Callaway Golf (ELY) Misses Q4 EPS by 2c, Revenues Beat; Offers Q1 & FY20 EPS Views Below Consensus, Q1 Revenue Guidance Below Consensus

Callaway Golf (NYSE: ELY) reported Q4 EPS of ($0.26), $0.02 worse than the analyst estimate of ($0.24). Revenue for the quarter came in at $311.9 million versus the consensus estimate of $305.3 million.

"2019 was another successful year for our Company," commented Chip Brewer, President and Chief Executive Officer of Callaway Golf Company. "In addition to record sales and operating profit, we made great progress executing our corporate strategy of transforming Callaway into a premium golf equipment and active lifestyle company. The acquisition of Jack Wolfskin in early 2019 was an important part of that strategy and our TravisMathew business continues to grow at double digit rates. All the while, we remained steadfast in our focus on the golf equipment business which grew over 7%, outpacing the overall golf market and further strengthening our brand positions."

"Looking forward to 2020, the outbreak of the coronavirus will impact our business with regard to sales in Asia and on the supply side," added Mr. Brewer. "The financial guidance we provided today reflects our best estimate of the impact of this outbreak on our business. It is very difficult, however, to provide an estimate with any degree of certainty given the dynamic nature of this crisis. Our thoughts and prayers are with the people of China, including our employees, customers and their families in that region, as well as those affected by the virus globally. We hope and pray for a speedy resolution."

Mr. Brewer continued, "While the coronavirus, tariffs and foreign currency rates will provide headwinds in 2020, we are looking forward to another strong year of operational performance with growth in both our golf equipment and soft goods segments. We also intend to make additional investments in our business in furtherance of our corporate strategy of making Callaway a larger and more diverse company with higher embedded growth prospects and long-term earnings outlook."

GUIDANCE:

Callaway Golf sees Q1 2020 EPS of $0.41-$0.47, versus the consensus of $0.67. Callaway Golf sees Q1 2020 revenue of $501-516 million, versus the consensus of $543.14 million.

Callaway Golf sees FY2020 EPS of $0.82-$0.94, versus the consensus of $1.21. Callaway Golf sees FY2020 revenue of $1.75-1.78 billion, versus the consensus of $1.78 billion.

First Quarter 2020 Guidance

Basis for First Quarter Guidance. The 2020 first quarter projections set forth below are based on the Company's best estimates at this time. They include the estimated impact of certain factors, including (1) the coronavirus which is estimated to have a negative impact of $20 million on net sales and $10 million on Adjusted EBITDA, (2) changes in foreign currency effects, which are estimated to have a negative impact of $5 million on net sales and $5 million on Adjusted EBITDA, and (3) incremental tariff expense of $4 million on cost of goods sold and Adjusted EBITDA. For the sake of simplicity, these will be referred to collectively as the "Q1 Macrofactors".

The Company estimates first quarter 2020 net sales to be approximately flat to slightly down in 2020 compared to 2019 primarily as a result of the Q1 Macrofactors. This assumes a flat to slightly improving overall golf market and a slightly later launch date for the new Chrome Soft golf balls when compared to the ERC Soft golf ball launch in 2019.

The Company estimates that its first quarter 2020 gross margin will be approximately 10 basis points higher than the same period in 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margin associated with this cycle of product launches. In the first quarter of 2020, the Company expects that gross margin will be negatively impacted by $1 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $5 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margin will also be affected by the Q1 Macrofactors described above.

The Company estimates that its first quarter 2020 operating expenses will be approximately $7 million higher than 2019 operating expenses. This increase is being driven primarily by normal inflationary pressures and strategic investments in the new market expansions for the Jack Wolfskin business. In 2020, the Company expects that operating expenses will be negatively impacted by $1 million in non-cash costs related to purchase accounting adjustments as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems. The operating expenses in 2019 were negatively impacted by $6 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The Q1 Macrofactors are also expected to have a positive impact on 2020 operating expenses, primarily from changes in foreign currency rates.

