Jack Wolfksin Parent Callaway Golf Company Announces Record Second Quarter Net Sales,

Callaway Golf Company (NYSE:ELY) today announced net sales growth of 13% in the second quarter of 2019 with record second quarter net sales of $447 million, and the Company raised full year earnings guidance and announced a new stock repurchase program.   

Commenting further on the Jack Wolfskin business, Chip Brewer, President and Chief Executive Officer of Callaway Golf Company said, "The Jack Wolfskin business showed nice growth in the second quarter of 2019 compared to 2018 as a result of excellent performance in its direct-to-consumer business.  Our investments in this important channel, which is a combination of owned and operated retail stores and ecommerce platforms, are beginning to pay off nicely with double digit growth in e-commerce and high single digit growth in owned retail during the quarter.  We are pleased to see this clear sign of progress and we remain excited about the long-term prospects for the Jack Wolfskin brand and the growth and scale opportunities it presents for our overall global apparel portfolio."

"We are very pleased with our results for the second quarter and first half of 2019," commented  Brewer. "Given the success of our 2019 product line and our TravisMathew business to date, and with the Jack Wolfskin business delivering 14% growth in local currency in the second quarter, we were able to overcome significant foreign currency headwinds and increase our guidance for the full year."

"We expect strong year-over-year earnings comparisons in the second half, with significant increases anticipated in Adjusted EBITDA for the full year 2019 compared to 2018, despite considerable foreign currency headwinds this year," added Mr. Brewer. "This reflects the strength of our 2019 golf product line, a more favorable second half golf product launch cadence, the continuing momentum of our TravisMathew business, and our outlook for the seasonal Jack Wolfskin business, which is expected to earn all of its 2019 profit in the second half."

The Company also announced today that the Board of Directors has authorized the Company to repurchase up to $100 million of the Company's common stock in open market or in private transactions. This new repurchase authorization replaces the prior $50 million repurchase program, which has been terminated by the Board of Directors, cancelling the remaining $22 million of authorization under that program.  The Company will assess market conditions, buying opportunities and other factors from time to time and will make strategic repurchases as appropriate.  The repurchases will be made in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, subject to market conditions, applicable legal requirements and other factors, and the repurchases will be made consistent with the terms of the Company's credit facility, which defines the amount of stock that can be repurchased.  The repurchase program does not require the Company to acquire a specific number of shares and it will remain in effect until completed or until terminated by the Board of Directors.

GAAP and Non-GAAP Results

In addition to the Company's results prepared in accordance with GAAP, the Company provided information on a non-GAAP basis. The purpose of this non-GAAP presentation is to provide additional information to investors regarding the underlying performance of the Company's business without certain non-recurring items and non-cash purchase accounting adjustments related to our acquisitions.    

The Company also provided sales information on a constant currency basis and information regarding its earnings before interest, taxes, depreciation and amortization expense, non-cash stock compensation expenses, and the non-recurring OGIO, TravisMathew and Jack Wolfskin transaction and transition-related expenses ("Adjusted EBITDA").

The manner in which this non-GAAP information is derived is discussed further toward the end of this release, and the Company has provided in the tables to this release a reconciliation of the non-GAAP information to the most directly comparable GAAP information. 

Summary of Second Quarter 2019 Financial Results

The Company announced the following GAAP and non-GAAP financial results for the second quarter of 2019 (in millions, except EPS):                                                               

For the second quarter of 2019, as compared to the same period in 2018, the Company's net sales increased $51 million(13%) to $447 million, a new record for the Company. The continued net sales growth was achieved despite an estimated negative impact of $9 million from changes in foreign currency rates and reflects the acquisition of Jack Wolfskin in January 2019, which contributed $48 million in net sales in the second quarter of 2019.  This second quarter net sales growth was led by increases in apparel (+138%), Gear and Other (+21%) and golf balls (+4%). 

