S&P Global Ratings revised its debt rating outlook on Topgolf Callaway Brands Corp. to negative from stable due to its recent report of weaker-than-expected performance for the third quarter despite maintaining relatively consistent S&P Global Ratings-adjusted EBITDA margins.

The rating agency said its Global Ratings-adjusted leverage ” for the trailing months ended September 30, 2023 was 5.6x, and S&P expects elevated, but improved, future leverage because of the uncertain economic climate and mounting pressures on the U.S. consumer.

S&P also affirmed its ratings on Topgolf Callaway, including its ‘B+’ issuer credit rating and all issue-level ratings on Topgolf. The negative outlook reflects S&P’s expectation for S&P Global Ratings-adjusted leverage around 5x through the end of 2024 and that weakness in sales and profitability will persist in the U.S. due to economic and consumer spending uncertainties.

S&P said in its analysis, “We forecast S&PGlobal Ratings-adjusted leverage will remain near our downside trigger of 5x or more through the end of 2024. TCB reported revenue growth of 5.3 percent for the third quarter (ended September 30, 2023) and 9.9 percent for the trailing-12 month period. Same-venue sales at Topgolf declined by more than 3 percent, offsetting golf equipment and lifestyle segment revenue largely in line with our expectations. This includes a low-single-digit decline in the equipment segment and a nearly 8 percent sales growth in the company’s lifestyle brands. Topgolf’s performance was hampered by lower walk-in traffic and corporate events, as well as a decline in consumer demand with extreme heat in certain markets. S&P Global Ratings-adjusted leverage for the trailing 12 months ended in September was 5.6x, and we now expect TCB to end the year with S&P Global Ratings adjusted leverage of 5.4x, compared to our previous forecast for adjusted leverage in the mid-to-high 4x range. Our outlook revision reflects the uncertain consumer environment for discretionary products and services that could lead to persistent sales weakness amid elevate leverage. We hold this view despite a modest improvement in S&P adjusted margins over the last year, significantly improved profitability at Topgolf, and our expectation for better margins over the next 12 to 18 months.

“The company is significantly exposed to discretionary consumer spending and remains vulnerable to shifts in market sentiment. After the early stages of the COVID-19 pandemic, the golf industry benefited from new participants and increased play by existing participants compared to pre-pandemic levels. This increase in golf participation drove TCB’s strong performance over the past few years, including about 28 percent sales growth in fiscal 2022. This compares to year-to-date 2023 sales growth of 8.7 percent, which is still robust but markedly slower compared to prior-year performance.

“While TCB’s unique golf ecosystem model will help support growth, we expect some moderation in operating performance with revenue growth in the mid-single-digit range over the next two years. While Topgolf’s recent decline in same-store sales was partially due to weather events, we also think that the slowing trend could persist if consumers decrease spending on entertainment services like those offered by the company. In addition, we also think the discretionary nature of the golf equipment category, coupled with high levels of consumer price inflation, could lead to a slowing in equipment and lifestyle. We see this risk while noting golf equipment demand tends to remain relatively consistent even in times of a mild recession. Still, we believe the company maintains a weaker competitive position relative to higher-rated peers and see additional risk from the financing strategy of Topgolf venues. We accordingly maintain our negative comparable ratings analysis modifier.

“We believe TCB’s unique golf ecosystem model and management’s financial policy will help mitigate performance challenges. We believe the company benefits from its strong market position as TCB operates as a diverse, globally scaled business marketing golf equipment (e.g., clubs and balls), golf gear, and related apparel. At the same time, TCB’s Topgolf segment provides consumers a unique entertainment complex that provides customers a mix of golf-centric amusement, food, and drink. We believe this supports both growth and relatively stable performance characteristics for TCB. At the same time, the equipment and lifestyle brand, holds a strong market position in golf equipment and adjacent categories, including significant market share in golf clubs (24 percent) and balls (21 percent).
We believe TCB can sustain low-single-digit organic revenue growth over the coming years, notwithstanding the normalization of golf activity and recessionary pressures. We believe management will balance growth investments, shareholder returns, and maintain prudent leverage in the long run, noting the company has publicly stated an intention to delever over time.

“The negative ratings outlook reflects our expectation that S&P Global Ratings-adjusted leverage will remain above 5x over the near-term before improving to 4.9xat year-end 2024. The outlook also reflects the uncertain economic environment and risks in consumer spending on golf-centric entertainment, golf equipment (e.g., clubs and balls), golf gear, and related apparel.”

Photo courtesy Topgolf