Callaway 1999 Annual Report Download - page 24

22 CALLAWAY GOLF COMPANY
MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operations and will continue to affect the Company's perfor-
mance in 2000. The success of the Company’s new golf ball
business could be adversely affected by various risks, includ-
ing, among others, delays or difficulties in manufacturing or
distribution and unanticipated costs. Although initial demand
for the Company’s golf balls is promising, there is no assurance
that such demand will result in a proportionate amount of actu-
al sales or that consumers will enjoy the balls sufficiently to
sustain future sales. Furthermore, although the Company
expects production of the golf balls to increase as the year
2000 progresses, there is no assurance that the Company will
be able to manufacture enough balls to meet demand or be
able to achieve the operational or sales efficiencies necessary
to make its golf ball business profitable. Consequently, there
can be no assurance as to whether the golf ball will be com-
mercially successful or that a return on the Company’s invest-
ment will ultimately be realized.
Gross Margin
The Company’s gross margin as a percentage of net sales
increased to 47% in 1999 from 42% in 1998. This increase pri-
marily resulted from lower obsolescence charges in 1999 (vs.
a $30.0million excess inventory charge recorded in the fourth
quarter of 1998), higher metal wood sales (which carry higher
margins) as a percentage of total net sales, as compared to
1998, and from reductions in manufacturing labor and over-
head costs realized through the Company’s 1998 restructur-
ing, along with reductions in certain component costs. Gross
margin as a percentage of net sales would have improved to
49% but for close-out sales of Great Big Bertha®
Tungsten•Titanium™Irons, Great Big Bertha®and Biggest Big
Bertha®Titanium Metal Woods, and Big Bertha®War Bird®
Metal Woods, which had much lower margins. However, con-
sumer acceptance of current and new product introductions,
the sale and disposal of non-current products at reduced
sales prices and continuing pricing pressure from competi-
tive market conditions may have an adverse effect on the
Company’s future sales and gross margin. Furthermore, the
Company expects that in 2000 the Company’s sales of irons
as a percentage of total net sales will increase. This would
negatively impact the Company’s gross margin as a percent-
age of net sales because irons generally sell at lower margins
than woods.
The Company’s margins also could be affected by its golf
ball business. During the year 2000, the Company expects that
its margins in the golf ball business will be less than the levels
it expects to achieve when the Company attains a level of
operational and sales efficiency that allows it to benefit from
certain economies of scale. There is no assurance, however,
that the Company will achieve the economies of scale neces-
sary to maintain or improve its current overall sales margins.
Seasonality
In the golf club and golf ball industries, sales to retailers are
generally seasonal due to lower demand in the retail market in
the cold weather months covered by the fourth and first quar-
ters. The Company’s golf club business has generally followed
this seasonal trend and the Company expects this to continue
for both its golf club and golf ball businesses. Unusual or
severe weather conditions such as the “El Niño” weather pat-
terns experienced during the winter of 1997-1998 may com-
pound or otherwise distort these seasonal effects.
Competition
The worldwide market for premium golf clubs is highly com-
petitive, and is served by a number of well-established and
well-financed companies with recognized brand names, as
well as new companies with popular products. New product
introductions and/or price reductions by competitors continue
to generate increased market competition. However, the
Company believes that it has gained unit and dollar market
share for woods in the United States during 1999 as compared
to 1998. While the Company believes that its products and its
marketing efforts continue to be competitive, there can be no
assurance that successful marketing activities by competitors
will not negatively impact the Company’s future sales.
A golf club manufacturer’s ability to compete is in part
dependent upon its ability to satisfy the various subjective
requirements of golfers, including the golf club’s look and
“feel,” and the level of acceptance that the golf club has among
professional and other golfers. The subjective preferences of
golf club purchasers may be subject to rapid and unanticipated
changes. There can be no assurance as to how long the
Company’s golf clubs will maintain market acceptance.
The premium golf ball business is also highly competitive
with a number of well-established and well-financed competi-
tors, including one competitor with an estimated market share
in excess of 50% of the premium golf ball business. These
competitors have established market share in the golf ball
business, which the Company will need to penetrate for its golf
ball business to be successful. There can be no assurance that
the Company’s golf balls will obtain the market acceptance
necessary to penetrate this established market.
New Product Introduction
The Company believes that the introduction of new, innovative
golf clubs and golf balls is important to its future success. The
Company faces certain risks associated with such a strategy.
For example, new models and basic design changes in golf
equipment are frequently met with consumer rejection. In
addition, prior successful designs may be rendered obsolete
within a relatively short period of time as new products are
introduced into the marketplace. Further, any new products