Topgolf Callaway Brands reduced its sales outlook for the year due to weakness at Jack Wolfskin and currency headwinds seen in the first quarter, but company executives said on an analyst call that overall profitability came in significantly better than expected and its Topgolf and Golf Equipment segments are both positioned to accelerate growth in the second half.

Chip Brewer, president and CEO, said on the call that revenue in the quarter overall and at its Topgolf business was in line with guidance. The Golf Equipment segment also delivered market share gains. Combined with stronger-than-anticipated operating efficiencies, some favorable timing of expenses, and currency hedge gains, EBITDA, EPS and cash flow all topped expectations.

On the downside, Topgolf lowered its full-year revenue expectations by $80 million, a little under 2 percent of full-year expected revenues, due to an approximate $45 million reduction in expected Jack Wolfskin revenues due to challenging market conditions in its European business as well as an additional currency headwind since its last quarterly analyst call of approximately $35 million.

However, Brewer said that despite the downward revenue adjustment, Topgolf maintained its overall full-year EBITDA forecast based on its currency hedging programs, improving operating margins at both its venues and Golf Equipment business as well as confidence in core brands and market conditions. Topgolf also increased its full-year EPS by 5 cents per share and raised its free cash flow and embedded free cash flow estimates by approximately $60 million and $40 million, respectively.

Brewer said, “In short, we remain on track for our organic revenue growth targets in our key brands, our overall EBITDA growth targets, and we are ahead of schedule in delivering operating efficiencies, cash flow, and EPS as well as now beginning the process of paying down term debt. As I see it, the fundamental engine of our business continues to strengthen.”

In the quarter ended March 31, sales slid 2.0 percent to $1.14 billion, at the lower end of guidance in the range of $1.14 billion and $1.16 billion. By segment, Topgolf and Golf Equipment delivered a 4.8 percent and 1.4 percent increase, respectively. The Active Lifestyle saw a 15.2 percent decline.

The Active Lifestyle segment includes the operations of the company’s soft goods business marketed under the Callaway, TravisMathew, Jack Wolfskin and Ogio brand names.

Adjusted EBITDA in the quarter rose 2.3 percent to $160.9 million, driven primarily by an $11.7 million increase at Topgolf. Results were well above guidance calling for adjusted EBITDA in the range of $130 million to $140 million.

On an adjusted non-GAAP basis, operating income was off 13.0 percent to $74.4 million. The decrease was largely driven by a $12.6 million decrease in Active Lifestyle operating income, partially offset by gains in Golf Equipment and Topgolf. On a reported basis, operating income slid 16.9 percent to $66.9 million.

On a non-GAAP basis, net income slumped 52.4 percent to $15.8 million, or 9 cents a share. On a reported basis, net income was $6.5 million, or 4 cents a share, against $25 million, or 13 cents, in the year-ago Q1 period.

Inventory decreased $226.9 million year-over-year to $702.9 million.

Topgolf On Track To Revive Same-Venue Growth
Topgolf segment revenue increased 4.8 percent, to $422.8 million, driven primarily by new venues. Same venue sales of negative 7 percent were in line with expectations and reflects lapping a post-COVID surge in the corporate events business in the 2023 first quarter and, separately, extreme weather during January 2024.

Topgolf segment operating income increased 3.6 percent to $2.9 million from $2.8 million a year ago. Segment adjusted EBITDA increased 24.3 percent, to $59.8 million primarily due to increased revenue from new venues and improved venue level margins.

Brewer said the 7 percent same-venue decline was in line with expectations as the year-ago quarter was boosted by a post-COVID surge in the corporate events business. Results were also impacted by “extreme cold weather” during January of this year. Q1 same-venue sales stabilized after the January weather normalized.

Looking to the second quarter, same-venue sales at Topgolf are expected to be down low-single digits, marking improvement from Q1. Brewer said this takes into account a slower-than-expected first three weeks of April as spring break and the Easter timing shifted sales.

Brewer said sales trends over the past two weeks “have returned to more normalized than expected levels.” However, sales at Topgolf are now running slightly behind full-year targets, “and given the choppy market conditions we have seen and could continue to see, “the company is widening its full year same venue sales guidance from approximately flat to a new range of slightly positive to down low single digits.

Brewer added, “Most importantly, we have confidence in same venue sales improving in the second half of the year as our biggest marketing spend and consumer programs go live starting Memorial Day, and compares versus last year become easier. And to be clear, our internal goal is for us to transition back to positive same-venue sales in the second half of this year. The teams have been working hard for this, and now that the unusual laps are behind us, they believe they will start to deliver improved results. I, for one, am confident in their direction and remain convinced that we’ll be able to grow same venue sales low single digits or better over the long term.”

