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Callaway Golf Company Analysis

Callaway Golf Company specializes in the design, manufacturing, and distribution of high-quality golf clubs. The company’s history began in 1982 and since then, the corporation has evolved into a leading manufacturer of a wide range of golf accessories (Callaway Golf Company, 2018). The main portion of the company’s sales is concentrated in the United States; nevertheless, the company generates significant revenues from other geographical regions. The market in which Callaway Golf Company operates is highly competitive and is served by well-established companies. Acushnet Holdings and Dick’s Sporting Goods were chosen as the competitors for the comparison. The ratio analysis has shown that the company’s financial performance has improved over the last 3 years and is in line with the performance of industry peers. The strategy review allowed for a conclusion that the company’s business and marketing efforts were successful, which is evidenced by improvements in key financial ratios.

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Competitive Strategy

Callaway is one of the leading producers and distributors of golf apparel and accessories. The company’s strategy was focused on winning a broad share of the market. The key to the success of the company lies in the understanding of customer needs. The company’s vision was to make the golf game more affordable and enjoyable for the average golfer. The organization has tried to make its product affordable for a wide audience (Vince, 2018). Historically, the business pursued a differentiation and concentration strategy but the results of the analysis of the past three years have shown that the company has shifted to a price competition strategy.

Historically, Callaway Golf invested in the development of innovative products and used high-quality materials (Callaway Golf Company, 2018). The organization continues to use quality raw materials but due to technological development, the cost of the product has become lower. Nevertheless, the average selling price has increased and the product lifecycle has become longer (Callaway Golf Company Investor Presentation, 2018). The market of the United States shows stable revenues so Callaway Golf pursues a growth strategy through increasing sales to Europe and other geographical regions.

The marketing strategy is designed to support the business strategy. Callaway Golf Company has managed to reinvigorate the brand and target a wider audience by engaging such sports stars as Tiger Woods (Larkin, 2018). Such a marketing strategy helps to rebrand the company and change the perception of golf.

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The company intends to continue investments in core business segments to sustain its growth strategy. The organization aims to improve operational efficiency using stringent cost management. The investment in research and development will help to drive productivity improvements. Investment in high ROI projects is a key priority for the company and it plans to return the capital to shareholders via share buybacks.

Ratio Analysis

Ratio analysis included the assessment of five key financial ratios for Callaway Golf Company and two competitors. The review of the most recent financial data has shown that the gross profit margin of the analyzed company has improved over the three years. The gross margin of Callaway Golf Company is significantly higher than that of Dick’s Sporting Goods but lower than the margin of Acushnet Holdings Corp. This fact suggests that there is room for improvement in gross profit margin.

The current ratio has deteriorated over the analyzed period; nevertheless, it is sufficient to cover all short-term liabilities. The competitors have similar ratios but the Acushnet Holdings Corporation maintains higher liquidity. Nevertheless, there is no reason to suggest that the analyzed business has liquidity issues.

Callaway Golf Company has the most conservative debt-to-equity ratio when compared to its industry peers. It is a good indicator which means that the company has healthy debt leverage. This ratio suggests that Callaway Golf is perceived as a less risky company compared to the chosen competitors.

The days of inventory ratio has slightly decreased since 2015, which is a good sign. This ratio is in line with the ratios of the industry peers, which means that the company has a healthy inventory turnover. Considering the life cycle of the company’s products, it is reasonable to suggest that this ratio will not change significantly.

The last ratio helps to assess the number of earnings that are attributed to each share. The company performs worse compared to its industry peers. This ratio has significantly deteriorated compared to 2016. Therefore, this fact suggests that Callaway Golf should focus its efforts on its improvement.