For the second quarter of 2019, the Company's gross margin decreased 230 basis points to 46.3% compared to 48.6% for the second quarter of 2018, which was in line with the Company's expectations.  Excluding non-cash purchase accounting adjustments related to the Jack Wolfskin acquisition, gross margins were 47.5%, a decrease of 110 basis points. This decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix of higher priced products which typically have lower gross margins due to more advanced technology, all of which was partially offset by the TravisMathew and Jack Wolfskin businesses, which were accretive on a gross margin basis.    

Operating expenses increased $44 million to $162 million in the second quarter of 2019 compared to $118 million for the same period in 2018. Excluding non-recurring costs related to the Jack Wolfskin acquisition, operating expenses were $159 million, an increase of $41 million in the second quarter. This increase is primarily due to the addition in 2019 of operating expenses from the Jack Wolfskin business, which added an incremental $38 million of operating expense excluding the non-recurring acquisition costs. 

Second quarter 2019 earnings per share decreased $0.33 to $0.30, compared to $0.63 for the second quarter of 2018.  On a non-GAAP basis, 2019 second quarter earnings per share was $0.37, which excludes $0.07 per share related to the non-cash purchase accounting adjustments and the non-recurring transaction and transition expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP earnings in 2019 includes a $9 million ($0.07 per share) increase in interest expense primarily related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin and foreign currency hedging losses, compared to hedging gains in the second quarter of 2018. This increased interest expense and hedging loss was slightly offset by a lower tax rate. The decrease in earnings also reflects the seasonality of the Jack Wolfskin business which generally reports an operating loss in the second quarter. 

Summary of First Half 2019 Financial Results

The Company announced the following GAAP and non-GAAP financial results for the first half of 2019 (in millions, except EPS):                                                              

For the first half of 2019, the Company's net sales increased $163 million (20%) to $963 million, compared to $800 millionfor the same period in 2018. The Jack Wolfskin business contributed $141 million in net sales in the first half. This net sales growth was achieved despite an estimated negative impact of $24 million from changes in foreign currency rates. On a constant currency basis, net sales increased in all operating segments and in all regions, and across all major product categories. Excluding the Jack Wolfskin business, first half net sales increased 4.5% on a constant currency basis. This 4.5% increase is attributable to the continued strength of the Company's 2019 golf product line and continued brand momentum of the TravisMathew business.

For the first half of 2019, the Company's gross margin decreased 300 basis points to 46.2% compared to 49.2% for the first half of 2018, which was in line with the Company's expectations.  Excluding non-cash purchase accounting adjustments related to the Jack Wolfskin acquisition, gross margins were 47.4%, a decrease of 180 basis points. This decrease is primarily attributable to foreign currency headwinds and the current year golf equipment product mix of higher priced products which typically have lower gross margins due to more advanced technology, all of which was partially offset by the TravisMathew business, which was accretive on a gross margin basis.

Operating expenses increased $97 million to $330 million in the first half of 2019 compared to $233 million for the same period in 2018.  Excluding one-time costs related to the Jack Wolfskin acquisition, operating expenses were $322 million, an increase of $90 million in the first half. This increase is primarily due to the addition in 2019 of $77 million of operating expenses from the Jack Wolfskin business, as well as investments in the TravisMathew and golf equipment businesses and normal inflationary pressures.

First half 2019 earnings per share decreased $0.47 to $0.81, compared to $1.28 for the first half of 2018.  On a non-GAAP basis, 2019 first half earnings per share was $0.99, which excludes $0.18 per share related to the non-cash purchase accounting adjustments and the non-recurring transaction and transition expenses related to the Jack Wolfskin, TravisMathew and OGIO acquisitions. The non-GAAP earnings in 2019 includes a $17 million ($0.15 per share) increase in interest expense primarily related to the new term loan entered into in January 2019 to fund the purchase of Jack Wolfskin.  This increased interest expense was slightly offset by a lower tax rate. The decrease in earnings also reflects the seasonality of the Jack Wolfskin business which generally reports an operating loss in the first half of the year. 

