net income growth.[13] The company's golf clubs segment (including all types of clubs and the accessories category) continues to be the most crucial aspect of the company's financial success as it operated at a 16.7% operating margin in 2007, compared to 0.42% for golf balls.[14] [edit] Key Trends and Forces[edit] Declining Golf Industry Challenges Callaway's SalesThe number of yearly golf rounds is an effective indicator for the annual sales of golf equipment. In 2006, 501 million golfers rounds of golf were played in the U.S., down from its peak of 518 million in 2000. The population (golfers who play at least eight rounds a year) in 2006 was 15 million, down from the record of 17 million in 2000.[3]  In 2006, for the first time in over half a century, the golf industry did not see any net increase of facilities from the previous year (119 new courses opened while 146 closed down). As a benchmark, 400 courses were introduced in 2000.[16] However, Callaway continues to grow as of 2007, with a 10.5% increase in sales during 2007, mainly due to a 21% increase in European sales as the company continues to seek expansion opportunities abroad.[11] [edit] Callaway's brand equity depends on the performance of its endorsed playersThe performances of the professional golfers sponsored by Callaway strongly relates to sales. When a pro golfer uses certain equipment to win a tournament, that company experiences tremendous exposure to the media and receives praise from its peers. Amateur golfers of all levels generally want to play with the same types of equipment (clubs, balls, gear) the successful professionals trust. Callaway equipment is represented well on major tours: Callaway Endorsement Players [17]
[edit] Due to the general trend of short product life cycles, Callaway's new releases must drive its revenueNew Callaway products have an average life of two years, with most of its sales occurring in the first, and generate about 55% of the company's annual sales.[18] As a result, Callaway faces the challenge of having to release fresh products every year to accommodate its consumers. The company's struggles with inventing novel clubs can be seen by the decline in research and development expenses since 2004:  Despite its downward trend of innovating profitable products, Callaway looks forward to a successful 2008 with the help of its strong brand equity and by introducing the following products to the market:
[edit] Seasonal fluctuations impact golf rounds played and Callaway’s salesWarm weather is the ideal condition for golf, and consequently Callaway generates approximately 65% of its revenue during the spring and summer. In addition, golf companies experience financial success when their players perform particularly well in the Majors (Masters in April, U.S. Open in June, British Open in July, PGA Championship in August)), which coincides with prime golf season in America. An abundant quantity of golfers hang their clubs during the cold months of fall and winter, resulting in a decrease of rounds played in the second half of the year. In the short term, Callaway is expected to get a slight boost from the three week extension of daylight savings time starting in 2008, as this should increase the number of rounds played in some North American markets. [edit] CompetitionCallaway encounters fierce competition in each of its departments, but has climbed its way to become one of the top retailers in four of the main golf equipment categories.[21] Callaway Products by Market Share of Total Golf Equipment Industry [22]
Fortune Brands, Adidas, and Nike are the three largest companies Callaway faces in the U.S.:
The following clubs are expected to compete with Callaway this year:
[edit] Notes
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