Callaway’s Q2 2020 Financial Report

Still not convinced COVID-19 is taking its toll on golf OEMs? We’ve already taken a look at Acushnet’s second-quarter performance. Now it’s time to take a gander at Callaway’s Q2 2020 Financial Report.

On the face of it, the Callaway numbers tell a story that could scare the hell out of management and investors alike. But upon further review, the picture is very similar to Acushnet’s – not great, but it’s not the Seventh Sign of the Apocalypse, either.

Once again, we must declare we are not, nor are we claiming to be, financial experts or investment counselors. We’re golf industry enthusiasts who like to read and learn what all this accounting stuff means.

The Specifics

Callaway’s Q2 2020 Financial Report shows net sales of $297 million for the quarter. That’s down 34% from the $447 million in sales during Q2 last year, and it’s right in line with the $300 million in sales reported by Acushnet for Q2.

The Q2 Net Profit story is startling. There isn’t any.

Callaway is reporting a Net Loss of $168 million for Q2, but there’s a big, huge and massive asterisk attached. That loss includes what’s called a pre-tax, non-cash goodwill impairment charge related to the Jack Wolfskin acquisition.  We’ll discuss what that all means later, but for now, let’s just say it does NOT mean the sky is falling in Carlsbad.

Taking a deeper dive into Callaway’s Q2 2020 Financial Report, we see golf club sales dropped 28% compared to Q2 of 2019, to $156 million (down from $292 million). Balls sales dropped 21% to $54 million. Apparel sales dropped 51% to $36 million, while Gear and Other (bags, gloves, etc), dropped 37% to $51 million.

The U.S. market took the brunt of the COVID-19 hit, with sales down 30% ($172 million, down from $247 million). Europe dropped 39%, Japan 56% and the rest of the world down 18%. Like Acushnet, Callaway reports sales in Korea were actually strong due to that country’s rapid recovery.

Also as with Acushnet, Callaway reports June sales were actually up 8% compared to June of 2019 because hey, we got to play golf again.

“There was a demonstrable pent-up demand to play golf…and an uptick in new orders from both consumers and retailers,” says Callaway CEO Chip Brewer. “The pace of recovery in the apparel business also exceeded our expectations but has been slower than that of golf.”

What’s Up With Jack?

You’d think a quarterly financial report showing a $168 million net loss would reflect operational incompetence and spark widespread investor panic. Neither, however, appears to be the case.

As mentioned above, that loss reflects a $174 million pre-tax, non-cash goodwill impairment involving Callaway’s 2018 Jack Wolfskin acquisition. Jack Wolfskin is a European maker of outdoor, hiking and mountaineering footwear, apparel, and equipment. Callaway paid $476 million for Jack Wolfskin, and that’s where the impairment comes in.

Goodwill is stuff like brand name recognition and reputation. They’re the intangibles that make a company worth more to consumers and investors than just the monetary value of its actual assets. An impairment charge is an accounting procedure. It can happen when an acquisition’s value drops below what a company paid for it. This happened in 2015 when Dunlop Sports LTD, the sports arm of Sumitomo Rubber Industries took a $36 million impairment on its Cleveland acquisition.

In this case, it could very well be that Callaway paid a premium for Jack Wolfskin, and the impairment is an accounting move to get Jack Wolfskin’s book value in line with its real value.

A worldwide pandemic might be the perfect time for goodwill impairment. It’s a down quarter, so you’re not worried about protecting positive results. It might play well with investors, too. Investopedia says companies that “bite the bullet and take an all-encompassing charge should be viewed more favorably than those who slowly bleed a company to death by taking a series of recurring impairment charges, thereby manipulating reality.” Again, it’s important to remember the impairment is an accounting procedure, not an actual cash loss.

Take that one-time charge out, and Callaway’s Q2 EBIDTAS (Earnings Before Interest, Depreciation, Taxes, Amortization, and non-cash Stock Compensation) is actually $29 million. That’s still down 56% compared to Q2 0f 2019, but in the ballpark with Acushnet’s Q2 EBIDTA of $33 million.

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Other Tidbits

COVID-19 smacked golf’s two biggest companies right in the shnozz in Q2. Take two prime selling months out of action and sales are going to suffer. That Callaway’s sales only fell by 34% (and Acushnet’s sales by only 35%) is, from a certain point of view, good news.

Callaway reported to its investors it actually sold more golf equipment in Q2 than it expected. E-commerce had a lot to do with it, growing by 50% over the previous year. Callaway is also in a strong cash position thanks to a $250 million dollar sale of convertible bonds in March.

Callaway – like Acushnet – has managed its inventory well during COVID-19. That means discounts and liquidation sales you may be hoping for probably won’t happen. Conversely, it’s not surprising to see Accounts Receivable up over 50% since the end of 2019. That’s a number worth watching when the Q3 numbers come out in late October or early November.

Callaway’s Q2 2020 Financial Report was released at 5 PM Eastern time yesterday, so there was no immediate impact on stock pricing. Today, however, will tell us how investors are reacting to the goodwill impairment and Q2 net loss.

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