Callaway Golf Company

By: Seth Fraser, Megan Foreman, and Corey Daigle

Overview• Brief History of Callaway

Golf• Where we are now• New Vision and Mission • External Analysis

– CPM– EFE– Summary

• Internal Analysis– IFE– Financial ratio analysis– Net Worth Analysis– Summary

• Strategic Analysis– SWOT Matrix– SPACE– Grand Strategy Matrix– IE matrix

• Possible strategies– QSPM

• Recommendations– Strategic

implementation and desired results

– Annual objectives (goal) and polices

• Evaluation Procedure

• 1981 Ely Callaway sells wine vineyard for 14 million dollars

• 83’ Ely renames the company Callaway Hickory Stick USA

• 85’ Company moves to Carlsbad, CA• 86’ Callaway becomes first company to use

computer controlled machines to insure flatness of the clubs, along with new and innovative designs

• 88’ Company renames its self Callaway Golf Company

• 89’ Introduce traditional sized steel clubs

History of Callaway Golf

• 90’ Callaway drivers are number one on senior PGA tour

• 92’ Callaway become publicly traded on NYSE under symbol ELY

• 95’ Callaway becomes number one manufacturer of sales in woods and irons

• 96’ Callaway becomes worlds largest manufacturer of clubs

• 97’ Callaway acquires Odyssey Sports• 99’ Titanium drivers are introduced in Asia and

Europe• 02’ Callaway lunches HX Golf Balls

History of Callaway Golf

Callaway Golf Today

• Callaway uses cutting edge technology to manufacture the world’s longest driver (the Big Bertha)

• Along with men's golf accessories and apparel they offer a large selection to women

• Callaway also offers a Fantasy Golf Challenge via the internet which offers Callaway products as prizes

Callaway Golf Today

• Callaway offers a golf magazine which has details on the number one players, courses and tips on golf

• Callaway also offers free donations to the under privileged and to better health benefits such the under insured along with employee volunteering

• As well Callaway offers great benefits and services to their employees

• http://www.callawaygolf.com/en/customerservice.aspx?pid=sitemap

Vision Statement

One good shot is not enough.

Mission Statement At Callaway Golf, we make golf

equipment for players world wide who think that hitting just one great shot is not enough. We believe technology is

a powerful tool for creating user-friendly equipment that can help

golfers of all styles and skill levels enjoy the game- and maybe a few more great shots along the way.

External Analysis

Opportunities1. Market in Europe expected to grow by 3-3.5%

2. 35% -43% Cheaper Labor in Eastern Europe and Asia3. Euro-Zone, no currency fluctuations4. More open to western culture in the Middle East5. Attitude towards leisure time6. Internet as distribution channel7. High school sport, 2.8 mill Juniors, 2-3%

increase

External Analysis

Threats

1. Price decline in golf club equipment 1.3% 2. Less rounds played by 2.9%

3. Mergers make former competitors stronger

4. Patent/Trademark infringement, $ 2-4 mill/year

5. Increase coverage of Golf on TV

6. Short production life-cycle

7. Weather conditions

EFE MatrixKey External Factors Weight Rating Weighted

Score

1. Market in Europe expected to grow by 3-3.5 % 0.09 3 0.272. Cheaper Labor in Eastern Europe and Asia, 35-43% 0.08 1 0.083. Euro-Zone, no currency fluctuations 0.05 2 0.14. More open to western culture in Middle East 0.06 2 0.125. Attitude towards leisure time 0.08 3 0.246. Internet as distribution channel 0.07 3 0.217. High school sport 0.06 3 0.18Threats1. Price decline in golf club equipment 1.3% 0.08 3 0.242. less rounds played by 2.9% 0.09 2 0.183. Mergers make former competitors stronger 0.08 4 0.324. Patent/Trademark infringement, $ 2-4 mill/year 0.07 2 0.145. Increase coverage of Golf on TV 0.08 2 0.166. short production life-cycle 0.05 3 0.157. Weather conditions 0.06 2 0.12Total 1 2.51

Opportunities

CPM

Critical Success Factors

Weight Rating Weighted Score

Rating Weighted Score

Innovation 0.19 4 3 0.57Market share 0.18 4 3 0.54Product Quality 0.15 4 4 0.6Price Compet. 0.15 3 4 0.6Market coverage 0.17 4 2 0.34PGA success 0.16 2 4 0.64Total 1

