Callaway Golf Company (ELY)

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Shunsuke Aonuma

Chlcks

Michael Mitchell

Callaway Golf Company (NYSE: ELY) makes golf equipment, including woods, irons, putters, balls, and other accessories.^[1] Callaways sales have historically been tied to the spending power of consumers overall, and thus was adversely affected by the global downturn.^[2]

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 is on a steadily declining trend.^[3] Furthermore, the amount of golfers that play at least 25 times a year has dropped about 33% since 2000.^[3] However, experts predict that the golf club market will see a growth rate of over 25% annually in China and India as golf continues to expand worldwide, a trend that benefits Callaway.^[4]

Callaway depends on continual new product launches for its success, as customers come back to buy the latest technology.

Business Overview

Callaway 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.^[5] 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 roughly half of its sales coming from abroad.^[6]

Business Segments

The company's business segments are organized into the Golf Clubs segment and the Golf Balls segment.

Golf Clubs Segment (80% of sales, 95.1% of operating income)^[7]

• Irons (27.6% of sales): The company sells irons and wedges under the Callaway Golf, Top-Flite, and Ben Hogan names. The company attributes several new successful product launches, including the X-20 series irons, for the rise in sales.

• Drivers and Fairway Woods (24% of sales): Callaway designs and sells drivers and fairway woods under the Callaway Golf, Top-Flite, and Ben Hogan brand names.^[8]

• 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.

Golf Balls (20% of sales, 4.9% of operating income ^[7])

Callaway earns 20% of its revenue from sales of golf balls under the Callaway Golf and Top-Flite brand names.^[1]

• Putters (9.1% of Revenue)^[1]:

Callaway also sells putters under the Odyssey, Callaway Golf, Top-Flite, and Ben Hogan brand names.

Key Trends and Forces

Declining Golf Industry Challenges Callaway's Sales

The number of golf rounds played in the US and the overall number of golf players has steadily declined in the last decade.^[9] Economic downturns also reduce demand for ELY's products as many consumers forgo purchases on luxury items like new drivers. ELY has cited softening worldwide sales following the 2007 Credit Crunch and subprime lending crisis.^[10]

One interesting factor that will help golf's popularity (along with Callaway's business) is the announcement that golf will make its return to the Olympic games in 2016, which will increase its exposure to the world and introduce it to a new generation of people.^[11]

Callaway's brand equity depends on the performance of its endorsed players

The 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 ^[12]

Due to the general trend of short product life cycles, Callaway's new releases must drive its revenue

New 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.^[13] 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:

Callaway's Annual Research and Development Expenses ^[14]

Seasonal fluctuations impact golf rounds played and Callaway’s sales

Warm 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.

Competition

Callaway 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.^[16]

Callaway's competitors include:

• Fortune Brands (FO): The Acushnet Company is Fortune Brand's golf division and runs the following companies: Titleist, Cobra Golf clubs, Pinnacle balls, FootJoy gear, and Scotty Cameron putters. Acushnet is the top U.S. selling golf product in balls (Titleist) and shoes (FootJoy).

• TaylorMade/adidas golf : Bought out by Adidas in 1997, TaylorMade manufactures golf clubs, balls, and accessories, while Adidas deals with apparel. Although it is ranked second in world club distribution, more PGA Tour professionals play with TaylorMade drivers than Callaway, Cleveland, Cobra, Nike, and Ping combined.^[17][18]

• Nike (NKE): Nike competes in all departments of the golfing market: clubs, balls, and gear. Always a leader in athletic innovations, Nike's golf equipment is used by Tiger Woods.

• Cleveland Golf: SRI Sports Limited, a Japan-based sporting goods company that sells tennis and golf equipment through their Dunlop and Srixon licenses, acquired Cleveland Golf in December of 2007. Their golf brands are number one in club sells and number two in ball sells in Japan.^[19] The company sells drivers through wedges and produces putters under their brand, Never Compromise.

• Ping Golf: Ping has proven to be a competitor in all categories of golf clubs. Their new products won awards in Golf Digest's Hot List for game-improvement irons and putters.^[20]

Notes

1. ↑ ^{1.0 1.1 1.2} ELY 2008 10-K, Item 7 "Management's Discussion," page 37
2. ↑ Callaway Q4 Results
3. ↑ ^{3.0 3.1 3.2} The New York Times, "More Americans Are Giving Up Golf," 2/21/2008
4. ↑ The Stock Masters: Is There Any Growth Left in Golf?
5. ↑ ELY 2006 10K, Item 1:Business, pg. 1
6. ↑
7. ↑ ^{7.0 7.1} ELY 2008 10-K, Item 7 "Management's Discussion," page 39
8. ↑ ELY 2007 10-K, Item 1, pg. 2
9. ↑ JS Online
10. ↑ "Callaway Swings to Quarterly Loss, Backs '08 View" Reuters.com 10/30/2008
11. ↑ CNBC: Callaway to be helped by new products, Olympics
12. ↑ Callaway Golf: Pro Tour
13. ↑ ELY 2006: 10k, Item 1:Risk Factors, pg.9
14. ↑ ELY 2006 10k, Item 6:Selected Financial Data, pg. 22
15. ↑ Golf Digest:Hot List 2008
16. ↑ Hoovers: TaylorMade-adidas Golf Company Overview
17. ↑ Hoovers: TaylorMade-adidas Golf Company Overview
18. ↑ TaylorMade: TaylorMade on Tour
19. ↑ Cleveland Golf: About us
20. ↑ Golf Digest: Hot List 2008