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Callaway Finds Itself in Deep Rough

Sporting goods: Stock plummets on plunging sales as golf shops refuse to stock its USGA-banned driver.


Investors sliced 19% off Callaway Golf Co.'s stock Friday after the premium golf-club maker reported plunging sales and profit, largely because its latest Big Bertha driver, the ERC II, has been a big bomb.

Callaway keeps marketing the ERC II even though the U.S. Golf Assn. has banned it from regulation play. Many retailers--including more than 1,200 pro shops, by the company's own estimate--refuse to sell the driver.

"I won't stock an illegal club in the shop," said Roger Little, owner of Desert Golf Center in Rancho Mirage. "They even came out and did a survey asking if I'd sell illegal clubs in the shop, and I said no."

In addition to the dispute with the USGA, the 106-year-old arbiter of U.S. golfing standards, Callaway blamed bad weather, the uncertain economy and discounting by competitors for its troubles.

The Carlsbad, Calif., company said it will earn 35 cents to 38 cents this quarter, compared with the 70 cents or 71 cents analysts had expected. Revenue will be $250 million instead of the expected $300 million, the company said.

The warning drove Callaway's stock down $3.43 on the New York Stock Exchange, where it closed Friday at $15.03 a share. Growing investor pessimism about the company's prospects has chipped away at the price since March 7, when Callaway hit its 52-week high of $27.18 a share.

Investment analysts sharply downgraded Callaway shares, saying the company had never let on that business was so slow.

"They were very consistent in referring us to the standard company line" on expecting about 70 cents a share, said Daniel Davila of Hibernia Southcoast Capital, whose rating on Callaway sank two notches, from "strong buy" to "hold."

Davila said the news was so bad that most analysts now will be leery of upgrading Callaway until there is powerful evidence of recovery. "It's going to be hard to stick yourself out on a limb when everybody was so wrong," he said.

Most of the factors affecting sales are outside Callaway's control, said Brad Holiday, the company's chief financial officer.

Winter lingered longer than usual in the United States and in Europe, so fewer golf rounds were played. Consumers and retailers have held back on purchases "in all major markets," Holiday said. Those pressures have caused a round of cost-cutting by competitors, also affecting results.

Davila and others said sales of most Callaway balls and clubs other than its drivers have held up better than competitors' products. But retailers have held off reordering from Callaway as they work off big backlogs of other products, said Bud Leedom, a Wells Fargo Van Kasper analyst.

Leedom helped trigger the latest slide in Callaway shares by downgrading the stock Thursday from "buy" to "market perform." "I was just hearing that things were slower than at first glance," he said. The stock fell $2.81 on Thursday to close at $18.46, a 13% decline. For the week, it tumbled 32%.

Leedom said the company is correct in blaming several factors for its woes, but he said the biggest problem--one that won't clear up if the economy and weather improve--is the dispute with the golf association over the ERC.

High-tech clubs such as the Big Berthas and longer-flight balls such as the Titleist Pro V1 have added more than 20 yards to the drive of the average Professional Golf Assn. player in the last two decades--and made many duffers eager to upgrade their drivers as well.

But when Callaway came out with the ERC in 1999 and the ERC II last year, the USGA said that the metal on the face of the forged titanium drivers springs back too quickly, speeding the ball farther than usual.

Callaway contended that amateur golfers could use the new club for fun, and golfing legend Arnold Palmer endorsed it. But the company learned how hard it is to buck the USGA. "This blew up much harder than anticipated," Leedom said.

The effect has been noticeable on the fairways, Little said.

"Two years ago when you walked out to the tee to play amateur golf, three or maybe even four of the guys in a foursome would be playing a Callaway driver," he said. "You go out there today and you may see one guy playing a Callaway, but it won't be the new one."

What's ironic, analysts said, is that only the best golfers gain much advantage from the club.

"The sad truth is that for lousy golfers such as myself, we don't get to enjoy the true qualities of a club like that," Davila said.

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