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Barry Rosenstein, founder of JANA Partners.
Adam Jeffery | CNBC
Callaway Golf soared in Thursday trading after activist investor Jana Partners disclosed a 9.2% stake in the company.
Jana, founded by Barry Rosenstein in 2001, said it plans to discuss with Callaway selling all or part of the golf equipment and apparel maker despite what the activist acknowledged as successful innovation and durable market share in its core business.
The activist’s position would make it the company’s second-largest shareholder behind BlackRock, based on the most recent government filings.
Shares are “undervalued and represent an attractive investment opportunity,” Jana said in a filing with the Securities and Exchange Commission.
Jana “intends to have discussions with the [Callaway’s] board of directors and management regarding the Issuer’s portfolio composition; strategic alternatives including exploring a sale of the Issuer or asset divestitures; capital allocation and acquisition strategy; operating performance and cost management; and governance,” it added.
Despite Thursday’s sharp upswing, shares of Callaway have dogged the broader stock market in recent months, with much of the decline following the company’s acquisition of outdoor apparel brand Jack Wolfskin earlier this year. Though CEO Chip Brewer lauded the $476 million purchase in January as an opportunity to provide “an innovative product offering with long-term synergies,” investors have proven tougher to convince.
“It is not our practice to discuss individual shareholders. It is, however, the Board and Mgmt’s practice to meet with shareholders to discuss the company’s strategy in accordance with SEC regulations,” a Callaway Golf spokesperson told CNBC.
A quick glance at the stock shows an approximate 20% decline over the last 12 months through Wednesday’s close, though a closer look reveals that the golf supplier actually outpaced the S&P 500 in 2018 with a 9.8% climb. But since November 2018, around the time Callaway’s bid for Jack Wolfskin was announced, the S&P has returned 6.5% versus Callaway’s 27% fall.
Though the company reported record first-quarter net sales of $516 million last month, investors weren’t thrilled with the company’s reduced sales outlook for Jack Wolfskin, which Brewer said in May was the result of “much reported softer market conditions in Central Europe and China.” As a result, the company said it expects that Jack Wolfskin’s full-year 2019 net sales will be 4% to 6% below a prior estimate of $382 million.
The company also reported non-GAAP earnings per share of 63 cents in the first quarter of 2019, a decline of 2 cents compared to the first quarter of 2018. It said it saw sales in the U.S. rise 5.9% in the first quarter versus the year-ago period.
Nevertheless, the acquisition revealed a key component behind Callaway’s — and Brewer’s — long-term strategy. A leader in global golf equipment sales, the company has in recent years embarked on a brand-building sprint, including the X Hot and X2 Hot line of fairway woods and a reintroduction of the Big Bertha driver.
It’s also tried to bolster its standing in the golf ball segment with its Triple Tack Technology and new ERC golf ball, running into fierce competition from leader Titleist.
“Our U.S. market shares continue to set records,” Brewer said during the company’s first-quarter earnings call on May 9. “On the brand side, we’ve had a strong start to the year on Tour with multiple golf ball and driver wins across the globe. And as part of a new strategic initiative, we have earned the claim of being the new number one driver of major worldwide tours and we continue to be the number one putter on-tour.”
