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Non-Tech : Callaway Golf -- it's a buy -- Ignore unavailable to you. Want to Upgrade?

To: Jacques Tootight who wrote (247)	2/17/1999 4:10:00 PM
From: Hoa Nguyen	Read Replies (2) \| Respond to of 307

I forwarded Jeff Mills' comment to someone who I consider very knowledgeable on Callaway, and I am sharing his (edited) reply below. Since I do not have his permission, I will not post his name. As for me, I'm sitting tight on my ELY shares. Considering that ELY is near the low of last October, when the whole market crashed, I think it's a pretty safe stock right now. H.N. ------ The party identified as Jeff Mills is of course entirely wrong. The most drastic failures of major golf club products has not ever led to wholesale withdrawal of the leading golf manufacturer by major marketers. Not only Callaway but most major golf manufacturers have tremendous product quantities at various retailers. Callaway does not, for instance, lead in iron club sales. There are train loads of Cobra and other irons stacked up out there, yet little press is given them. Only the price leader, Callaway Golf. Callaway routinely destroys marginally defective stock (blemishes so slight most would never detect them) at the equivalent level of $50-100 million of destroyed product. Routinely. Since Callaway produced over $600 million dollars of product last year, it could easily destroy $30 million dollars of inventory without anyone noticing. That's 5% of last years product. For a company with no debt and probably a $500,000,000 bank credit line, writing it off would be financially stupid. Writing it off against the stockholders would be a minor cost, but a politically stupid one. Ely Callaway, one of the premier entrepreneurs in sport industry, just would not do it (maybe after two or three more bad years, but by then the current surplus will be gone). He's got other, smarter ways to deal with a problem like that. Production cost of ANY steel-wood club is not over $30, ANY titanium headed wood club not over $50. Wholesale is probably 3 times this cost (because it is a luxury product, and the prestige leader). Selling it off by a retailer at $9 above wholesale still keeps them over $100-150 dollars. While a "great buy" to a golfer, it is certainly not a giveaway price. Speaking of which, these tremendous profit margins are why the prestige brands never drop their prices. The difference between just destroying excess product (as "blems"), which has usable taxable production costs, and giving it away isn't much. By destroying it (or holding it two or more years, same difference) they preserve their price level and thus enormous profits on any new product. Edwin Watts is also known for selling off two to four year old gear at huge discounts. This has not lead to others dropping current prestige lines because of one seller's activities. Bear in mind that this is a heavily cyclical industry. The reason Callaway has stayed at about $10 so long is that there are enough golf insiders and believers to keep it at that level, regardless of virtually any bad news. I still think it will rebound to $25-$35, but considering the press and the numerous disinterested investors, it may be 6 months to a year before it does so.