Callaway 2005 Annual Report Download - page 24

Item 1A. Risk Factors
Certain Factors Affecting Callaway Golf Company
The financial statements contained in this report and the related discussions describe and analyze the
Company’s financial performance and condition for the periods presented. For the most part, this information is
historical. The Company’s prior results, however, are not necessarily indicative of the Company’s future
performance or financial condition. The Company has also included certain forward-looking statements
concerning the Company’s future performance or financial condition. These forward-looking statements are
based upon current information and expectations and actual results could differ materially. The Company
therefore has included the following discussion of certain factors that could cause the Company’s future
performance or financial condition to differ materially from its prior performance or financial condition or from
management’s expectations or estimates of the Company’s future performance or financial condition. These
factors, among others, should be considered in assessing the Company’s future prospects and prior to making an
investment decision with respect to the Company’s stock.
Market Acceptance of Products
A golf equipment manufacturer’s ability to compete is in part dependent upon its ability to satisfy the
various subjective requirements of golfers, including a golf club’s and golf ball’s look and “feel,” and the level of
acceptance that a golf club and ball has among professional and recreational golfers. The subjective preferences
of golf club and golf ball purchasers are difficult to predict and may be subject to rapid and unanticipated
changes. In addition, the Company’s products have tended to incorporate significant innovations in design and
manufacture, which have often, but not always, resulted in higher prices for the Company’s products relative to
other products in the marketplace. There can be no assurance that a significant percentage of the public will
always be willing to pay premium prices for golf equipment or that the Company will be able to design and
manufacture products that achieve market acceptance. In general, there can be no assurance as to whether or how
long the Company’s golf clubs and golf balls will achieve and maintain market acceptance, and therefore, there
can be no assurance that the demand for the Company’s products will permit the Company to experience growth
in sales, or maintain historical levels of sales, in the future.
New Product Introduction and Product Cyclicality
The Company believes that the introduction of new, innovative golf clubs and golf balls is important to its
future success. A major portion of the Company’s revenues is generated by products that are less than two years
old. The Company faces certain risks associated with such a strategy. For example, in the golf industry, new
models and basic design changes in golf equipment are frequently met with consumer rejection. In addition, prior
successful designs have been rendered obsolete within a relatively short period of time as new products are
introduced into the marketplace. Further, any new products that retail at a lower price than prior products may
negatively impact the Company’s revenues unless unit sales increase. The rapid introduction of new golf club or
golf ball products by the Company has resulted in closeouts of existing inventories at both the wholesale and
retail levels. Such closeouts have resulted in reduced margins on the sale of older products, as well as reduced
sales of new products, given the availability of older products at lower prices.
The Company’s newly introduced golf club products generally, but not always, have a product life cycle of
up to 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 occurs sooner in the product cycle and
is more significant. The Company’s fusion woods generally sell at higher price points than its titanium metal
woods, and its titanium metal woods generally sell at higher price points than its steel metal woods. Historically,
the Company’s woods products generally have achieved better gross margins than its other products. However,
price compression in the woods market has made this differential less, and at times gross margins on woods may
be less than other products. 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.
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