Dueling Fools
June 9, 1999

Callaway in the Rough
The Bear Rebuttal
by Paul Larson ([email protected])

While I respect my fellow Fool Warren, I think he has hooked one badly when taking a swing at Callaway.

Warren points out that Callaway is no longer involved in ancillary golf activities. Well, here's a company that has never produced a single golf ball in its history, yet the company is plowing ahead and sinking cash into the effort to enter that market from scratch. Clubs and balls are both needed to play the game, but the similarity in their markets ends right there.

Besides, will golfers really fork over Callaway's exorbitant prices for something that's likely to end up lost in the bushes or at the bottom of a pond? Yes, balls are a repeat purchase item. This means Callaway will be forced to compete with the multitude of existing ball companies on efficiency and price, something the company has yet to do in its history.

In his argument, Warren seems to blame external and tangential events for Callaway's demise -- Japan, USGA discussions, El Nino, improper alignment of the planets, etc. (Okay, maybe he didn't blame the planets.) The fact is that Callaway's fall from grace is due to a major market shift away from the company's products. One doesn't see sales decline 17% in a healthy economic climate unless there are some major factors at work with the products. The company's rise was thanks to the golfing community's zeal for the Big Bertha line, and the fall from fashion and popularity is just as striking. Live by the fad, die by the fad.

Warren then points out the company's relatively unleveraged balance sheet as a strong attribute. Point taken, but it won't take many more years like last year before the balance sheet starts to look a little more tattered, too. Total debt-to-equity was at 27.7% this time last year, but now it's up to 34.0%.

The bullish argument then points to Ely Callaway's integrity as something to take solace in. All the management integrity in the world isn't going to help unless the company can reverse the trend in demand for its products.

In his parting shot, Warren asks Fools to look at the big picture. I'll urge you to do the same. Fashions and tastes in the golf industry change just as they do in the clothing industry, and one should not extrapolate Callaway's faddish success in the early '90s to that of the status quo in the next century. Callaway has now joined the ranks of Taylor Made, Titleist, Spalding, and others as just another golf company.

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