Callaway's Flywheel is Taking Shape

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Hey Golfers -

The global golf equipment and technology giant reported earnings last Tuesday after the bell. Callaway reported earnings per share of $0.14, beating analyst expectations of $0.09 per share. Callaway ($ELY) stock popped 6.9% Wednesday morning at the open due to positive third-quarter earnings.

Callaway has multiple brands in its portfolio.

• Topgolf

• Odyssey

• Travis Matthew

• Ogio

• Jack Wolfskin

Here is a breakdown of Callaway's ($ELY) stock price over the last three years.

• November 2019: $20.44

• November 2020: $16.75

• November 2021: $29.21

Over the weekend, I reviewed the investor slide deck and earnings call transcript. Before we look at the third quarter, I wanted to provide a fascinating quote from Callaway CEO Chip Brewer during the earnings call.

Let’s dive into Callaway's third-quarter results. 

Callaway reported third-quarter revenue of $856 million, an 80% increase over the same period in 2020. The massive increase is due to recognizing the revenue of Topgolf, which it did not have in 2020.

Even taking Topgolf out of Callaway’s financials, they would’ve reported a very nice quarter. Golf Equipment was up 8% over the same period and is up a strong 39% year to date. Apparel, Gear & Other was up 12% in the quarter and up 35% yearly. Golf Equipment and Apparel, Gear & Other totaled $1.67 billion year to date, up a staggering 37%. Callaway is protecting the core business exceptionally well.

This is the second quarter in which Callaway has reported financials on Topgolf, so we do not have year-over-year numbers to compare. In their investor slide deck, Callaway points out that the same venue sales reached approximately 100% of 2019 levels. Meaning Topgolf was able to return to pre-pandemic numbers.

How does each of Callaway’s three business units represent its overall business? I tweeted the below out last week, stunning.

Topgolf alone has three business units under its roof.

• Topgolf

• Toptracer

• Topgolf Media

This is where the flywheel starts to come in. A couple of weeks ago, I tweeted that Suite Shots, a Topgolf competitor, was building a facility in Des Moines, Iowa. The interesting part? They are utilizing Toptracer technology. Toptracer is expected to build 8,000 bays next year. Even as Topgolf competitors open venues, Callaway will still recognize revenue due to Toptracer technology embedded in those venues, fascinating.

Callaway isn’t stopping with the flywheel there. Two weeks ago, they announced a $30 million minority investment in Five Iron Golf. If you aren’t familiar with Five Iron Golf, here is a quick breakdown.

• Urban indoor golf and entertainment venues

• Offers simulator rentals, golf lessons, custom club fittings

• Nine domestic venues

• Seven venue locations under development

The Callaway investment includes a non-exclusive marketing agreement where Five Iron customers have the opportunity to demo Callaway clubs and balls. It will be interesting to see where this investment ultimately ends up. Callaway had a minority investment in Topgolf before Callaway fully acquired Topgolf last year.

The investment in Five Iron Golf makes a lot of sense. Outside of Callaway continuing to diversify its portfolio into golf entertainment, they recognize the growth in golf entertainment and indoor golf. In a recent Perfect Putt newsletter, I wrote that the indoor golf segment is booming. In fact, it is growing seven times faster than the golf industry. 

This is what Chip Brewer had to say about the Five Iron investment and the glimpse at the flywheel.

Topgolf will continue to expand its business with new venues. Topgolf is on pace for nine venue openings this year and has ten scheduled for 2022. That growth is relatively aggressive, well over 10% per year in new venues.

Let’s recap Callaway’s flywheel model.

• Step 1: Invest in high growth golf segments, specifically golf entertainment and indoor golf

• Step 2: Engage with future customers with its golf entertainment businesses, Topgolf and Five Iron Golf, to introduce Callaway products

• Step 3: Callaway increases market share and revenue by selling its core business products; Golf Equipment & Apparel, Gear & other

• Step 4: Those customers return to golf entertainment and indoor golf facilities with friends

Have yourself a Monday, talk to you next week!

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