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Robert Stephens, CFA
Robert Stephens, CFA
Articles (302) 

Why Further Growth Could Be Ahead for Callaway Golf

The company’s strategy may stimulate its bottom line

February 12, 2020 | About:

Callaway Golf Co. (NYSE:ELY) has upside potential even after its 21% rise over the past year.

The global sporting goods company is releasing innovative new products, investing in new brands and working to become more efficient.

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Innovative approach

The company is investing in research and development to create new products that implement artificial intelligence. For example, in the fourth quarter of 2019, Callaway released its MAVRIK line of golf clubs, which consist of new materials and offer a wider range of improved AI features that could increase their appeal among consumers.

Callaway Golf’s investment in AI technology could differentiate its products from those of its competitors. In its fourth-quarter results, the company said its new AI products have resonated with customers. As a result, it now has a first-mover advantage over many of its peers, which could strengthen its financial performance in the near future.

In addition, the business is upgrading its customer services. For instance, it is investing in its fitting centers, where customers can have their golf clubs customized to their own individual body measurements. This initiative could improve Callaway's customer satisfaction levels as well as widen its economic moat.

Investment plans

The company is investing in the Jack Wolfskin outdoor apparel brand following its acquisition in 2018. As part of this initiative, Callaway hired a new design team in China that has the potential to produce products that are more popular with local consumers.

Callaway Golf also plans to establish Jack Wolfskin's North American headquarters in Utah ahead of the brand’s launch in the U.S. in the second quarter.

It is also increasing its investment in Jack Wolfskin’s online business, where it reported double-digit sales growth in the fourth quarter of 2019. Sales through the brand’s website could lead to improving margins for the overall business. It may also encourage a higher level of loyalty from its customers due to the brand having a direct relationship with them.

Potential challenges

Callaway Golf's financial performance is likely to be negatively impacted by the spread of coronavirus in China. The outbreak has caused its factories in the country to be closed for a prolonged period, and may lead to reduced demand for the company’s products in China as well as neighboring countries.

In addition, tariffs increased the company’s costs by $5 million in the fiscal fourth quarter, which could act as a drag on its future profit growth.

Callaway Golf revised its financial forecasts for fiscal 2020 in response to the uncertain trading outlook it faces. The company reduced its sales forecast by $25 million and cut its profit expectations by $12.5 million.

To offset the impact of these challenges, the business is becoming more efficient by upgrading its manufacturing facilities in North America to increase their capacity to serve larger markets. It is also investing in information technology projects that could more efficiently manage its global operations. Callaway is also planning to improve the efficiency of its Jack Wolfskin brand by cutting costs by $15 million between 2020 and 2022.

Outlook

Market analysts forecast the company will record a 32% increase in earnings per share in fiscal 2020, followed by 17% growth in 2021. The price-earnings ratio of 23 may be expensive, but Callaway's growth strategy could catalyze its share price.

Disclosure: The author has no position in any stocks mentioned.

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