Callaway Q4 and 2020 Financials: Record Sales, Net Loss

Key Takeaways:

• Record $375 million in sales in Q4 for Callaway
• Club sales up 48.5 percent, ball sales up 14.3 percent, apparel sales up 8.7 percent over Q4 2019
• Callaway still posts net loss for Q4 but for a very good reason.
• Overall net loss for 2020 but not as bad as it could have been.

The Callaway Q4 and 2020 financial reports are out and they say what you’d expect. And maybe what you wouldn’t expect.

The golf industry’s comeback continued to roar in Q4. Callaway posted another record quarter with $375 million in sales, a jump of 20 percent over Q4 of 2019. That increase was fueled by a huge leap in club sales and a respectable bump in ball sales compared to 2019.

“We are very pleased with how strongly our business finished 2020,” said Callaway CEO Chip Brewer in a statement. “This increase reflects the continued unprecedented demand in our golf equipment business and a quicker than expected recovery in our soft goods business led by sales of Travis Mathew and Jack Wolfskin apparel.”

Although Callaway is reporting a record sales quarter, there is a harsh reality. The company did post a net loss for Q4 which is not uncommon even during the best of times. And there’s also a net loss for the year. Again, not unexpected, given the fact COVID shut down the golf industry for nearly two months in the spring.

There is a lot to unpack here so let’s get to it.

Callaway Q4 and 2020 Financials: What Does It Say?

As mentioned, Callaway’s net sales for Q4 were $375 million, topping the 2019 mark of $312 million. Golf club sales led the way, totaling more than $170 million. Equipment sales industrywide were up 59 percent in Q4 and total sales were the highest on record. Overall, Callaway’s golf club sales were up slightly for the full year. 2020 club sales topped $787 million compared to just over $768 million last year – an increase of 2.4 percent.

Golf sales totaled over $43 million in Q4 compared to $38 million in 2019. However, ball sales for the full year were down more than seven percent. Apparel sales also had a strong Q4, up nearly nine percent at $110 million. Again, however, yearly sales were down 15 percent. Gear and Accessory sales (bags, gloves, etc.), dropped by more than 17 percent for the year.

Overall, Callaway’s 2020 sales totaled nearly $1.6 billion. That’s a 6.6-percent drop from 2019’s record sales of just over $1.7 billion. Again, considering some of the gloom and doom prediction of March and April, I think Callaway will take it, thank you very much.

Global Results

Regionally, Callaway was still Numero Uno in the U.S. in Q4, with sales topping $174 million – a 34-percent jump over Q4 2019. For the year overall, sales in the U.S. were down slightly compared to 2019, totaling just over $778 million – a drop of just 1.2 percent year over year.

The big news, however, is from Japan. Callaway became the first non-Japanese OEM to lead the market in sales in Q4, at just over $53 million. In an oddity you’ll only find in financial reports, that’s an increase of $358 over last year’s Q4, or basically a couple of wedges. Still, it topped the Japanese market. For the year, however, overall sales in Japan dropped nearly 14 percent.

Callaway also claims Number One status in Europe for Q4, with more than $91 million in sales, a five-percent increase over 2019. As with the Japanese market, sales in Europe were down for the year – totaling nearly $373 million. That’s 13 percent off from 2019.

 Callaway Q4 and 2020 Financials: Gross Profits and Net Loss

As mentioned earlier, Callaway is reporting net losses both for Q4 and for the year. It’s not unusual for golf companies to post Q4 net losses but it’s usually due to declining sales. In this case, myriad additional operating costs contributed to Callaway’s Q4 net loss of $41 million. These included soft goods inventory reduction initiatives (i.e., liquidating), higher operation costs due to COVID-19 and higher freight costs to meet demand.

In addition, Callaway’s leadership decided to pay back employees for their reduced salary levels for a portion of the year. This payback excludes executive officers, who early in the year chose to forgo salary during the pandemic.

For the record, Callaway posted a $29 million net loss in Q4 of 2019.

For the year, Callaway is reporting a $127-million net loss, compared to a $79-million net profit in 2019. If you’re wondering how a $112-million reduction in sales can turn a $79-million profit into a $127-million dollar loss, you can thank something called a “pre-tax, non-cash goodwill impairment.”

That sounds like a load of accounting hocus pocus but, in fact, it was a necessary reconciliation of Callaway’s 2018 purchase of Jack Wolfskin. In Q2, Callaway basically took a $174-million book loss to get Jack Wolfskin’s book value in line with its real value.

As a result, Callaway showed a book net loss of $168 million in Q2. Callaway was going to have to take the Jack Wolfskin impairment anyway, as it likely paid a premium to acquire the company. And it’s better from an investor standpoint to do it all at once. And what better time than in the middle of the worst quarter during a worldwide pandemic?

Now, About TopGolf

Callaway is still working on wrapping up its $2-billion merger with TopGolf. The shareholder vote is scheduled to take place on March 3 with the deal closing shortly after. There may be a bit of a speed bump, however. In late January, a Callaway investor named Jerome Anderson filed a lawsuit in a California federal court alleging Callaway left out crucial financial information in its filings with the U.S. Securities and Exchange Commission on the proposed merger.

The suit claims Callaway left out critical information about the company’s financial projection, supporting analysis and potential conflicts of interest, to make the merger look more favorable to stockholders. Anderson’s suit seeks to either stop the vote or provide damages to stockholders if their stock value goes down if the vote goes through.

We’ve been unable to find out what information Anderson says Callaway omitted. But in its 2021 outlook, Callaway isn’t taking TopGolf business into account. Callaway expects sales to be strong but still be impacted by COVID-19 fallout. Specifically, Callaway says mandated shutdowns in Europe and Asia will impact Q1 soft goods sales. In addition, golf equipment sales will be impacted by supply chain constraints, which means if you want a set of Apex irons, you might find them on backorder.

COVID-19 has created havoc throughout the golf industry, particularly in shipping. There is a shortage of ocean freight containers, which Callaway estimates will add approximately $13 million to its shipping costs next year. In early December, a cargo ship lost nearly 2,000 containers in a storm in the Pacific. Several golf OEMs lost product in that accident.

Final Thoughts

As we always mention in these stories, we do not proclaim ourselves to be financial experts or investment counselors. We’re golf geeks like you and we like to read about the industry. And the Callaway Q4 and 2020 financials definitely make for good reading, as will Acushnet’s report when it comes out in the next few weeks. That said, while no one wants to go through another early spring lockdown, the post-lockdown bounce turned a potential nightmare into a not-so-bad year. The net loss is a little hard to take but it’s a book loss as opposed to a paper loss. And since the Jack Wolfskin impairment needed to be taken anyway, getting it done in one fell swoop is better in the long run.

Callaway stock tumbled slightly after the report was released yesterday but that’s not unexpected. It did the same thing last year after the 2019 results were released and Callaway asserted itself as golf’s No. 1 company.

Callaway stock bottomed out March 18, 2020, at $5.34/share but has peaked at $31.74/share earlier this week. Over the past few weeks, several institutional investors and hedge funds have been buying up chunks of Callaway stock. One such group, Capital Management Inc, increased its stake in Callaway by over 4,000 percent.

Take that, GameStop.