Is making sporting goods a better business to be in than selling them? That's the question if you're mulling a new position in either Topgolf Callaway Brands (MODG -0.50%) or Dick's Sporting Goods (DKS 4.01%) -- but not a position in both. The former is a well-established brand of golf clubs and golfing accessories. The latter is a chain of retail stores offering a wide variety of sporting goods.
If you're struggling to decide on your next pick of this sector, keep reading. I will give you my assessment and conclusion.
More different than alike...more or less
You likely know these two companies. Dick's Sporting Goods of course operates more than 850 retail locations, with most of them being namesake stores. It did over $12 billion worth of business last year, making it the single biggest player within the highly fragmented U.S. sporting goods retail market.
Topgolf Callaway, on the other hand, not only makes the highly respected Callaway brand of golf clubs but Odyssey putters, TravisMathew clothing, and more. The company also operates interactive driving ranges under the Topgolf banner and is even the outfit behind the World Golf Tour video game. All told, Topgolf Callaway drove nearly $4 billion worth of revenue in 2022, turning $558 million of it into operating income.
It's not exactly an apples-to-apples comparison. For investors, however, everything's relative. Does Topgolf Callaway offer enough prospective reward given its risk? Is Dick's worth holding in the current tough economic environment? After all, retailers' profit margins tend to be thin even in the best of times. They're certainly strained here and now.
In instances like these, it's best to take a step back and look at both options through a more philosophical lens. Checking out both companies' histories during hard times can't hurt either.
One is more resilient -- and that matters right now
Golf has historically been a great business to be in. The market is changing though. Namely, there's not a lot of growth in the cards. Mordor Intelligence estimates the global golf equipment market will expand at an annualized pace of just over 4% through 2028, jibing with numbers from Straits Research.
In the meantime, the National Golf Foundation reports that the total number of rounds played in the U.S. in 2022 slipped 4% year over year. It's a curious lull given that a record-breaking number of people played for the first time last year. Keeping them playing seems to be a struggle -- at least, in the United States.
It's not clear why worldwide growth is lethargic, or why domestic interest in golf is waning. It would be naive, though, to pretend rampant inflation isn't squeezing consumers here and abroad. LendingClub says that as of early this year, 60% of U.S. adults as well as half of all U.S. households earning more than $100,000 per year -- a sweet spot for the golf business -- are living paycheck to paycheck.
Economic malaise doesn't just crimp spending on golf, of course. All discretionary spending is stifled when the economy is tepid and incomes are under pressure. That's a problem for Dick's Sporting Goods too -- except it may not be as much of a problem as it is for Topgolf Callaway. Dick's Sporting Goods sailed through the 2007/2008 recession like it wasn't even happening.
Topgolf Callaway, on the other hand, hit a wall around that time and wouldn't work its way out of the red until 2014 (and then mostly thanks to acquisitions like Topgolf, Jack Wolfskin, Ogio, and TravisMathew).
If the current economic sluggishness lingers or devolves into a full-blown recession, we could see a repeat of that profit pressure.
That's what CFRA analyst Zachary Warring fears anyway. He recently downgraded Topgolf Callaway from a buy to a hold, explaining that while its golf equipment segment "enjoyed incredible demand since the pandemic as golf experienced a surge in popularity... demand may have been pulled forward and [we] expect a slowdown in MODG's highest margin business in 2023."
It may all ultimately prove a boon for Dick's though as consumers trade down to lower-cost forms of entertainment and activity.
Dick's beats Topgolf Callaway this time around
It's just a possibility, mind you. Should the global economy stage a full-blown recovery in the near future, this year's projected sales growth of 11.4% for Topgolf Callaway may well come to fruition. Ditto for next year's estimated top-line growth of nearly 10%, which should in turn pump up the company's bottom line back above 2022's diminished figure.
Dick's Sporting Goods' sales growth projections, meanwhile, are only a third of Topgolf Callaway's.
You’re paying a much bigger premium, however, for Topgolf Callaway’s prospective growth. Whereas Dick’s Sporting Goods' shares trade at less than 10 times next year’s estimated bottom line, Topgolf Callaway stock is priced at a forward price-to-earnings multiple of 22. That’s a steep premium to pay for a piece of a company teetering on the edge of tough times, especially in light of the fact that slower-moving Dick’s Sporting Goods has at least managed to top its earnings estimate in each of the past 12 quarters.
You're paying about three times Dick's shares' forward-looking price-to-earnings (P/E) ratio when you step into a stake in Topgolf Callaway, however. That's a steep premium to pay for a piece of any company teetering on the edge of tough times. It's an especially steep premium when you could own Dick's shares at less than ten times next year's per-share earnings projection that will very likely be topped anyway, as has been the case for each of the past 12 quarters.
This won't always be the case. But for now, Dick's Sporting Goods is the better buy. Topgolf Callaway shares are well down from their mid-2021 high for a reason.