Q1 Revenue was up 12.2% y/y. MODG reports revenue in two segments: Product and Services but I find it more helpful to look at the business in three segments: Topgolf (“TG”), Golf Equipment and Lifestyle. TG was up 25.3% y/y and the venue business showed great SVS at 11%. The guide here is slightly confusing with mgmt citing corporate events weakness as a reason to change SVS guide from HSD to M-HSD but in the process increasing EBITDA guidance for the segment and leaving full year sales guidance flat. There was note that venue product sales (Callaway brand sales at TG venues) was down from $4.2m last year to $3.7m this quarter. Although immaterial this is an interesting number to follow as it quantifies cross selling opportunities and MODG ability to convert casual players to more entrenched (higher LTV) on & off course.
Golf Equipment was fine in the quarter. Revenues were down 5.2%. I have modeled -3% for the full year. Golf equipment is proving to be more sticky than bears anticipated and margins haven’t reverted. Golf interest is continuing to grow (recent masters numbers and golf datatech numbers). The lifestyle business is on fire growing 28% y/y and benefitting from easing supply chain costs with margins at 11.5%.
Going through the thesis: I think bears have three primary hesitations with MODG that accounted for the sell off. 1) The TG EBITDA guide of $90m for Q2 and the $315-$325m FY TG EBITDA guide implies a steep hockeystick-like y/y growth in TG in H2 (and ~50% y/y growth in Q3). Bears are taking the under, but after modeling out the implied incremental margins I have confidence in this guide. The mgmt team has historically been conservative with their guides and have a history of living up to the expectations they set. 2) The second point that bears are getting hung up on is the leverage in the business. Interest expense was up to $50m in the quarter from $31.4m last year eating away at margins and Long term debt was up to $1.5b. During the quarter MODG repaid their “Term Loan B”, “TopGolf Term Loan” and “Topgolf Revolving Credit Facility” which had an aggregate outstanding balance of $878.9m as of December 31st, 2022 and weighted average interest rate of 9.4%. In order to do this they took out a “2023 Term Loan B” with principal of $1,250m at an 8.26% interest rate. In all net debt/EBITDA is >4x. In a rising rate environment, that has investors spooked. Management said that leverage would increase in Q2 but then come down quickly in 2H. TopGolf flipping to cash flow positive is the real catalyst here, once that engine is humming this business will (very) quickly delever. Management reiterated their goal of being less than 3x net debt by 2025. In effect we are watching an LBO in the public markets. There are no large near term maturities ($276m due in 2026 is the largest on the $1.5b outstanding). The 3rd bear case is that TG is a margin inflection story and the investments we’re seeing in S&M and a new IT system are masking that.
The real highlight is the new unit economics update during the quarter. We got beter color on the difference between small, medium and large venues revenues ($13m-$19m-$23m+) all higher than previously thought. EBITDAR margins were upped form 32% to 35% and estimated payback periods are 2.5 years with 50-60% cash on cash returns up from 40-50%. Mgmt also reiterated the 2025 guide on $800m in EBITDA and said that this years $270m in capex is a good run rate to go off of. Current;y the business trades at 10-11x ‘23 EBITDA in life with Acushnet despite having a fast growing consumer brand with 50% CoC returns quickly adding new stores. If they get anywhere close to $800m 2025 EBITDA the stock should do very well from here.
Thank you for your detailed analysis. There is one point I want you to clarify. When you say landlord of Topgolf fund 75% of development cost, do you mean landlord bearing the cost or making loan to Topgolf?
MODG Q1’23 Earnings Update:
Q1 Revenue was up 12.2% y/y. MODG reports revenue in two segments: Product and Services but I find it more helpful to look at the business in three segments: Topgolf (“TG”), Golf Equipment and Lifestyle. TG was up 25.3% y/y and the venue business showed great SVS at 11%. The guide here is slightly confusing with mgmt citing corporate events weakness as a reason to change SVS guide from HSD to M-HSD but in the process increasing EBITDA guidance for the segment and leaving full year sales guidance flat. There was note that venue product sales (Callaway brand sales at TG venues) was down from $4.2m last year to $3.7m this quarter. Although immaterial this is an interesting number to follow as it quantifies cross selling opportunities and MODG ability to convert casual players to more entrenched (higher LTV) on & off course.
Golf Equipment was fine in the quarter. Revenues were down 5.2%. I have modeled -3% for the full year. Golf equipment is proving to be more sticky than bears anticipated and margins haven’t reverted. Golf interest is continuing to grow (recent masters numbers and golf datatech numbers). The lifestyle business is on fire growing 28% y/y and benefitting from easing supply chain costs with margins at 11.5%.
Going through the thesis: I think bears have three primary hesitations with MODG that accounted for the sell off. 1) The TG EBITDA guide of $90m for Q2 and the $315-$325m FY TG EBITDA guide implies a steep hockeystick-like y/y growth in TG in H2 (and ~50% y/y growth in Q3). Bears are taking the under, but after modeling out the implied incremental margins I have confidence in this guide. The mgmt team has historically been conservative with their guides and have a history of living up to the expectations they set. 2) The second point that bears are getting hung up on is the leverage in the business. Interest expense was up to $50m in the quarter from $31.4m last year eating away at margins and Long term debt was up to $1.5b. During the quarter MODG repaid their “Term Loan B”, “TopGolf Term Loan” and “Topgolf Revolving Credit Facility” which had an aggregate outstanding balance of $878.9m as of December 31st, 2022 and weighted average interest rate of 9.4%. In order to do this they took out a “2023 Term Loan B” with principal of $1,250m at an 8.26% interest rate. In all net debt/EBITDA is >4x. In a rising rate environment, that has investors spooked. Management said that leverage would increase in Q2 but then come down quickly in 2H. TopGolf flipping to cash flow positive is the real catalyst here, once that engine is humming this business will (very) quickly delever. Management reiterated their goal of being less than 3x net debt by 2025. In effect we are watching an LBO in the public markets. There are no large near term maturities ($276m due in 2026 is the largest on the $1.5b outstanding). The 3rd bear case is that TG is a margin inflection story and the investments we’re seeing in S&M and a new IT system are masking that.
The real highlight is the new unit economics update during the quarter. We got beter color on the difference between small, medium and large venues revenues ($13m-$19m-$23m+) all higher than previously thought. EBITDAR margins were upped form 32% to 35% and estimated payback periods are 2.5 years with 50-60% cash on cash returns up from 40-50%. Mgmt also reiterated the 2025 guide on $800m in EBITDA and said that this years $270m in capex is a good run rate to go off of. Current;y the business trades at 10-11x ‘23 EBITDA in life with Acushnet despite having a fast growing consumer brand with 50% CoC returns quickly adding new stores. If they get anywhere close to $800m 2025 EBITDA the stock should do very well from here.
Thank you for your detailed analysis. There is one point I want you to clarify. When you say landlord of Topgolf fund 75% of development cost, do you mean landlord bearing the cost or making loan to Topgolf?
Nice writeup. If TopGolf makes up the bulk of the total value, why was Callaway able to buy it?
What multiple did they pay for TopGolf and why would the public market pay more than what the PE was willing to sell for?