This article from the Wall Street Journal offers a great analysis of Callaway’s decision to spinoff its Topgolf business amid slowing consumer spending.
Published by: Wall Street Journal
Published date: September 2024
Duffers are ruining things for Topgolf Callaway.
Serious golfers are reliably showing up on golf courses, spending money on their equipment and golf balls. But recreational players are no longer as keen on shelling out some $70 an hour on a driving range for fun these days. This has been just one of many problems plaguing the company since it bought recreational driving-range operator Topgolf.
Hence its decision to spin off the Topgolf business. The company said last week that the target spinoff date would be in the second half of 2025, though it also said it would be open to other options such as an outright sale of Topgolf if an attractive offer shows up.
Investors weren’t enthusiastic about the combination to begin with. Shares of the company, previously known as Callaway, fell 19% following the initial announcement of the deal in October 2020. Not only were so-called deal synergies not very convincing, but the company took on substantial debt as a result. This followed another acquisition—apparel brand Jack Wolfskin—that had also added to its debt pile.
The company initially thought that visitors to Topgolf would become newbie golfers who might seek out its products after trying them out at those venues, which carry Callaway equipment. As it turns out, hitting a few balls at a recreational driving range isn’t enough to convert people into Callaway faithfuls.
Lately, the Topgolf business has been hit hard by slowing consumer spending. Same-venue sales fell 8% in the second quarter from a year earlier, the fourth consecutive quarter of declines. The sales drop was even worse for big-group events because of “corporate belttightening,” according to the company.
That is quite the contrast with bowling-alley operator Bowlero , which reported a same-store sales increase in the same quarter. Eric Wold, equity analyst for B. Riley Securities, noted that movie theaters and theme parks also haven’t experienced the degree of slowdown that Topgolf has seen recently.
The steeper price tag might be one contributor: In its location in Edison, N.J., for example, it costs about $155 to reserve one bay for a two-hour session during peak hours. And that doesn’t include food or drinks.
Topgolf is trying out different ways to lure customers, including variable pricing, tweaks to its promotions and adding concerts and live DJ nights.
In all, Topgolf Callaway’s shares have shed nearly 52% since it unveiled the deal, a contrast with peer Acushnet (owner of Titleist), which has appreciated 83% over the same period. This is despite the fact that the postpandemic period has been “the greatest period for the sport of golf and the golf equipment industry” since the peak of Tigermania more than 20 years ago, according to Joe Altobello, equity analyst at Raymond James.
Last year was the record for rounds played in U.S. history, and that number was still growing through mid-2024, according to a research note from Jefferies.
Callaway has been a clear beneficiary, and it still has the leading market share in the U.S. for drivers, fairway woods and irons, according to the research note.
Topgolf itself isn’t a lousy business— it is profitable and generated a 15.5% margin on the basis of earnings before interest, taxes, depreciation and amortization last year. Its top line grew at a healthy 27% compound annual growth rate between 2021 and 2023 before the recent slowdown, and it still has a long runway of new locations. It will, however, first need to prove that it can bring customers back after the first handful of visits.
More broadly, Altobello notes that the company was probably getting a “conglomerate discount” because the two are such different businesses: There might not be a big overlap of investors who want to invest in an industry-leading golf-equipment maker and those who want a stake in an entertain-ment-and-restaurant type busi –ness.
Today, Topgolf Callaway’s enterprise value is less than 10 times forward-12-month Ebitda, a 14% discount to peer Acushnet and 10% cheaper than Bowlero. That makes for an enticing entry point, but investors might first want to see proof of lasting discipline at Callaway before pouncing.
