Callaway Golf Co. (ELY) – Rick Whiting
One of the hallmarks our investment process is to know the management of a company and to understand their thought process. We do not believe that it is enough to have a static understanding of where the company is positioned today, but rather we wish to have confidence in management’s view of the opportunities and challenges before them, as well as their contingency plans should things change. Most importantly, we want to share with management a common understanding of the financial and structural metrics by which we may objectively judge their performance.
It is in this light that we would like to thank Chip Brewer, CEO and President of Callaway Golf, as well as his assembled management team and their employees. Mr. Brewer took the helm of Callaway in 2012. His challenges were threefold: define a new path for an iconic brand that was adrift, rationalize the cost structure of the business, and energize the talent in-house while the world proclaimed the game of golf to be dead. Let us not forget that in 2012, while the U.S. consumer was starting to feel a shade more confident, their wallets were open only for essentials such as replacing an aging fleet of cars, getting out from under credit card and mortgage debt and doing deferred maintenance on their homes. Golf clubs were not at the top of most priority lists.
Mr. Brewer presented investors with a check list of items he felt needed to be addressed for the company to win in a stagnant environment and to blossom in a recovering economic environment. He gave of a very clear vision of how success or failure would be defined and the metrics to measure progress along the way. We believe Mr. Brewer and the team at Callaway have executed on the plan beautifully and have not let themselves be sidetracked along the way. Throughout, they have also dealt with hurdles incumbent in a bumpy recovery, foreign currency headwinds and competitors with less stable business plans.
Today we own a substantially smaller position in the company’s stock. We believe Callaway continues to have a pristine balance sheet, market share opportunities and operating margin initiatives on the table. We still have a great deal of confidence in Mr. Brewer’s leadership but the narrative has changed somewhat.
The restructuring and its benefits, while ongoing, are largely behind us. We do see a pathway to growth as gasoline remains inexpensive, unemployment is historically low, and consumers have already done much of the heavy lifting addressing necessities. Yet, as the company pivots from repair to growth, the metrics to measure steps along the way become more subjective. We feel there is still upside in the stock, but prudence in investing has led us to reposition the size of our investment, re-underwrite the fundamentals, enjoy some profits, and thank the team at Callaway for a job well done.