Topgolf Callaway Brands raised its 2023 full-year outlook on positive trends across its business highlighted by increased traffic at its Topgolf venues, market share gains in its golf equipment business, and strong brand momentum in its active lifestyle segment.
Total net revenue in the third quarter was $988.5 million, up 15.4 percent year-over-year, or up 21 percent on a currency-neutral basis, while adjusted EBITDA was $144.4 million, up 4.0 percent year-over-year, or 22.7 percent on a currency-neutral basis.
“As we look to the balance of this year and into 2023, we are optimistic about our competitive positioning across each segment, the resiliency of our core consumers, and the embedded growth within our business,” said company president and CEO Chip Brewer on a conference call with analysts. “Over the long term, we believe we can deliver profitable growth across all of our segments, as well as a competitive advantage via the scale, and synergies of our combined enterprise. We remain confident that off-course golf will continue to be a key driver of growth in the Modern Golf ecosystem and as our recent rebrand suggests, Topgolf is expected to be an even larger contributor to both top-line and bottom-line growth.”
Brewer cited Golf Datatech data that indicated the U.S. golf equipment market is down only 2.3 percent through the third quarter on a sell-through dollar basis despite relatively poor weather and playable hours in the early part of this year.
“The market has clearly not declined meaningfully as many expected it to with COVID restrictions abating earlier this year, and we’ve been pleased with the fact that we gained market share as the year progressed,” Brewer offered. “After a slow start to the year, our U.S. hardgoods market share year-to-date through Q3 was 23.8 percent, up 97 basis points year-over-year. It’s clear that interest in golf remains high and that Callaway is outperforming the market, something I believe we have a track record of doing.”
The Topgolf segment contributed $413.8 million in revenue in the quarter, a 24 percent increase over the 2021 comp period, reflecting “strong same-venue sales growth and additional new venues,” but segment operating income was down 1.4 percent to $23.6 million.
“Topgolf venues delivered an impressive 11 percent same-venue sales growth in Q3, driven by a roughly even mix of traffic growth and price,” Brewer said.
Operating margins decreased slightly during the quarter due to planned increased staffing costs, increased pre-opening expenses, as well as increased marketing spend. That metric slipped 146 basis points to 5.7 percent of sales in the quarter versus the year-ago period. Management said they expect the Topgolf full-year results to show improved operating margins over 2021.
“Social events were a particularly strong contributor this quarter as the venues are increasingly gaining recognition as a preferred place to gather for group events and celebrations,” Brewer offered. “Looking forward, we believe we can deliver 10 percent or higher same-venue sales for Q4 as well, thus delivering high single-digit same-venue sales for the full year.”
New venue development reportedly “remains on schedule” with two new locations opened in Q3 and six new venues scheduled to open in Q4, “the most ever in a single quarter.” By the end of the year, the company expects to have 81 total owned venues worldwide.
“The business model is proven, with venues delivering an impressive 40 percent to 50 percent year 3 cash-on-cash return,” explained Brewer. “And we have a clear road map for the growth ahead of us as we plan to successfully open 11 new venues a year and at the same time, deliver positive same-venue sales growth across existing venues. Toptracer had a good quarter as well, with approximately 1,600 bays installed. For the full year, we now estimate that we will install between 7,000 and 8,000 new bays.”
The Golf Equipment segment generated $296.7 million in revenue, a 2.5 percent increase (9.3 percent increase on a constant-currency basis) versus the year-ago comp period. This was said to be driven by “continued high demand, strong market shares, and good supply in golf equipment.” The company feels predicting the timing of shipments and supply between quarters can be challenging. They received some supply earlier than expected in the third quarter and some of the strength experienced in the quarter was due to a shift in the timing of sales from Q4 to third quarter. Golf equipment operating income increased 8.3 percent $49.6 million despite the foreign currency headwinds. Operating margins rose 90 basis points to 16.7 percent of sales in the quarter.
