Callaway's Stock Price is Down 49%

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Today At A Glance:

Callaway announced financial results last week — their stock took a hit — down nearly 20% the following trading session. Today’s newsletter looks at Callaway to see if there is a concern in the golf industry or a Callaway-focused concern.

Read Time: 6 minutes.

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Hey Golfers —

Callaway’s stock price is down 49% year to date — the company’s market cap is under $2 billion. Here is how the performance stacks up against the three major indexes.

• Dow Jones — up 3.5%

• S&P 500 — up 15.5%

• Nasdaq — up 32.8%

Callaway’s publicly traded peer, Acushnet, is up 26.4% for the year.

Is Callaway’s poor performance this year a golf or a Callaway issue? I reviewed the financial documents and earnings call transcript over the weekend to give us a better idea.

Historical context is important — Callaway has performed fairly well in the last ten years.

Let’s start at the top and peel back the onion.

Callaway’s revenue for the third quarter was $1.04 billion — up 5.3% from the third quarter in 2022. And year to date, Callaway has posted $3.39 billion in revenue — up 7.7%.

Callaway breaks out its revenue into three different units.

• Topgolf

• Golf Equipment

• Active Lifestyle

Topgolf represented 43% of total revenue in the third quarter with $447.7 million in revenue — up 8.2% on the quarter.

Golf Equipment represented 28.2% of total revenue in the third quarter at $293 million in revenue — down 1.1% for the quarter.

Active Lifestyle represented 28.8% of total revenue in the third quarter with $299 million in revenue — up 7.7% on the quarter.

Let’s dive into Topgolf.

Topgolf has been on a run for the last few years. Forecasted revenue for 2023 is $1.75 billion — an increase of over $500 million since 2021.

• 2021 — $1.2 billion

• 2022 — $1.5 billion

• 2023 — $1.75 billion (forecasted)

They have opened dozens of new venues.

• 2021 — 9 new venues

• 2022 — 13 new venues

• 2023 — 11 new venues (forecasted)

Topgolf will add 33 new venues since the beginning of 2021. For context — Topgolf has 83 venues in the United States. Revenue growth has been fueled by new venues and existing venues growing. But the latter came to a halt in the third quarter. 

Topgolf grew its same venue revenue for seven consecutive quarters. In the third quarter — same venue revenue decreased 3%. The revenue decline from the same venues was attributed to two things.

• Corporate sales

• Extreme heat in parts of the U.S.

Corporate events represent roughly 20% of Topgolf’s annual revenue. And corporate sales were down 17% during the third quarter. Callaway CEO Chip Brewer attributed the decline to a post-Covid bump of corporate events in 2022.

Non-corporate events were flat for the quarter for Topgolf — a positive sign.

Topgolf did have a couple of good things go their way in the quarter.

• Outperformed venue margin

• Average spend per ticket increased in the third quarter.

Topgolf’s poor quarter really boiled down to not booking enough corporate events.

Building a Topgolf venue requires significant capital.

• Small to Medium — $20 - $27 million

• Medium to Large — $30 - $40 million

Callaway has invested hundreds of millions of dollars since the acquisition of Topgolf. The same venue decline in revenue during the third quarter wasn’t necessarily welcome by investors.

Callaway announced they will open eight to nine venues in 2024 — a revision down from what they had planned. Callaway forecasts to open eleven venues in 2025. The move to push venues down the developmental pipeline will free up $100 million in capital. 

This is an important pivot as they reach to achieve positive free cash flow — something they expect to do by the end of this year.

Callaway golf equipment was down 1.1% for the third quarter. Callaway groups its equipment and ball revenue together. I want to highlight Acushnet’s third quarter sales of golf equipment — Acushnet breaks out golf clubs and golf balls.

• Golf clubs — up 17.6%

• Golf balls — up 6.3%

It is important to note that Acushnet did have a product release in the third quarter.

One item that has me interested is Callaway’s golf ball revenue.

Callaway’s golf ball revenue was down 5% for the quarter. As golf rounds increase — golf ball sales generally increase. And rounds are up 4% through September for the year. Callaway says golf ball revenue decreased due to retail channel catch-up in 2022. It is something to keep an eye on during their next report in the beginning of 2024.

Callaway’s lackluster stock performance isn’t reflective of the golf industry. It is more of a Topgolf story. A story of trying to capture a market as quickly as possible to beat future competition. Topgolf is over 20 years old — and they have built around 40% of its total venues in the last three years.

I am not sure if the team at Callaway would categorize it this way — but from the outside looking in, I would describe their current situation as no man’s land. Meaning they have grown revenue by a substantial amount — but to get that revenue has required significant capital, which has eroded margins and not returned enough value to shareholders.

At some point in no man’s land, a business will turn the corner. We either start becoming more profitable and becoming free cash flow positive, or we don’t, and the business deteriorates.

Callaway is committed to being free cash flow positive at the end of the year. I am very much looking forward to their annual report in early 2024.

Topgolf is important to the golf industry. Callaway had NGF conduct a study for them in which they found that ~10% of green grass golfers credit Topgolf for getting them on the golf course. That doesn’t necessarily mean 10% are net new golfers, but maybe golfers getting reintroduced to the game. Nonetheless — Topgolf is a key driver in getting golfers on the golf course, which is a positive for the industry.

Have yourself a great Monday. Talk to you next week!

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