Topgolf Callaway Brands Corp. (NYSE:MODG) - A Diversified Modern Golf Company Poised for Growth

Published on September 24, 2024 | Ticker: MODG

Topgolf Callaway Brands Corp. (NYSE:MODG) is a leading modern golf and active lifestyle company that provides world-class golf entertainment experiences, designs and manufactures premium golf equipment, and sells golf and active lifestyle apparel and other accessories through its family of brand names, which include Topgolf, Callaway Golf, Odyssey, TravisMathew, Jack Wolfskin, OGIO, Toptracer and World Golf Tour.

Financials

The company reported annual net income of $95 million, annual revenue of $4.28 billion, annual operating cash flow of $364.7 million, and annual free cash flow of -$118.1 million in its most recent fiscal year. In the first quarter of 2024, the company generated revenue of $1.14 billion, a 2% decrease compared to the same period in the prior year. This decrease was primarily driven by a 15% year-over-year decline in the company's Active Lifestyle segment, partially offset by 5% growth in Topgolf and 1% growth in Golf Equipment.

Business Overview

Topgolf Segment: Driving Growth through Venue Expansion and Operational Efficiencies

Topgolf's revenue grew 5% year-over-year in the first quarter, driven primarily by the addition of new venues. However, same-venue sales declined 7% during the quarter, which was in line with the company's expectations. The decline was attributed to a post-COVID surge in corporate events in the first quarter of 2023, as well as extreme weather conditions in January 2024.

To drive same-venue sales growth, Topgolf is focused on three key areas: digital, experience, and value. The company's digital revenue penetration increased to 35% in the first quarter, up from 33% in the same period last year, and the percentage of visitors coming through digital channels rose to 62%, up 710 basis points year-over-year. Topgolf is also introducing new games and experiences, such as the recently launched "Block Party" game, and is testing value offerings like the "free 30" program, which provides customers with 30 additional minutes of gameplay when they book online during specified hours.

Topgolf's operating margins continue to improve, with a 180 basis point year-over-year increase in venue-level EBITDAR margin in the first quarter. The company attributes this to the successful implementation of its PIE inventory management system and new labor model, which have now been rolled out system-wide. Topgolf remains on track to achieve its 35% EBITDAR margin target for the full year.

Golf Equipment Segment: Gaining Market Share through Innovative Product Launches

Topgolf Callaway Brands' Golf Equipment segment, which includes the Callaway Golf and Odyssey brands, reported a 1% increase in revenue in the first quarter. This growth was driven by the successful launch of the Ai Smoke woods and irons, as well as the Chrome Tour golf balls. The company gained market share in both the golf clubs and golf balls categories during the quarter.

In the golf clubs category, Callaway held the #1 U.S. market share position in drivers, fairway woods, and hybrids. The Ai Smoke woods achieved the #1 U.S. model market share position in drivers, fairway woods, and irons. In the golf balls category, Callaway's premium Chrome Tour product line achieved a new record U.S. market share of 11%, and the company's overall golf ball market share increased by 120 basis points year-over-year to 19.3%.

The company expects its Golf Equipment segment to deliver revenue growth for the full year, driven by a robust pipeline of new product launches planned for the second half of 2024. These launches are expected to be more weighted towards the back half of the year compared to 2023, when new introductions were more concentrated in the second quarter.

Active Lifestyle Segment: Navigating Challenges in the Jack Wolfskin Business

Topgolf Callaway Brands' Active Lifestyle segment, which includes the TravisMathew, Jack Wolfskin, and OGIO brands, reported a 15% year-over-year decline in revenue in the first quarter. This decrease was primarily due to the lapping of a significant corporate channel sell-in at TravisMathew in the first quarter of 2023, as well as challenging market conditions in Europe for the Jack Wolfskin brand.

The company's TravisMathew brand performed in line with expectations in the first quarter, but was down compared to the prior year due to the lapping of the corporate channel sell-in. TravisMathew remains on track to open approximately 10 new stores in 2024, with 7 leases already signed.

The Jack Wolfskin brand, which represents less than 10% of Topgolf Callaway Brands' total sales, faced a tough macroeconomic environment in Europe, including high retailer inventory levels and soft overall market conditions. As a result, the company has lowered its full-year revenue expectations for this brand. However, the company expects Jack Wolfskin to deliver positive EBITDA growth and performance in 2024, and it has transitioned to a new European leadership team to stabilize and optimize the business.

Financial Position and Outlook

Topgolf Callaway Brands ended the first quarter of 2024 with $239.3 million in cash and cash equivalents, including restricted cash. The company's net debt leverage ratio, excluding convertible debt, was 4.0x at the end of the quarter, compared to 4.1x in the prior year period. Excluding the company's venue financing REIT debt, the REIT-adjusted net debt leverage ratio was 2.2x, down from 2.5x in the prior year.

For the full year 2024, the company is lowering its revenue guidance by $80 million to a range of $4.435 billion to $4.475 billion, primarily due to unfavorable foreign currency impacts and softer performance in the Jack Wolfskin business. However, the company is reiterating its adjusted EBITDA guidance of $620 million to $640 million, as it expects to offset the revenue decline through operational efficiencies, currency hedging, and cost management.

The company is also raising its full-year earnings per share (EPS) guidance by $0.05 to a range of $0.31 to $0.39, driven by the repricing of its Term Loan B, anticipated debt paydown, and higher expected cash flow. Additionally, the company is forecasting free cash flow of approximately $165 million and embedded free cash flow of approximately $265 million, representing improvements of $60 million and $40 million, respectively, compared to prior guidance.

Conclusion

Topgolf Callaway Brands' diversified business model, strong brand portfolio, and focus on operational efficiencies position the company well for continued growth and value creation. The company's investments in digital capabilities, new product innovation, and strategic initiatives across its Topgolf, Golf Equipment, and Active Lifestyle segments are expected to drive long-term success.

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