Shares of Topgolf Callaway Brands Corp. experienced a significant drop, marking their worst percentage decline in over three years. This decline follows the company’s decision to lower its full-year outlook and a decrease in analyst sentiment towards the stock.
However, analysts argue that the decline in enthusiasm for golfing is not the primary issue for Topgolf Callaway (MODG, -16.87%). Instead, they believe the challenges lie within its sports-entertainment chain, Topgolf. Higher prices for basic amenities have dampened demand and interest among corporate event-planners.
According to Stephens analyst Daniel Imbro, who downgraded the company’s shares after its quarterly results were published, the demand for golf equipment remains strong. The sport is primarily driven by dedicated enthusiasts rather than casual hobbyists.
Imbro stated, “Coming out of COVID, we certainly lost some of the temporary golfers. However, we gained more dedicated players.”
He also mentioned that despite a normalization in rounds played last year, metrics such as the number of people keeping handicaps and receiving lessons indicated an increase among enthusiastic players.
Topgolf Callaway, known for selling golf equipment under the Callaway brand and operating the sports-entertainment chain Topgolf, merged with the latter in 2021. Topgolf features driving ranges equipped with ball-tracking technology and dartboard-like targets for players to aim at. Additionally, they provide food and alcohol services.
This merger allowed Topgolf Callaway to gain a significant revenue driver, with Topgolf becoming its largest sales segment. However, it also introduced a different aspect to their business, involving both running driving ranges and managing restaurants.
Imbro highlighted the shifting focus of the company’s stock and narrative from golf equipment to Topgolf, emphasizing its increasing importance.
Topgolf Callaway Downgraded as Slowing Demand Takes Toll
Shares of Topgolf Callaway, the popular golf entertainment company, took a significant hit after being downgraded by Stephens and JPMorgan. Both firms lowered their ratings to neutral, citing a decline in demand as the primary reason.
The stock closed 16.9% lower on Thursday at $10.35, marking its largest percentage drop since October 28, 2020, when it tumbled 18.8%. This year alone, the stock has fallen 48.9%. In contrast, rival company Acushnet Holdings Corp., which owns popular golf brand Titleist, has seen a 28% increase in its shares during the same period. Analysts noted that Acushnet had a more conservative balance sheet this year.
Topgolf Callaway executives reported a 3% decrease in same-venue sales during the third quarter. They attributed this decline to a drop-off in corporate events following the “post-COVID surge” last year, as well as unfavorable weather conditions in the South and weaker trends in Asia.
To address these challenges, the company announced plans to implement cost-cutting measures of approximately $45 million per year and reduce capital spending by $100 million over the next two years. These efforts are aimed at achieving positive cash flow for the company, but unfortunately, they will also include staff reductions.
Despite the downgraded rating, some analysts, like Imbro, expressed optimism about Topgolf’s future potential. However, others believe that the dimmer outlook from Topgolf Callaway was anticipated by investors.
“While we cannot overlook the disappointing performance of the quarter and the guidance cut for ’23, investor patience is likely running thin. That being said, we believe that investors were already expecting the miss and downward guidance,” noted Truist analysts in a recent report.
They also mentioned that the company’s proactive approach to addressing cash concerns and adopting a more conservative stance on its long-term growth prospects could be seen favorably by certain investors.