“Our company is on a roll, and I’m very optimistic about the road ahead,” Chip Brewer, Callaway Golf’s president and CEO, told analysts after the company delivered strong third-quarter results that exceeded expectations despite supply chain hurdles and again raised its guidance for the year.

“Callaway continued to benefit from broad-based momentum across all segments,” said Brewer. “The operational headwinds we and nearly all consumer brands faced during the quarter were no match for our world-class team of professionals and the strong demand we are experiencing in golf equipment and apparel. In addition, Topgolf delivered exceptional results as increased walk-in traffic and social event bookings led to further gains in sales and productivity.”

In the quarter ended September 30, sales surged 79.8 percent to $856 million from $476 million a year ago.

By segment, Topgolf’s sales were $334 million against no sales in the year-ago period. Topgolf was acquired in March 2021. Golf Equipment revenues advanced 8.6 percent to $290 million. Apparel, Gear and Other sales, including OGIO, TravisMathew and Jack Wolfskin, rose 12.0 percent to $233 million a year ago.

Adjusted EBITDA ran up 58.0 percent to $139 million from $88 million a year ago.

Topgolf Venue Revenues Return To 2019 Levels
Exploring segment highlights, Brewer said Topgolf’s owned venues continued their positive trends with Q3 same venue sales at approximately 100 percent of 2019 levels. The performance reflected strong walk-in traffic and improved event sales, especially in the social event bookings.

“Our performance was particularly impressive considering the headwinds we faced from the increase in Delta COVID cases early in the quarter,” said Brewer. “Getting back to 2019 levels of same venue sales is a significant milestone for the Topgolf team and a strong indicator of more growth to come as the business fully recovers from COVID impacts.”

Topgolf also saw improved profitability with adjusted EBITDA of $59 million for the quarter, significantly outpacing forecasts. Said Brewer, “To put this in perspective, Topgolf earned as much in Q3 as it did for the entire year in 2019.”

Looking ahead, the corporate events business is still expected to be lighter in the fourth quarter than it was in 2019. Relative to Q3, Topgolf’s total systems same venue sales are expected to be down in Q4 because corporate events are historically a more significant portion of Topgolf’s Q4 sales mix. Topgolf is now anticipated to show low- to mid-90s same venue sales rates for both Q4 and the full year, “up nicely from our prior forecast,” said Brewer.

Topgolf is expected to see above-average inflationary pressures on food, beverage and wages in the holiday quarter, but those cost pressures are expected to be primarily mitigated by top-line growth, continued labor efficiency and selectively taking price.

Venue expansion continued as planned during the quarter with an opening of a Colorado Springs venue. Eight venues opened this year, with one in Fort Myers set to open in November. Brewer said Topgolf expects to be able to reach a target of ten new venues next year.

Toptracer expansion continued during the quarter, with year-to-date installation surpassing installs in 2020 and nearly double the number of installs in 2019; COVID restrictions and supply chain issues led to fewer installs during the quarter than anticipated. For the full year, total new bay installs will be approximately 10 percent below Topgolf’s 8,000 bay target.

Brewer said demand for Toptracer remains “very strong” as customer feedback with driver ranges reporting 25 percent to 60 percent revenue increases post-installation. Brewer said, “We are confident that in a normal operating environment, we will be able to get back to our goal of 8,000-plus installations per year.”

Golf Equipment Q3 Revenues Climb 8.6 Percent
The golf equipment sales gain of 8.6 percent reflects an interest in golf remaining at “all-time highs.” Brewer said all signs show that the high level of interest “is continuing and will do so through the foreseeable future.”

He noted that according to Golf Datatech, hardgoods retail sell-through continued to trend higher, up 1.3 percent in the third quarter year-over-year and ahead 46.5 percent compared to 2019. Said Brewer, “We are not seeing demand decline, and our customers are telling us that they expect a strong year for golf in 2022.”

Brewer also said the golf equipment’s strong performance was due to better-than-expected navigation of supply chain bottlenecks. Brewer said, “Although we expect both us and the industry at large to be supply-constrained for the foreseeable future, we are also confident we’ll be able to manage through in a manner that supports our growth and profitability initiatives. We are also cautiously optimistic that our efforts and scale are creating a competitive advantage for us here.”

