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Callaway Is Firing on All Cylinders: Is It a Buy?

By Ryan Henderson – Dec 6, 2021 at 8:14AM

Key Points

  • Sales of equipment and apparel both rose despite tough year-over-year comparisons.
  • Topgolf is quickly becoming Callaway's most important segment.
  • Callaway looks like a great business at a fair price.

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The maker of golf equipment, gear, and apparel has new avenues for growth thanks to its recent investments in the entertainment space.

Since Callaway Golf (MODG 0.24%) first announced in Oct. 2020 that it would be acquiring the entertainment brand Topgolf for $2.6 billion in stock, its share price has increased by more than 30% -- and that's after declining over 30% in the past six months. Since unveiling the Topgolf deal, all of Callaway's operating segments have also been on a roll, and the latest quarter was no exception.

Here's why Callaway investors should be very excited about what's to come.

A club setting up to hit a golf ball at a driving range.

Image source: Getty Images

Equipment and apparel

Thanks in part to the pandemic's social-distancing requirements, people all over the world last year took to golf in record numbers as a safe, outdoor recreational activity. This created record demand for the golf equipment Callaway sells. In fact, in the fourth quarter of 2020, Callaway's golf club sales were up 48.5% year over year. According to Golf Datatech, that was the strongest fourth-quarter on record for U.S. retail sales of golf equipment. And so far, that increased demand is here to stay.

Though the company was lapping a record period of growth, Callaway's golf equipment sales rose 8% year over year in the third quarter (and 38% versus the same period in 2019). As CEO Chip Brewer elaborated during the company's earnings call, "Demand and interest in golf remains at all-time highs."

And the top-line gains weren't limited to its equipment business. In 2017, Callaway went on an acquisition spree, buying gear and apparel companies Travis Matthew, OGIO, and Jack Wolfskin. Those segments, plus Callaway's own brand, saw an overall 12% jump in revenue and a 35% increase in operating income last quarter. Gear and apparel now account for roughly one-third of the company's total operating income -- a significant increase from the prior year.

Powered largely by the Travis Matthew brand, which saw 84% same-store sales growth during the quarter, Callaway is attempting to build on its success in the apparel segment by adding new stores. Management stated it intends to open three more Travis Matthew locations in the upcoming quarter, which will bring the total to 29 by year's end -- up from 18 at the end of 2020.


On top of the company's impressive performance in its equipment and apparel business lines, Callaway also saw surprisingly strong results from its Topgolf subsidiary. The operator of massive, tech-enabled driving ranges with individual lounges and food and beverage offerings accounted for 39% of the top line, making it Callaway's biggest contributor.

Though Topgolf's same-venue sales declined earlier in the pandemic, that metric has since recovered and climbed to 2019 levels. And in the third quarter, the company opened two new venues in Colorado and New York with plans to finish the year with 70 total locations.  

But Topgolf doesn't just generate revenue through its own facilities -- it also sells its Toptracer ball-tracking technology to other driving ranges. And those businesses are willing to pay up for the new technology, because it helps them increase the prices they charge their own customers. According to Brewer, driving ranges report revenue gains of 25% to 60% after installing Toptracer.

Overall, management expects Topgolf to generate more than $1 billion in revenue for the 10 months of 2021 during which Callaway will have owned it -- slightly more than its revenue for all of 2019. 

Long-term outlook

Over the last five years, Callaway has transitioned away from purely an on-the-course business model to a more comprehensive golf company. This was even more evident in the third quarter when management announced it was making a $30 million private investment in the indoor simulation and entertainment company Five Iron Golf. 

Thanks to its wide array of business segments, Callaway now enjoys far more growth opportunities than it used to. At Topgolf alone, the company has identified a path to grow its global venue count more than fivefold.

Yet despite this evolution and the clear potential that lies ahead, Callaway stock still trades at a modest valuation. As of this writing, Callaway has an enterprise-value-to-operating-cash-flow ratio of just under 15. While that isn't insanely cheap, I think it's a fair price to pay for a beloved consumer brand with an unrivaled business model.

Ryan Henderson has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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