Brewer also cited three “key areas of opportunity” expected to help support sales growth: digital, experience and value.

Digital revenue penetration in Q1 increased to 35 percent versus 33 percent from the same period last year with the overall percentage of visitors that come through digital channels increasing to 62 percent, up to 710 basis points year over year. Brewer said, “Our new and evolving digital and commercial teams are getting smarter every day, unlocking key insights and driving results. Building on this, I’m pleased to report that our cross-brand consumer data platform is now live ahead of schedule, and we expect this will greatly improve our ability to gather player insights, tailor more compelling products and offerings, and importantly, serve as the backbone necessary for a Topgolf Callaway brand loyalty program slated to be in trial mode at Topgolf by the end of this year.”

Around experiences, Topgolf recently introduced Block Party, its first new game since Angry Birds in 2021 to a strong response. Brewer said, “One of the great aspects of this new game is that it’s fun for all player skill levels as you score points by hitting the ball literally anywhere in the outfield. Player response has been extremely positive so far, and we intend to invest in media to support greater awareness as we enter our peak summer months.”

As part of efforts to tap synergies across the organization, Topgolf is now hosting Callaway club fitting events at locations. Callaway club upgrade programs and Chrome Tour Golf ball promotions are also being employed at Topgolf locations. Said Brewer, “Our goal is to ensure that the Callaway brand is top of mind for the on-course golfers that visit Topgolf every day, a number we believe is approximately 40 percent of all U.S. golfers annually, as well as the new beginner golfers that Topgolf is creating.”

On value, Topgolf in the quarter promoted half-off Tuesdays to follow past similar in-app-only promos on Mondays and Wednesdays. Brewer said, “We’ve been pleased with the results but perhaps more importantly, this offering was a first step towards a broader strategy to build a compelling portfolio value offerings for players.”

Topgolf is also introducing a promotion offering “30 free minutes of extra play.” Said Brewer, “With the help of our new consumer data platform, we will also be experimenting with passes and bundled offers to drive repeat visits within 60 to 90 days of an initial visit.”

Regarding profitability, the Topgolf segment saw a 180 basis points year-over-year increase in gross margins at the venue level in the quarter with the help of a new inventory management system and labor model as well as the timing of marketing spend. Said Brewer, “We remain on track to hit our 35 percent EBITDA margin target for the full year. Furthermore, as the profitability of our venues continue to increase and same venue sales transition back to growth, our already attractive venue returns will become even stronger than they are today. This positions us extremely well as we continue to grow our footprint against the backdrop of significant whitespace.”

He said Topgolf now has 92 owned and operated venues in the U.S. and four internationally-owned venues. Incuding franchisees, it has over 100 venues globally. For the year, it plans to add seven venues in 2024 versus the eight previously due to a delay at a planned opening in New Braunfels, TX. Brewer added, “Looking ahead, excluding this year where we intentionally pulled back to accelerate cash flow, we remain confident in our ability to average 10 new venues per year over the foreseeable future. We also remain confident in our TAM of 250 venues in the United States with a similar number available internationally.”

Golf Equipment Sales Benefit From Share Gains
Golf Equipment segment revenue increased 1.4 percent to $449.9 million, primarily due to strong sales from its recent Chrome Tour ball launches as well as the strength of its new Ai Smoke golf clubs. Segment operating income increased 0.6 percent to $82.1 million, primarily due to increased operating efficiencies.

Brewer said Callaway gained share year over year in both golf ball and clubs. In clubs, Callaway held its position as the number one U.S. market share brand in driver fairway woods and hybrids. The Ai Smoke achieved the number one U.S. model market share position in driver fairway woods and irons. Callaway also gained the number one U.S. dollar market share position in putters, a position Callaway has not held in a while and attributed to the strength of the Ai-ONE putter launch.

Golf balls also showed “nice growth,” especially in the premium or tour category, where Callaway achieved a new record U.S. market share of 11 percent. Overall, Callaway golf ball share reached 19.3 percent, up 120 basis points year over year. Strong feedback from the Chrome Tour ball launch is expected to drive further market share gains, backed by advertising and field activation investments. In other areas, Callaway continues to see strong package set sales and the brand achieved a record 16 percent share in golf gloves.

