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Callaway Golf Company (ELY)Stock (Consumer Products Industry, Retail Industry, Sporting Goods Industry)
 Callaway Golf Company (NYSE: ELY) manufactures golf equipment and accessories. The company sold $1.1 billion in equipment for FY 2007[1], and 47% of these sales were outside the U.S.[2] In 2007, Callway's net sales were divided between woods (27%), irons (28%), putters (10%), balls (19%), and other accessories (17%). The company sells more golf clubs than any other manufacturer, including Titleist, TaylorMade, Nike, Cleveland, and Ping.[3] Callaway is the leading company in a shrinking market (and the only one focused exclusively on golf). 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, and equipment sales are falling across the board.[4] Callaway depends on continual new product launches for its success, as customers come back to buy the latest technology. The firm has has had mixed success with this of late - in 2007, sales of a new line of Top Flight balls called the Xtreme flopped, and so in 2008 the firm is stepping up its efforts, releasing a new D2 ball technology using dimples on top of dimples to improve the ball's flight and give the player greater control. New releases like the D2 as well as the revival of substandard brands like Top Flite and Ben Hogan will be equally important to the firm's future growth.[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. In February 2008, the company built its brand equity even further by signing a five-year license with St. Andrews Links to develop accessories, whose proceeds will directly contribute to the restoration and preservation of the historical golf course.[7] These high-profile deals and endorsements are common in the golf industry, and Callaway must make strategic decisions about which golfers to sign, as their success has a major effect on equipment sales. The company generated over $1.1 billion in sales in 2007, of which $493 million yielded into gross profit. In the same year, Callaway spent over $32 million in research and development, and total costs were $403 million.[8] Callaway hopes to drive its market share in 2008 with the release of its Hyper X woods, X-20 and Big Bertha irons, and Tour golf balls.
 [edit] Key Trends and Forces[edit] Stagnant growth of the golf industry challenges Callaway's market share gainsThe number of yearly golf rounds is an effective indicator for the annual sales of golf equipment. In 2006, 501 million golfers teed it up 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. 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.[13] The stagnant golf population hinders the increase of consumer spending and prohibits Callaway's growth, forcing the company to focus on innovation and capitalizing on its brand equity to experience market share gains. [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:
[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.[15] As a result, Callaway faces the challenge of having to release fresh products every year to accommodate its consumers. In the recent past, Callaway lost its reputation as a market leader due to products that miserably failed, like the ERC driver, or ones that never really stood out, such as the FT-3 driver. The company's struggles with inventing novel clubs can be seen by the decline in research and development expenses over the past three years: 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] Top Flite and Ben Hogan brands need new products to help earningsCallaway's acquisition of Top Flite and Ben Hogan in 2003 is one of the main sources of the company's present day troubles. The Ben Hogan brand received mild success with the Tour Deep golf ball since its release in 2004, but has not developed any new technology since.[18] Top Flite's failed attempt in 2006 to return as an ubiquitous golf ball with the launch of the Top Flite Xtreme has been mitigated with last year's debut of the D2. The new ball, which implements Dimple-in-Dimple aerodynamics technology, could serve as a springboard for Top Flite's comeback.[19] [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.[20]
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:
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