0.483.53 2.68 3.29

0.570.540.30.45

0.32 3

0.760.72

0.45

3323

Callaway Taylor Made

0.68 0.34

Titleist

Rating Weighted Score

0.6

2

External Analysis Summary

• At what point does market saturation occur in domestic and foreign markets

• Cheaper labor in Asia and Eastern Europe• Short production life-cycle• Mergers make former competitors stronger• Internet as distribution channel• Marketing channels• Attitude towards leisure time• Consumer interest is getting younger and younger

(high school)

Internal Analysis

Strengths

1. Financial ratios

2. Strong management team

3. Profit margin of 50%, low cost production

4. High brand equity

5. Diverse product line (width)

6. Technology and innovative skills

7. Net working capital( 2.8% increase)

Internal Analysis

Weaknesses1. Customer service2. Production process, golf ball company3. Employment contracts4. Distribution5. Only view specified suppliers6. Only production facility in USA7. Marketing

IFE MatrixScore

Strengths

1. Financial Ratios 0.09 4 0.362. Strong management team 0.06 4 0.243. Low production costs for golf clubs, margin of 50%

0.09 3 0.27

4. High brand equity 0.09 4 0.365. Diverse Product line (width) 0.06 4 0.246. Technology and innovative skills 0.08 4 0.327. Net working capital 0.05 3 0.15

Weaknesses1. Customer service 0.08 2 0.162. Production process, golf ball company 0.06 2 0.123. Employment contracts 0.06 2 0.124. Distribution 0.07 2 0.145. Only view specified suppliers 0.07 1 0.076. Only production facility in USA 0.07 1 0.077. Marketing 0.07 2 0.14TOTAL 1 2.76