Business Outlook for 2019

Basis for Full Year 2019 Non-GAAP Estimates. The Company currently estimates that non-cash purchase accounting adjustments related to Jack Wolfskin will have a negative impact on 2019 earnings per share in the amount of approximately $0.12.  The non-cash purchase accounting adjustments for the OGIO and TravisMathew acquisitions will have a $0.01 negative impact on earnings per share in 2019, consistent with 2018. Both of these estimates are unchanged from the Company's prior estimates.

In addition to these purchase accounting adjustments, the Company's non-GAAP guidance for 2019 excludes $0.12 per share of non-recurring transaction and transition expenses related to the Jack Wolfskin transaction, and non-recurring advisory fees. The 2018 non-GAAP adjusted results presented below exclude $0.01 per share of non-recurring transaction income related to the Jack Wolfskin acquisition.

Full Year 2019 Guidance

($ in millions, except EPS):

The Company raised its 2019 net sales guidance to $1,685 million - $1,700 million, which is above the mid-point of its prior guidance of $1,670 - $1,700 million. This would result in net sales growth of approximately 35% - 37% in 2019 compared to 2018. The estimated incremental sales growth versus previous estimates is expected to be driven by further strength in the core business which is currently estimated to grow 7% - 9%, on a constant currency full year basis when compared to 2018. The increases in the core business are expected to be driven by continued success of the 2019 golf equipment line, including the second half new product launches, namely the Epic Star irons, Epic Flash Star hybrids, and Epic Forged Irons, as well as continued brand momentum in the TravisMathew business. The Company currently estimates that changes in foreign currency rates will have a negative impact of $32 million on 2019 full year net sales when compared to 2018, a $3 million decrease from when the Company last gave guidance as the U.S. dollar weakened slightly during the second quarter of 2019.

The Company refined its 2019 gross margin estimate and currently estimates that its 2019 gross margin will be 46.7% compared to previous guidance of 47.0%.

The Company lowered its previous 2019 operating expense guidance by $2 million to $628 million.  

The Company increased its non-GAAP earnings per share guidance to $1.03 - $1.09 driven by projected increases in net sales, operating expense leverage and less interest expense. The estimated tax rate remains at 20.5% for full year 2019. These estimates assume a base of 97 million fully diluted shares consistent with the Company's previous estimate of 97 million.

The Company also raised its full year 2019 Adjusted EBITDA guidance to $208 million - $215 million, which is above the mid-point of its prior guidance of $200 million – $215 million. The Adjusted EBITDA increase is driven by anticipated increases in net sales and operating expense leverage.

Third Quarter 2019

Basis for Third Quarter 2019 Non-GAAP Estimates.  The non-GAAP presentation excludes non-cash purchase accounting amortization related to the Jack Wolfskin, TravisMathew, and OGIO acquisitions in the amount of approximately $0.01 for the third quarter of 2019.  There is an additional $0.02 of non-recurring transaction and transition expenses in the third quarter of 2019 related to the Jack Wolfskin transaction and non-recurring advisory fees.  The effect of these items on the third quarter of 2018 was approximately $0.01 of expense.

($ in millions, except EPS):

The Company expects third quarter 2019 net sales growth of over 56% compared to 2018 driven by the addition of the Jack Wolfskin business, and an increase in new product launches which include Epic Star irons, Epic Flash Star hybrids, and Epic Forged Irons, as well as continued growth in the TravisMathew business. This increase will be slightly offset by an estimated $7 million of negative impact from changes in foreign currency exchange rates compared to 2018.

The Company's non-GAAP earnings per share for the third quarter of 2019 is estimated to increase 100% to $0.22.  The Company's third quarter 2019 Adjusted EBITDA is estimated to increase 127% to $50 million compared to $22 million in the third quarter of 2018. This increased profitability is expected to be driven primarily by the addition of the Jack Wolfskin business, the net sales increases in the core golf equipment business driven by new product launches and growth in the core apparel and accessories businesses, and for earnings per share by a lower estimated tax rate in the third quarter of 2019 compared to the third quarter of 2018. These estimates assume a base of 97 million shares.