2021 was a pivotal year for Callaway Golf Co. (MODG 1.07%)During the first quarter, the company completed its acquisition of the golf entertainment brand Topgolf for a purchase price roughly equal to Callaway's entire market value. With Topgolf now in the fold, Callaway's market cap is more than triple what it was two years ago, and the company is home to a more diverse set of businesses.
Having just reported its fourth-quarter earnings, let's look at what investors should expect moving forward.
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2021 at a glance
For the full year, Callaway saw strong growth across all its segments. Topgolf, Golf Equipment, and its apparel and gear businesses each saw year-over-year increases in revenue as well as operating income. Driven by strong demand for golf all around, Callaway delivered its best year ever on an adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) basis reporting $445 million for the last 12 months -- a 170% increase from the same period a year prior.
One bright spot for Callaway, in particular, was the robust growth in its TravisMatthew brand. Known primarily for its premium men's golf and lifestyle apparel, TravisMatthew saw continued strength in Q4 both online and in person. TravisMatthew's retail locations saw 67% same-store sales growth versus a year ago, and its e-commerce sales increased 30%. Callaway added 10 new retail locations in 2021. Since it's seeing such strong demand for the TravisMatthew gear, Callaway's management team stated that it plans to continue opening stores at a healthy pace.
While Callaway's full-year numbers certainly looked good, there was one point of weakness in Q4. Callaway's golf equipment segment saw about a 24% decline in year-over-year revenue, which the company attributed to a shift in production resources prioritizing its upcoming 2022 launches over its existing product lines. Management did, however, reiterate during its conference call that it's seeing strong demand for its equipment products and that it expects the equipment segment to once again increase sales over the next year.
Topgolf's steady growth
Topgolf, the operator of many huge tech-enabled and family-fun-style driving ranges, has quickly become the leading revenue driver for Callaway. Despite being heavily impacted by a lack of corporate events due to COVID-19, Topgolf surpassed its Q4 2019 same-venue sales figure by 6% -- its biggest increase since the pandemic.
Topgolf also added nine new locations throughout the year, reaching a total of 70 venues worldwide. Between its new and existing locations, Topgolf generated roughly $1.2 billion in revenue and $179 million in adjusted EBITDA for the full year. Next year, Topgolf expects to add another 10 locations and increase its revenue by more than 22%.
But the massive venues aren't the only promising business line for Topgolf. The company also owns the Toptracer brand, which sells golf ball-tracking technology to traditional driving ranges. Traditional driving ranges are often eager to pay up for Toptracer since it enhances their customers' experiences. This year, Topgolf installed Toptracer's technology at just under 7,000 new bays, each one set to generate about $2,000 in revenue a year. Callaway has stated that it sees a path to more than 150,000 installed bays over the long term, which would bring in about $300 million in recurring revenue each year.
The big picture
An investment in Callaway today is an investment in what management refers to as "modern golf." With Topgolf driving the majority of the company's revenue, Callaway is now a very different business than what it used to be. Unlike Callaway's hyper-competitive retail businesses, Topgolf is a highly unique asset with a model and brand that's difficult to replicate. This should help Callaway generate more predictable growth in revenue and profits over time.
However, since Callaway is currently reinvesting the majority of its cash back into new Topgolf venues and TravisMatthew locations, the stock is tough to value on a cash flow basis. Instead, the company's adjusted EBITDA figure is likely a more relevant metric. Today, Callaway trades at a market cap of $4.6 billion, which is about 10 times its trailing 12-month adjusted EBITDA. For a growing business with a unique and replicable model in its Topgolf brand, that strikes me as a very reasonable valuation.