Key Internal Factors Weight Rating

Financial Ratio AnalysisCompany Industry Sector S&P 500

Valuation Ratios

P/E Ratio (TTM) 25.36 20.11 20.86 24.01

P/E High - Last 5 Yrs 26.90 43.52 37.56 45.41

P/E Low - Last 5 Yrs 10.82 14.06 10.28 16.26

Beta 1.45 0.84 1.05 1.00

Price to Sales (TTM) 1.44 2.21 1.19 3.33

Price to Book (MRQ) 2.00 3.94 3.21 4.29

Price to Tangible Book (MRQ) 2.81 6.67 6.04 7.56

Price to Cash Flow (TTM) 12.98 14.31 11.18 17.32

Price to Free Cash Flow (TTM) 12.65 24.93 24.73 28.97

% Owned Institutions 87.07 56.96 51.37 64.19

Dividends

Dividend Yield 1.59 1.32 2.30 2.04

Dividend Yield - 5 Yr Avg 1.70 0.96 2.38 1.48

Dividend 5 Yr Growth Rate 0.00 7.13 -3.77 6.48

Payout Ratio (TTM) 40.06 16.59 25.54 26.78

Financial Ratio AnalysisGrowth Rates %

Sales (MRQ) vs Qtr 1 Yr Ago 19.40 12.91 10.85 13.40

Sales (TTM) vs TTM 1 Yr Ago 2.62 10.99 7.63 11.90

Sales - 5 Yr Growth Rate 2.98 12.18 6.94 9.30

EPS (MRQ) vs Qtr 1 Yr Ago N/A 30.16 26.58 28.69

EPS (TTM) vs TTM 1 Yr Ago -31.76 29.80 18.81 21.92

EPS - 5 Yr Growth Rate -3.10 21.20 5.91 12.15

Capital Spending - 5 Yr Growth Rate -35.10 1.04 -1.52 4.06

Financial Strength

Quick Ratio (MRQ) 1.14 1.85 1.47 1.26

Current Ratio (MRQ) 2.95 2.49 2.24 1.76

LT Debt to Equity (MRQ) 0.00 0.25 2.65 0.68

Total Debt to Equity (MRQ) 0.00 0.32 2.80 0.85

Interest Coverage (TTM) NM 8.64 8.14 11.86

Financial Ratio AnalysisProfitability Ratios %

Gross Margin (TTM) 45.28 40.70 28.55 47.32

Gross Margin - 5 Yr Avg 47.89 38.59 28.17 47.01

EBITD Margin (TTM) 13.56 20.07 11.46 20.79

EBITD - 5 Yr Avg 17.38 16.55 10.32 20.82

Operating Margin (TTM) 8.09 16.76 7.23 20.33

Operating Margin - 5 Yr Avg 12.35 12.63 6.72 18.35

Pre-Tax Margin (TTM) 8.34 16.29 7.38 17.27

Pre-Tax Margin - 5 Yr Avg 12.35 11.51 6.20 17.54

Net Profit Margin (TTM) 5.59 11.53 4.34 13.12

Net Profit Margin - 5 Yr Avg 7.79 7.41 3.83 11.59

Effective Tax Rate (TTM) 32.94 32.48 30.43 31.31

Effective Tax Rate - 5 Yr Avg 36.64 34.25 38.14 34.20

Management Effectiveness %

Return on Assets (TTM) 6.02 12.67 6.06 6.40

Return on Assets - 5 Yr Avg 9.56 9.82 5.57 6.79

Return on Investment (TTM) 7.35 17.50 8.45 9.97

Financial Ratio AnalysisReturn on Investment - 5 Yr Avg 11.63 13.84 8.00 10.93

Return on Equity (TTM) 7.71 23.40 13.72 18.71

Return on Equity - 5 Yr Avg 12.07 16.29 13.87 19.22

Efficiency

Revenue/Employee (TTM) 246,676 482,389 369,451 622,866

Net Income/Employee (TTM) 13,795 79,982 27,449 81,707

Receivable Turnover (TTM) 5.86 7.46 6.44 9.76

Inventory Turnover (TTM) 3.09 8.29 9.16 10.46

Asset Turnover (TTM 1.08 1.23 1.18 0.92

www.investor.stockpoint.com

March 2004

Net Worth Analysis

Company Worth Analysis (year-end 2001 2002 2003 average)

Stockholders Equity $548,000,000Net Income x 5 $286,666,665(Share Price/EPS) x Net Income $1,023,809,518Number of Shares Outstanding x Share Price $990,000,000

Method Average $712,119,046

Stock Performance

Internal Analysis Summary

• Strong Financials

• New Working Capital Increasing

• Profit Margin of 50%

• Weak marketing campaign

• Weak Distribution Channels

SWOT Matrix

• S-O Strategies1. Expand production

into Eastern Europe

2. Open selected Callaway shops around the world

• W-O Strategies1. Start Callaway

Online shop

2. Callaway Golf Camps

• S-T Strategies1. Improve Production

2. Callaway Golf Camps

3. Acquire competitors like Mizuno

• W-T Strategies1. Move Marketing

Channels1. Select personalities

for endorsements2. Buy golf ball

manufacturer3. Backward

integration

Space Matrix

Y axisFinancial strength 5 +1 worst to + 6 best Y axis: 5 + (-2) = 3Environmental stability -2 +1 worst to +6 best

X axisIndustry strength 3 6 best to 1 worst X axis: 3+(-2)=1Competitive advantage -2 -6 worst to –1 best

Grand Strategy Matrix

The Internal-External IE Matrix

Clubs Balls Accessories

Revenues 84% 8% 8%

IE Information

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

High I II III

3.0 to 3.99

Clubs

Medium IV V VI

2.0 to 2.99

Callaway

Accessories

Low VII VIII IX

1.0 to 1.99 Balls

Possible Strategies• Expand into East Europe

• Open Selected Callaway shops around the world

• Start Callaway online shopping• Move marketing channels• Select personalities for endorsements

• Improve Production• Acquire competitors like Mizuno• Callaway Golf camps• Backward integration

QSPM

Strengths AS TAS AS TAS

1. Financial Ratios 0.09 3 0.27 4 0.362. Strong management team 0.06 3 0.18 4 0.243. Low production costs for golf clubs, margin of 50% 0.09

4. High brand equity 0.09 2 0.18 1 0.095. Diverse product line (width) 0.076. Technology and innovative skills 0.06 1 0.06 2 0.127. Net working capital (2.8% increase) 0.06 1 0.06 2 0.12

Weaknesses

1. Customer service 0.082. Production process, golf ball production 0.06 1 0.06 4 0.243. Employment contracts 0.06 2 0.12 3 0.184. Distribution 0.07 2 0.14 4 0.285. Only view specified suppliers 0.076. Only production facility in USA 0.07 2 0.14 4 0.287. Marketing 0.07 4 0.28 1 0.07