The Active Lifestyle segment had revenue of $278.0 million, up 19.3 percent, or 31 percent on a constant-currency basis, compared to Q3 2021. The increase was attributed to momentum in the TravisMathew, Jack Wolfskin, and Callaway brands. Active Lifestyle operating income decreased $6.5 million, or 18.8 percent, in Q3 compared to Q3 2021, but would have increased on a constant-currency basis. Operating margins declined 193 basis points to 10.2 percent of sales in the three-month period ended September 30.
The Callaway Apparel business in Asia reportedly turned in another strong quarter as did both TravisMathew and Jack Wolfskin. “For Jack Wolfskin in local currency, both China and Europe grew nicely during Q3,” Brewer detailed. “We are proud of this result as investors will note that many of our competitors are struggling in those markets. We’re also seeing excellent signs of brand health as a recent third-party research study of consumer preferences showed Jack Wolfskin to be the No. 1 brand associated with outdoor activities in Germany. And the brand just earned a prestigious ISPO product award, the gold standard in the outdoor industry for technical and sustainably conscious product design. Shifting to TravisMathew, we continue to see outstanding brand momentum across all channels. The brand is delivering strong double-digit revenue and profit, and they are experiencing another promising pre-book season for spring/summer 2023.”
Our active lifestyle segment remains a highly profitable segment with excellent growth prospects. Turning now to our outlook. I’d like to give you some color on the balance of this year and due to the level of uncertainties out there and the difficulty that investors may have in quantifying them, and initial outlook for 2023. For 2022, we’re raising our full-year profitability guidance for Topgolf and the total company despite further FX pressures relative to our last guide.
On a constant-currency basis, total segment operating income for the third quarter increased 21.8 percent for the period. Third quarter adjusted EBITDA was $144 million, up 4 percent over Q3 2021, or up 23 percent on a constant-currency basis.
“Looking at only the FX, if current rates hold, it would be a meaningful headwind for us in 2023,” Brewer suggested. “However, we view this as a short- to mid-term issue as over longer periods, rates will either moderate or businesses will adjust. Even with all of the above, for 2023, we currently expect approximately 10 percent revenue growth and approximately $600 million in adjusted EBITDA, with Topgolf contributing a little more than half of this EBITDA.”
Inventory balance increased to $722 million at the end of the third quarter of 2022, compared to $385 million at the end of September 30, 2021. Management does not expect any uptick in promotional activity despite the fact that channel inventories have normalized in the market.
“We feel good about the levels of our inventory. Inventory turns and days on hand are roughly consistent with pre-pandemic levels,” said CFO Brian Lynch. “We also feel good about the quality of our inventory and do not foresee promotional activity based on our current inventory position.”
“The market probably has more normalized inventory levels right now,” added Brewer. “And so, there’ll probably be more promotional activity than there was in the last couple of years, which is zero, by the way. So more than zero. But probably less than historical.”
Topgolf Callaway raised its full-year 2022 revenue expectations to a range of $3.965 billion to $3.985 billion, including approximately $150 million of negative foreign currency impact, which is approximately $21 million more than our last estimate of $129 million. The segment assumptions underlying this guidance are said to be the same as prior earnings reports, with Topgolf segment revenue of approximately $1.56 billion, Golf Equipment segment revenue growth of 12 percent or more, and Active Lifestyle segment revenue reaching approximately $1 billion. The operating segments are covering the increased negative foreign currency impacts. The full-year adjusted EBITDA guidance of $560 million to $570 million is a $5 million increase compared to the mid-point of previous guidance.
“The Golf Equipment business is largely expected to cover the incremental foreign exchange risk,” Lynch shared. “Topgolf is now expected to deliver between $240 million to $250 million of adjusted EBITDA. To reiterate Chip’s comments for 2023, we expect the business to grow approximately 10 percent in revenue and to achieve approximately $600 million in adjusted EBITDA using currency spot rates from late October. From a constant-currency perspective, that would represent approximately 13 percent or more revenue growth and approximately $65 million in adjusted EBITDA.”
Lynch explained that the projections include no hedge gains as their hedging program resets at the beginning of the year and also takes into account the lapping of the channel filling in the golf equipment business that they had this year as retail inventory has returned to normal levels.
“Given it is early to provide these metrics, we are not providing segment-level detail at this time,” Lynch concluded.
Photo courtesy Topgolf