Apparel, Gear and Other Q3 Sales Gain 12 Percent
In the Apparel, Gear and Other segment, the 12 percent year-over-year gains reflect strong momentum at TravisMathew and Jack Wolfskin, as well as the success of Callaway branded product in Asian markets.

“The TravisMathew brand continues to be on fire, gaining strong traction in newer East Coast markets while maintaining a strong following here on the West Coast,” said Brewer. “The brand is performing extremely well in all channels.”

TravisMathew’s same-store sales grew 84 percent versus 2020 and 50 percent versus 2019. Two TravisMathew stores opened in Florida in the quarter to bring the total store count to 26, with three more scheduled to open in the fourth quarter. E-commerce was up 50 percent year-over-year, excluding a one-time year-ago sales event.

Jack Wolfskin experienced a “strong Q3,” with 2022 spring/summer pre-books up significantly over 2020 and comps increasing almost 10 percent over 2019 and 2020. Jack Wolfskin experienced port delays in Hamburg, Germany, but could fulfill all orders in the quarter without cancellations.

Callaway apparel in Japan continued to be a top-performing brand in the wholesale channel, holding the No. 1 position year to date. In Korea, Callaway apparel is off to a “solid start” with positive reception from the major department stores in the region. 

Profitability Impacted By Topgolf Acquisition
On a reported basis, income from operations improved 18.8 percent to $76 million from $64 million a year ago. Net income was a loss of $16 million, or 9 cents a share, from earnings of $52 million, or 54 cents a year ago.

On a non-GAAP basis, total cost and expenses were $772 million in the third quarter of 2021 compared to $406 million in the third quarter of 2020. Topgolf added $310 million of total costs and expenses. The remaining $56 million increase includes moving spending levels back to normal levels, the start-up of the Korean Callaway apparel business, TravisMathew expansion, increased costs to support a larger organization, and higher freight costs and inflationary pressures. Brian Lynch, CFO, said, “To date, increased sales volumes and selective price increases have balanced out the cost increases, and we believe this will continue to be the case in Q4 and into early 2022.”

On an adjusted basis, operating income rose 21.4 percent to $85 million from $70 million a year ago. Adjusted net earnings fell 55.9 percent to $26 million, or 14 cents a share, from $59 million, or 61 cents, a year ago and topped Wall Street’s consensus estimate of 10 cents.

The increase in operating income was led by a $24 million increase in segment profit due to the addition of the Topgolf business and a $9 million increase in apparel, gear, and other operating income, partially offset by an $11 million decrease in golf equipment operating income due to increased freight costs and return to more normalized spend.

Earnings And Revenue Guidance Raised 
Looking ahead, Callaway now expects sales for the year in the range of $3,110 to $3,120 million, up from $3,065 to $3,095 million previously. Adjusted EBITDA is now projected in the range of $424 million to $430 million, up from a range of $370 to $390 million previously.

The full-year 2021 net revenue estimate assumes Topgolf segment revenue for the ten months beginning March 8, 2021 slightly above 2019 full year levels of $1,059 million and continued positive demand fundamentals for Callaway’s Golf Equipment and Apparel, Gear and Other segments, and improved supply in Golf Equipment in the fourth quarter. Full-year 2021 adjusted EBITDA estimate assumes the Topgolf segment will deliver approximately $158 million in Adjusted EBITDA for the ten months beginning March 8, 2021, amid strong revenue flow-through.

For the fourth quarter, the implied revenue guidance is increasing by approximately $30 million, with about 50 percent of that flowing through to adjusted EBITDA. Lynch said the revenue increase is expected to be driven by continued overperformance in the venues, increased supply and golf equipment and spend levels continue to ramp up to normalized levels. On the operational side, continued cost pressure from increased freight costs and inflationary pressures, including labor and commodity prices, are expected as well as negative foreign currency impacts due to a strengthening U.S. dollar for the balance of 2021 and into 2022.

Lynch added, “However, despite these headwinds, we believe strong demand sales volumes and select price increases across our business segments will balance out these pressures, and we expect all businesses to grow next year.”

Photo courtesy Calloway