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Golfers understand that changing one’s swing is a risky and time-consuming process with no guarantee of better scores. Tell that to the maker of Callaway branded golf clubs. Its own transformation has also gone awry.
In 2020 it acquired Topgolf, a nightclub-like, gamified driving range operator, at an announced equity value of $2bn. The all-stock deal gave Topgolf shareholders half the company which was rebranded Topgolf Callaway Brands.
The combined group’s total equity value has since halved to just $2bn. Topgolf customer traffic has slowed in the middle of a capital intensive expansion plan. A combination of high inflation and high interest rates has proved a poor stroke of luck. Shares of the company are down 41 per cent so far in 2023.
Moving away from producing golf kit into entertainment was bold for Callaway. Callaway’s core equipment business is in solid shape. Golfing, which boomed during the pandemic, remains as popular as ever. The share price of its arch-rival Acushnet, owners of the Titleist brand, are up 33 per cent this year, far ahead of Topgolf Callaway. In its most recent quarter, the company said Topgolf same location sales fell by 3 per cent, as its corporate events business has faded.
Nominally, the company has a net leverage to ebitda ratio of around 4 times. But that calculation is complicated by real estate debt and lease payments. Adjusting for those, the company claims core leverage is half that. But even with more than $4bn of revenue expected this year, Topgolf Callaway should generate free cash flow of only $65mn.
Topgolf promises to reach a steady-state, pure cash operating profit margin of 16 per cent. But there is a real risk that the company’s expectations about TopGolf’s “occupancy” target have been overly optimistic. If so, then this double digit profitability would then be just as hopeful.
Shareholders will now wonder if the company effort to lower its handicap has done the opposite.
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