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  2015 2016 2017
Gross profit margin (Revenues – Cost of goods sold) / Revenues
Callaway Golf Company (843 794 – 486 161) / 843 794 = 42.39% (871 192 – 486 181) / 871 192 = 44.2% (1 048 736 – 568 288) / 1 048 736 = 45.82%
Acushnet Holdings Corp (1 502 958 – 727 120) / 1 502 958 = 51.62% (1 572 275 – 773 550) / 1 572 275 = 50.8% (1 560 258 – 759 466) / 1 560 258 = 51.3%
Dick’s Sporting Goods (72 70 965 – 5 088 078) / 7 270 965 = 30% (7 921 981 – 5 556 198) / 7 921 981 = 30% (8 560 472 – 6 101 412) / 8 590 472 = 29%
Current ratio Current Assets / Current Liabilities
Callaway Golf Company 391 487 / 178 636 = 2.19 460 425 / 186 854 = 2.46 465 984 / 314 374 = 1.48
Acushnet Holdings Corp 671 523 / 755 591 = 0.88 664 531 / 462 108 = 1.44 687 076 / 306 783 = 2.2
Dick’s Sporting Goods 1 798 798 / 1 118 833 = 1.61 1 995 678 / 1 397 415 = 1.43 2 006 085/1 425 014 = 1.41
Debt-to-equity ratio Total Debt / Shareholders’ Equity
Callaway Golf Company 218 279 / 412 945 = 0.53 192 682 / 608 600 = 0.32 331 782 / 659 735 = 0.50
Acushnet Holdings Corp 1 434 431 / 193 506 = 7.4 967 348 / 768 823 = 1.26 879 932 / 847 392 = 1.04
Dick’s Sporting Goods 1 559 479 / 1 832 225 = 0.85 2 128 807 / 1 929 489 = 1.10 2 262 438 / 1 941 501 = 1.16
Days of inventory Average inventory / Cost of sales / Number of days
Callaway Golf Company ((208 883 + 207 229) / 2) / 486 161 * 365 = 156.2 ((189 400 + 208 883) / 2) / 486 181 = 149.5 ((262 486 + 189 400) / 2) / 568 288 * 365 = 146.5
Acushnet Holdings Corp ((326 359 + 324 581) / 2) / 727 120 * 365 = 163.37 ((323 289 + 326 359) / 2) / 773 550 * 365 = 153.27 ((363 962 + 323 289) / 2) / 759 466 * 365 = 165.15
Dick’s Sporting Goods ((1 527 187 + 1 390 767) / 2) / 5 088 078 * 365 = 104.67 ((1 638 632 + 1 527 187) / 2) / 5 55 6198 * 365 = 104 ((1 711 103 + 1 638 632) / 2) / 6 101 412 * 365 = 100.19
Earnings per Share Profit after taxes / Number of shares of common stock outstanding
Callaway Golf Company 0.18 2.02 0.43
Acushnet Holdings Corp – 0.74 0.74 1.24
Dick’s Sporting Goods 2.83 2.56 3.01

Strategy Analysis

The ratio analysis has shown that the company’s historical strategy has been rather successful. Nevertheless, the company has shifted from a differentiation and niche strategy to a growth strategy. Callaway Golf Company intends to capture the broad market and focuses its business and marketing efforts on these goals. The changes in ratios over the recent year are evidence that the company’s moves have been quite effective.

The company’s gross profit margin has improved, which evidences that the cost management of the company was strong. In addition, the ratio allows a suggestion that the company managed to achieve growth in sales while maintaining relatively high prices. The improvement of the days-in inventory ratio also speaks in favor of the growth strategy as inventory turnover improved in 2017.

Furthermore, the company planned to invest in research and development to provide high-quality innovative products. This fact explains why the current ratio slightly deteriorated in 2017. The liquidity is still strong but Callaway Golf does not have excessive liquidity since it invests more heavily in new projects.

The debt to equity ratio also improved in 2017, which evidences that the company has stepped on a path of sustainable growth. Callaway Golf is interested in making its production more effective and accumulating funds through returns and growth. Thus, the company has found the most appropriate capital structure to lower the level of debt.

The earnings per share ratio have shown poor performance in 2017. Nevertheless, the company’s strategy emphasized value creation to the shareholders through dividends and share buybacks. Therefore, it is possible to conclude that Callaway Golf Company has an appropriate strategy in place.

 

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