Callaway shaking things up

Callaway Golf Co., facing a large second-quarter loss after consecutive years of declining sales, is in the midst of a major shakeup.

The Carlsbad, Calif., company announced on June 29 the departure of George Fellows, its chief executive since 2005. It also plans an undetermined number of layoffs and other cost reductions that the company said will save $50 million annually. Anthony S. Thornley, a board member who was appointed as interim CEO, said during a June 30 conference call with analysts that some of those cost savings will be redirected into marketing “to strengthen our brand.”

Ron Beard, chairman of Callaway’s board of directors, said the company is “not starting a search at this time” for Fellows’ successor. Thornley added that he is “not taking a short-term view of this job,” though it was unclear whether he wants to remove “interim” from his title.

In preliminary financial results announced June 29, Callaway reported that it expects to lose $55 million on sales of $270 million during the second quarter. That compares with an $11.5 million profit on $303.6 million in sales during the same period in 2010. Callaway will announce its official second-quarter results in late July.

The projected $55 million second-quarter loss includes a $46 million valuation allowance because of the likelihood that the company will not be able to realize its US deferred tax assets. This is a required accounting decision that reflects the company’s projection that future income won’t be sufficient to take advantage of the tax breaks. In its June 29 press release, however, Callaway reported that it “expects to be able to reverse the allowance in future periods as the Company’s U.S. business returns to profitability.”

“The bottom line is that our results are not satisfactory, and the board believes now is the time to make changes to our organization,” Thornley said during the conference call. Thornley acknowledged in a June 29 statement that Callaway “is not keeping pace with the industry recovery.”

Fellows’ departure follows a downturn in Callaway’s business since 2007, when sales reached $1.12 billion. Sales during the past two years — $950.8 million in 2009 and $967.7 million in 2010 — were the lowest figures since 2004, when total sales were $934.6 million. Callaway has incurred a net loss in the past two years — including $18.8 million in 2010 — after four straight years of increasing profits.

Callaway’s problems are evident across various parts of its business:

• Sales in the critical metalwoods segment, the high-margin category on which Callaway built its brand in the 1990s, continue to lag. That segment accounted for $305.9 million in sales in 2007, but fell to $225.4 million in 2010.

• Despite Callaway’s acquisition of Top-Flite in 2003, the company has struggled to gain traction in the ball business. Total ball sales were $176.5 million in 2010, the lowest level since 2003, before the integration of Top-Flite.

• Domestic sales have been in decline, falling to $468.2 million in 2010 from $597.6 million in 2007.

• Callaway’s efforts to build its international business have met with mixed results. International sales peaked at $563.2 million in 2008, but fell to $495.5 million in 2010. Annual sales in Japan rose from $103.4 million in 2005 to $166.5 million in 2008, but since have been flat, finishing 2010 at $164.8 million. European sales, which reached $193.3 million in 2007, fell to $130.1 million in 2010 — far below even the 2005 level ($166.2 million).

Casey Alexander, who follows Callaway as a special-situations analyst at Gilford Securities, said Callaway’s plan to reinvest in marketing initiatives was a positive sign.

“Fellows has been a cost-cutter, a cost-reduction CEO,” Alexander said. “Unfortunately that has led to market-share losses across his span as CEO.”

Callaway’s plans to delay a search for Fellows’ successor suggests “they are at least keeping their options open,” Alexander said.

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