Thursday, May 2, 2019

A Current AIM International Equity Holding: Callaway Golf Company (ELY, $17.47): “Is Callaway About to Tee Off?” By: Paul J. Cox, AIM Student at Marquette University

Callaway Golf Company (ELY, $17.47): “Is Callaway About to Tee Off?”
By: Paul J. Cox – AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


Callaway Golf Company (NYSE: ELY) has evolved from a manufacturer of golf clubs to a leading producer and distributor of premium golf equipment and apparel.  Most recently, ELY has focused on expanding its lifestyle apparel segment acquiring JW Stargazer Holdings and their flagship brand Jack Wolfskin, which management expects to provide a platform for future growth in the apparel segment.

Approximately 43%, 46% and 49% of total net sales were derived outside of the United States for 2018, 2017, and 2016 respectively doing business in over 100 countries across the globe.
ELY owns a minority interest in Topgolf – which is an outdoor entertainment based venue in which participants hit golf balls at targets in interactive golf games.  Callaway is the preferred partner of Topgolf offering preferred retail position in Topgolf stores and supplier contracts.  Topgolf plans to open 10 new stores every year with over 50 locations currently.  Topgolf has been instrumental in in driving golf interest and participation.

Key points:

  • Callaway’s gross margin improved 70 basis points in FY 18’ to 46.5% compared to 45.8% in FY 17’.  Management credits this to an increase in average selling prices and a more favorable product mix with the investment into its lifestyle apparel segment. Incorporating higher technology costs and rising costs of raw materials hindered these margins despite improvement.
  • Net sales in the United States increased 25.1% to $706.3 million during 2018, while sales outside of the United States increased $52.4 million, or 10.8% compared to 2017.  This increase reflects strong market conditions as well as the Travis Matthew line gaining brand momentum in the United States.  Sales outside of the United States were spearheaded by a 22% increase in Korean sales year over year due to brand strength.
  • Callaway lost Market share in the hard goods market coming in at 24%, down 110 basis points year-over-year.  While losing market position in the hard goods area, the golf ball brand was up 210 basis points year over year with 16.4% of the market.
  • Callaway struggled in European markets during Q4 2018.  Sales decreased by 9.4% in Q4 and the hard goods market share decreased year over year.  Despite a tough European Q4, sales increased 6.1% for the full year.
  • Management has indicated their confidence in the 2019 product lineup.  The new products introduced include the Epic Flash Driver designed using A.I. to increase ball speed and distance and is the only driver on the market that has been awarded 20 out of 20 stars for performance, innovation, demand and aesthetics, the Apex line of Irons featuring a complete technology overhaul, ERC Golf Balls and Stroke Lab Putters.

What has the stock done lately?

Callaway shares, like most company’s shares, dropped significantly during the market corrections in November and December, dropping from $22.53 to ~$14 after the corrections.  Since then, the stock has been recovering and reverting back towards the $20 range trading at $17.11 as of April 25, 2019.  The 52 week range is $14.44 (12/24/18) – $24.67 (09/28/18).

Past Year Performance: 

ELY was added to the AIM small cap portfolio at a price of ~$15 with a price target of $25.  The stock has experienced volatility with changing market conditions throughout the end of 2018 Q4.

Source: FactSet

My Takeaway:

ELY is positioned well for growth moving forward into the rest of 2019 and beyond.  Management is confident that the 2019 club line up will drive equipment sales growth.  I believe that margin expansion still has room to grow and continue into the future.  Management sees drivers for margin improvement stemming from increasing the amount of sales generated from direct to consumer channels and the increasing scale of the soft goods lines and higher volume of golf ball sales.  It is worth noting however a lot of these items have higher price points and could be considered luxury items.  If market conditions deteriorated it might be especially difficult for ELY to continue to grow into the future and the stock price could be adversely affected.  I believe 2019 will be an important year for ELY to reap the synergies of their recent acquisitions and expanding their lifestyle apparel segment, and its ability to operate as a multi-branded business and sell multiple brands to single customers will be critical moving forward.  Callaway should be kept in the AIM small cap portfolio.

Source: FactSet

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