The Company estimates first quarter 2020 earnings per share of $0.41 - $0.47. The Company's first quarter 2020 earnings per share estimate assumes an effective tax rate of approximately 18.0% compared to 16.5% in the same period in 2019. These estimates also assume a base of 97 million fully-diluted shares in the first quarter of 2020. The Company estimates first quarter 2020 Adjusted EBITDA of $72 - $79 million compared to $79 million for the first quarter of 2019. The Adjusted EBITDA estimates will benefit from a reduction in acquisition-related costs, which are estimated to be $2 million in the first quarter of 2020 related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems compared to $14 million in 2019. The earnings per share estimates will benefit from a reduction in acquisition-related costs and non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems, which are estimated to be $0.02 in the first quarter of 2020 compared to $0.13 in the first quarter of 2019. The projections also include the impact of the Q1 Macrofactors discussed above.

Business Outlook for 2020

Basis for Full Year Guidance. The 2020 full year projections set forth below are based on the Company's best estimates at this time. They include the estimated impact of certain factors, including (1) the coronavirus which is estimated to have a negative impact of $25 million on net sales and $13 million on Adjusted EBITDA, (2) changes in foreign currency effects, which are estimated to have a negative impact of $9 million on net sales and $10 million on Adjusted EBITDA, and (3) incremental tariff expense of $3 million on cost of goods sold and Adjusted EBITDA. For the sake of simplicity, these will be referred to collectively as the "Full-Year Macrofactors".

The Company estimates full year 2020 net sales growth of approximately 3% - 5%. This assumes a flat to slightly improving overall golf market and the estimated impact of the Full-Year Macrofactors discussed above.

The Company estimates that its full year 2020 gross margin will be approximately 120 basis points higher than 2019. This increase is being driven primarily by a positive mix benefit of the margin-accretive apparel business and higher golf equipment gross margin associated with this cycle of product launches. In 2020, the Company expects that gross margin will be negatively impacted by $5 million in non-recurring costs related to the warehouse consolidation projects in North America, Asia and Europe. The gross margin in 2019 was negatively impacted by $13 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition. The 2020 gross margin will also be affected by the Full-Year Macrofactors described above.

The Company estimates that its full year 2020 operating expenses will be approximately $46 million higher than 2019 operating expenses. This increase is being driven primarily by the continued investment in the Company's soft goods businesses, which includes new market expansion for Jack Wolfskin, continued infrastructure and brand investment for TravisMathew and investment in Asia to grow all of the Company's apparel brands. Normal inflationary pressures and on-going investment in the golf equipment business are also contributing to the increase. In 2020, the Company expects that operating expenses will be negatively impacted by $6 million in non-cash costs related to purchase accounting adjustments as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems. The operating expenses in 2019 were negatively impacted by $18 million of purchase accounting adjustments and non-recurring costs related to the Jack Wolfskin acquisition as well as other non-recurring advisory fees. The Full-Year Macrofactors are also expected to have a positive impact on 2020 operating expenses, primarily from changes in foreign currency rates.

The Company estimates full year 2020 earnings per share of $0.82 - $0.94. The Company's 2020 earnings per share estimate assumes an effective tax rate of approximately 18.0% which is slightly higher than 2019. These estimates also assume a base of 97 million fully-diluted shares in 2020, approximately flat with 2019. The Company estimates full year 2020 Adjusted EBITDA of $190 - $205 million. The Adjusted EBITDA estimates will benefit from a reduction in acquisition-related costs, which were $28 million in 2019 compared to an estimated $6 million in 2020 of non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems. The earnings per share will benefit from a reduction in acquisition-related costs, which were $0.28 per share in 2019 compared to $0.09 per share of non-cash amortization expense in 2020 related to the Jack Wolfskin acquisition and non-recurring expense related to the global warehouse consolidation activities as well as a small amount of non-recurring expense related to transitioning Jack Wolfskin's information systems. The projections also include the impact of the Full-Year Macrofactors discussed above.

For earnings history and earnings-related data on Callaway Golf (ELY) click here.

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