Callaway 2002 Annual Report Download - page 32

CALLAWAY GOLF COMPANY 29
The Company’s newly introduced golf club products generally
have a product life cycle of approximately two years. These
products generally sell significantly better in the first year after
introduction as compared to the second year. In certain
markets, such as Japan, the decline in sales during the second
year is even more significant. The Company’s titanium metal
wood products generally sell at higher price points than its
comparable steel metal wood products. The Company’s wood
products generally achieve better gross margins than its
comparable iron products. The Company generally introduces
new titanium metal wood products and steel metal wood
products in alternate years. The Company’s sales and gross
margins for a particular period may be negatively or positively
affected by the mix of new products sold in such period.
Seasonality and Adverse Weather Conditions
In addition to the effects of product cycles described above, the
Company’s business is also subject to the effects of seasonal
fluctuations. The Company’s first quarter sales generally
represent the Company’s sell-in to the golf retail channel of its
products for the new golf season. Orders for many of these sales
are received during the fourth quarter of the prior year. The
Company’s second and third quarter sales generally represent
re-order business. Sales during the second and third quarters
therefore are significantly affected not only by the sell-through
of the Company’s products that were sold into the channel during
the first quarter but also by the sell-through of the products of
the Company’s competitors. Retailers are sometimes reluctant
to re-order the Company’s products in significant quantity
when they already have excess inventory of the Company’s
competitors’ products. The Company’s sales during the fourth
quarter are generally significantly less than the other quarters
because in general in the Company’s principal markets less
people are playing golf during that time of year due to cold
weather. Furthermore, it previously was the Company’s practice
to announce its new product line at the beginning of each
calendar year. The Company has departed from that practice
and now generally announces its new product line in the fourth
quarter to allow retailers to plan better. Such early announce-
ments of new products could cause golfers, and therefore the
Company’s customers, to defer purchasing additional golf
equipment until the Company’s new products are available.
Such deferments could have a material adverse effect upon
sales of the Company’s current products and/or result in close-out
sales at reduced prices.
Because of these seasonal trends, the Company’s business can
be significantly adversely affected by unusual or severe weather
conditions. Unfavorable weather conditions generally result in
less golf rounds played, which generally results in less demand
for golf clubs and golf balls. Consequently, sustained adverse
weather conditions, especially during the warm weather
months, could materially affect the Company’s sales.
Conformance with the Rules of Golf
New golf club and golf ball products generally seek to satisfy the
standards established by the USGA and R&A because these
standards are generally followed by golfers within their respec-
tive jurisdictions. The USGA rules are generally followed in the
United States, Canada and Mexico, and the R&A rules are
generally followed in most other countries throughout the
world. The Rules of Golf as published by the R&A and the USGA
are virtually the same except with respect to the regulation of
“driving clubs.” See above “USGA Action.”
All of the Company’s current products (including the new Great
Big Bertha II Titanium Drivers), with the exception of the Great
Big Bertha II+ Titanium Drivers, are believed to be “conforming”
under the Rules of Golf as published by the USGA. All of the
Company’s products are believed to be conforming to the Rules
of Golf as published by the R&A, except (as discussed above at
“USGA Action”) that effective January 1, 2003 the Company’s
Great Big Bertha II+ Titanium Drivers will not be conforming in
certain competitions involving highly skilled golfers and effective
January 1, 2008 such drivers would not be conforming under the
Rules of Golf as published by the R&A. These new R&A restrictions
could affect current and future sales of such drivers in R&A
jurisdictions, including jurisdictions in which the Company
previously sold such products and in which there previously
were no R&A restrictions. The Company also believes that the
general confusion created by the USGA as to what is a conforming
or non-conforming driver has hurt sales of its drivers generally.
In addition, there is no assurance that the Company’s future
products will satisfy USGA and/or R&A standards, or that existing
USGA and/or R&A standards will not be altered in ways that