After two consecutive quarters of mixed results, the latest quarter was an improvement for Callaway Golf. The group's net profit for the three months ended June 30 sank by 53 percent from the year-ago period, down to $28.9 million, but this was mainly due to currency headwinds and the impact of new acquisitions.
Conversely, sales jumped by 13 percent to $446.7 million, despite an estimated $9 million negative impact from changes in foreign currency rates, with a solid performance in the golf equipment business and continued double-digit growth in the TravisMathew business. The revenues also included $48 million from Jack Wolfskin, the German brand acquired in January, whose direct-to-consumer business progressed thanks to product innovation and investments in marketing that are beginning to bear fruits.
The overall gross margin dipped by 2.3 percentage points to 48.6 percent in the quarter, partly due to currency headwinds. The company's profitability took a hit from Jack Wolfskin's different seasonality as well as increased interest expenses from the loan used to finance its $476 million takeover. The second quarter is seasonally more important for the group's golf business than for Jack Wolfskin.
Moving forward, the management expects strong earnings growth in the second half, in spite of adverse foreign currencies. It mentioned the strength of its 2019 golf product line, a more favorable cadence in golf product launches, the continuing momentum of the TravisMathew business, and the seasonally stronger Jack Wolfskin business, which is expected to earn all of its 2019 profits in the second half.
In a conference call, Callaway's management again made its case for its diversification into apparel, after receiving criticism from some shareholders. It noted in particular that Jack Wolfskin has raised its scale in the apparel sector from $300 million to $700 million a year, with revenues from Europe soaring.
While noting that the golf market is structurally sound, despite its low growth and cash generation, it indicated potential benefits from Jack Wolfskin's expertise in e-commerce and other direct-to-consumer operations, which now contribute about 30 percent of its revenues.
In an interview during the OutDoor by Ispo show in Munich, the chief executive of Jack Wolfskin, Melody Harris-Jensbach, indicated that her brand may also contribute to the development of better apparel lines by Callaway. The 58-year-old Korean-born manager, who spent time in the U.S. before moving to Germany in 1986, worked for Escada, Esprit and Puma before running Jack Wolfskin.
She said that China, a country where the brand is generating annual sales of around €75 million, will be one of Jack Wolfskin's priority areas for investment, opening more retail stores as of next year. Five factory outlets will start up soon. The brand currently has about 600 points of sales in China, mostly franchised, plus e-commerce. It is working with Tmall.
Jack Wolfskin plans to develop more specific products for the Chinese and Japanese markets, in terms of colors and fit.
Further investments are also planned in Japan next year. The U.S. will probably come next, but the project is still very much under development, so the timing is somewhat uncertain at this stage.
Meanwhile, the growing Callaway group is making new investments to build its omni-channel capabilities. Callaway plans to use Jack Wolfskin's European logistics to handle all its brands, as it is doing in the U.S. with the establishment of a new distribution center. It has also acquired a minority interest in its Japanese joint venture to build a platform for the Asia/Pacific region.
Callaway raised its guidance for the full year, expecting sales in the $1,685-$1,700 million range, up from a previous forecast of $1,670-1,700 million.
In the U.S., the group's revenues for the second quarter were up by 6 percent to $247.4 million, while Europe surged by 76 percent to $81.6 million, boosted by the addition of Jack Wolfskin. In constant currencies, European sales climbed by 86.8 percent. Meanwhile, sales in Japan declined by 7 percent to $55.7 million, or by 5.9 percent in constant currencies. In the Rest of World, which includes Korea and other Asian markets, sales jumped by 9 percent to $62.0 million, or by 15.4 percent at constant exchange rates.
Callaway now breaks out profitability for its hardgoods and softgoods segments: profits from golf equipment sales declined by 2 percent to $292.3 million, while profits from apparel, gear and other items rose by 58 percent to $154.4 million.
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