Callaway Golf: Forex Winds Shifting

1. Forex Winds Shifting Back in Callaway’s Direction

Almost from the moment the ink was dry on our last report of nine days ago, key foreign exchange rates have literally exploded back in Callaway’s (ELY) favor. Here is the chart on the Euro/$US exchange rate that we published on 3/10/09:

And here is how that chart on the Euro has developed since that day:

Clearly things have improved for Callaway Golf when referencing sales registered in Euros and British Pounds.

Finally we offered this very bearish chart on the Japanese Yen/$US relationship:

Here is how the Yen/$US chart has developed since that time:

As you can see, after a bump in the Yen, the Yen weakened right back to where it was, down approximately 11% since Callaway offered guidance on January 27th.
Frankly, we are not and have never pretended to be currency specialists. In fact, Callaway’s guidance forced us to start watching this, as we would far rather focus on the big picture. Still, the tremendous impact that Forex changes have on Callaway’s profitability means that we have to keep our eye on this factor.

2. Raising Estimates to Reflect Forex Movement

We are going to put $5 million in top line revenue back on the first quarter (and $2 million in selling expenses that take place in local currency). This has the effect of raising our 2009 Q1 EPS estimate from $0.33 per share to $0.36 per share. This also raises the FY 2009 EPS estimate from $0.46 per share to $0.48 per share. Out best guess is that we will still be the Street low estimates both for the quarter and the year.

3. The Apparel Opportunity Redux

Back in our November 3, 2008 report, on the heels of TaylorMade’s acquisition of Ashworth, we wrote the following in reference to Callaway’s need to find a new apparel outsourcing partner:

We think this afford an interesting opportunity. Callaway could use this forced change as an opportunity to become more fashion forward, by choosing to work with a partner that is more branded in their own right, such as Perry Ellis (PERY) or Kenneth Cole (KCP). This could allow for cross promotional opportunities as well as further extensions into women’s apparel. We would be far less enthused if the new partner were a mainstream golf partner such as Cutter & Buck.

Callaway recently announced that Perry Ellis would indeed be their outsourced apparel partner. We think this is the perfect partner to allow Callaway to pursue a more fashion forward agenda and seek to redefine golf apparel. The relationship will actually start producing styles for the 2010 season. Interestingly, enough, since we wrote that last November, Perry Ellis shares have declined to the present $3.39 per share.

4. Reiterate Buy Rating

We are going to reiterate our Buy Rating even though Callaway shares have lifted somewhat off of the tangible book value figure. We still are not going to assign a price target. We likely won’t until at least the first two quarters of 2009 are in the books. At that point we can start to discount 2010 EPS estimates which should compare most favorably to 2009.

Disclosure: The analyst manages a hedge fund that owns shares of this company.

Comments

[a. palmer jr.:]

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Mar 31 11:31 PM

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Cynthia Kurtz
big bertha

Jun 30 03:10 AM