By region, the overall U.S. market and Callaway’s own business there “both remain strong with field inventories and consumer demand both in line with expectations.” Europe started the year slower than expected due to poor weather conditions in the U.K. but gained share. The Japanese market overall is up slightly on a constant currency basis, but Callaway’s sales were down in reported terms due to currency headwinds as well as lower selling volumes this year versus last year “as retailers are being more conservative,” said Brewer. The Korean market “has been tough this thus far” with sales down double digits in part due to currency headwinds.

Brewer summed it up, “As we look towards the balance of the year, it’s worth mentioning that we have both more and larger product launches planned for the second half of this year than we had in 2023. And thus, our growth will be more second-half weighted. This was always part of our plan, and consistent with similar fall launches and product cadences that we’ve done in previous years. We remain on track to grow the golf equipment segment for the full year and we continue to feel good about the overall health of golf globally.”

Active Lifestyle Segment Impacted by Travis Matthew and Jack Wolfskin Declines
Active Lifestyle segment revenue fell 15.2 percent to $271.5 million and Brewer said segment sales are now expected to be down for the full year. Operating income in the segment slid 33.8 percent to $24.7 million due to the top-line decline.

Brewer said Topgolf was pleased with the quarterly performance at Travis Matthew, which in line with expectations. As expected, however, Topgolf had warned on its February analyst call that Travis Matthew’s sales were expected to be down in the quarter due to a corporate channel sell-in which occurred during the first quarter of 2023 and did not recur in Q1 2024. Brewer said the corporate channel sell-in was “significant relative to the size of this brand.”

Brewer added, “Excluding this impact, underlying sales trends remain healthy and growing. We also remain on track to open approximately 10 stores this year. with seven leases already signed. Travis Matthew also celebrated the one-year anniversary of our women’s launch, and we remain confident in our ability to continue to grow that business. We’re also pleased with the results of our shoe business under the Travis Matthew brand.”

Jack Wolfskin generated lower volumes in the quarter due primarily to a soft macro backdrop in Europe. Brewer said, “Jack Wolfskin remained under pressure in Q1 largely due to a tough macro environment, including an over-inventoried channel and soft overall market conditions in Europe.” As a result, full-year revenue expectations for Jack Wolfskin were lowered.

On the positive side, positive EBIDTA growth is still expected for Jack Wolfskin in 2024 and Topgolf continues to be “pleased” with the brand’s performance in China.  Brewer added, “Looking forward, we’re certainly not accepting of the status quo. Earlier this year we transitioned to a new European leadership team which has been proactively taking action to stabilize this business, return to profitability and drive future growth. There has been considerable progress already made with more to come in the next few months.”

Brewer also noted that Jack Wolfskin remains a “relatively small portion of our annual revenues, and even smaller portion of our annual profit.”

Outlook
The updated full-year outlook calls for:

  • Companywide sales between $4,435 million to $4,475 million versus sales in the range of $4,515 million to $4,555 million under previous guidance. In 2023, sales were $4,285 million.
  • Topgolf revenue to be approximately $1,960 million, the same as previous guidance. In 2023, Topgolf’s sales were $1,761 million.
  • Topgolf same venue sales growth to be slightly positive to down low single digits. Previously, same-venue growth was expected to be approximately flat. In 2023, same-venue growth was up 1 percent.
  • Consolidated adjusted EBITDA between $620 million and $640 million, the same as previous guidance. In 2023, consolidated adjusted EBITDA was $597 million.
  • Topgolf’s adjusted EBITDA to be approximately $350 million, the same as previous guidance. In 2023, Topgolf’s adjusted EBITDA was $304 million.
  • Non-GAAP diluted EPS in the range of 31 cents to 39 cents, versus guidance in the range of 26 cents to 34 cents previously. In 2023, earnings were 49 cents a share.

For the second quarter, sales are expected in the range of $1,180 million and $1,200 million compared with $1,180 million in the same period a year ago. Consolidated adjusted EBITDA is expected in the range of $191 million to $201 million, down from $206 million a year ago.

Topgolf revenue and operating income in the second quarter are expected to be up year over year due to the new venues since Q2 last year. The Golf Equipment segment’s revenue and operating income are expected to be down year over year for the second quarter due to a shift in timing of launches from Q2 last year to the second half of 2024, but still expected to be up for the full year. The launch of Big Bertha woods and irons in the year-ago second quarter is expected to cause a headwind of $30 million compared to Q2 this year. Active Lifestyle segment revenue is expected to be down year over year as TravisMathew will be lapping the remaining portion of the corporate channel sell-in and the Jack Wolfskin business is expected to continue to be remain soft due to market conditions in Europe.

Image courtesy Chip Brewer/Harvard Business School, Christina Gandolfo