SUBTOTAL 1 1.49 1.98

Strategic Alternatives

Key Internal Factors WeightAquiring Competitor

Mizuno

Production facilities in Eastern Europe

AS TAS AS TAS

1. Market in Europe expected to grow by 3-3.5 % 0.09 4 0.36 3 0.272. Cheaper Labor in Eastern Europe and Asia 0.08 2 0.16 4 0.323. Euro-Zone, no currency fluctuations 0.05 2 0.1 3 0.154. More open to western culture in Middle East 0.06 3 0.18 2 0.125. Attitude towards leisure time 0.086. Internet as distribution channel 0.07 2 0.14 3 0.217. High school sport, 2.8 mill junors, 2-3% increase 0.06

1. Price decline in golf club equipment 1.3% 0.08 1 0.08 3 0.242. less rounds played by 2.9% 0.09 1 0.09 3 0.273. Mergers make former competitors stronger 0.08 4 0.32 2 0.164. Patent/ Trademark infringement, $2-4 mill/year 0.07 2 0.14 3 0.215. Increase coverage of Golf on TV 0.086. short production life-cycle 0.05 2 0.1 3 0.157. Weather conditions 0.06SUBTOTAL 1.67 2.1SUM TOTAL ATTRACTIVENESS SCORE 3.25 4.08

Production facilities in Eastern Europe

Opportunities

Threats

Key External Factors Weight Aquiring Competitor

Mizuno

RecommendationsPrimary Strategies

1. Improve production2. Acquire competitors

Secondary Strategy

1. Expand into Eastern Europe2. Open worldwide stores

3. Online shop4. Special Credit cards…

5. Special low air fair flights…

6. Offer younger customers (high school students) discounts on goods 7. Set up web site for local golf courses (offer arranged tee time)8. Get in on Frisbee golf9. Offer competitions for free weekend golf resort

Strategic Implementation and desired results

• Expand into European market and help increase the popular western culture on golf– Domestic & International sales

• 81.4 to 82.4 (3% increase)

• Decrease cost of manufacturing to keep up with cheaper countries• 30.2 (37%) to 29.3 (-3%)

Over the next 3-5 years(Numbers in Millions)

EPS/EBIT Analysis

$Amount Needed $500 Million

Interest Rate 5%

Tax Rate 33%

Shares Outstanding 66 Million

Stock Price $15.00

EPS/EBIT Analysis

Recession Normal Boom Recession Normal Boom

EBIT 50,000,000 100,000,000 150,000,000 50,000,000 100,000,000 150,000,000Interest 0 0 0 25,000,000 25,000,000 25,000,000EBT 50,000,000 100,000,000 150,000,000 25,000,000 75,000,000 125,000,000Taxes 16,500,000 33,000,000 49,500,000 8,250,000 24,750,000 41,250,000EAT 33,500,000 67,000,000 100,500,000 16,750,000 50,250,000 83,750,000# Shares 99,333,333 99,333,333 99,333,333 66,000,000 66,000,000 66,000,000EPS 0.34 0.67 1.01 0.25 0.76 1.27

Common Stock Financing Debt Financing

Recession Normal Boom Recession Normal Boom

EBIT 50,000,000 100,000,000 150,000,000 50,000,000 100,000,000 150,000,000Interest 7,500,000 7,500,000 7,500,000 17,500,000 17,500,000 17,500,000EBT 42,500,000 92,500,000 142,500,000 32,500,000 82,500,000 132,500,000Taxes 14,025,000 30,525,000 47,025,000 10,725,000 27,225,000 43,725,000EAT 28,475,000 61,975,000 95,475,000 21,775,000 55,275,000 88,775,000# Shares 89,333,333 89,333,333 89,333,333 76,000,000 76,000,000 76,000,000EPS 0.32 0.69 1.07 0.29 0.73 1.17

70 Percent Debt - 30 Percent Stock70 Percent Stock - 30 Percent Debt

Evaluations

• Qtr & Annual financial reports

• Yearly examination by firms head analysts of the company

Callaway in the News

• http://biz.yahoo.com/fool/050425/111445675824.html?.v=1

• http://us.rd.yahoo.com/finance/freex/smart/SIG=11iuhmkjh/*http://yahoo.smartmoney.com/stockwatch/index.cfm?story=20050420&afl=yahoo

• http://us.rd.yahoo.com/finance/external/forbes/SIG=1299rdilp/*http://www.forbes.com/facesinthenews/2005/04/14/0414autofacescan01.html?partner=yahoo&referrer=

• http://biz.yahoo.com/bw/050322/225702_1.html• http://biz.yahoo.com/bw/050321/215826_1.html