Topgolf Callaway dropped a bit of a bombshell late yesterday.

In its second-quarter financial report, the company reported that disappointing stock performance and same-venue Topgolf sales are prompting it to conduct a full strategic review of the Topgolf business.

Specifically, that review will include “a potential spin of Topgolf.”

“We remain convinced Topgolf is a high-quality business with significant future opportunity,” Topgolf Callaway CEO Chip Brewer told investors. “At the same time, we have been disappointed in our stock performance for some time, as well as more recent same-venue sales performance.”

Brewer says the strategic review of Topgolf is underway.

“The review includes the assessment of organic strategies to return Topgolf to profitable same-venue sales growth, as well as inorganic alternatives,” said Brewer.

One of those inorganic alternatives, it would seem, would be to sell off Topgolf.

The trouble with Topgolf

When Callaway merged with Topgolf in 2021, it catapulted the combined company into a stratosphere never seen before in golf. Callaway morphed from a billion-dollar equipment and apparel brand into a multi-billion-dollar golf-centric total lifestyle brand.

Callaway rebranded itself as Topgolf Callaway and built as many as 13 new venues annually. Those new venues sparked tremendous top-line sales growth. The problem, however, has been in same-venue sales quarter over quarter and year over year.

“Same-venue sales growth” is as simple as it sounds: current sales at an existing venue compared to sales at that same venue during the same period of the previous year. Same-venue sales have been problematic for Topgolf for several quarters but this year’s Q2 performance has brought the issue to a head.

The company reported yesterday that Topgolf’s Q2 revenue topped $494 million while first six months’ revenue exceeded $917 million. Both are up five percent over last year. Operating income was also up.

The problem, however, is that that increase was driven almost exclusively by new venue sales. Same-venue sales for the quarter and the first half of the year were both down eight percent. The company says the drop was fueled by “softer than expected traffic.”

In its Q1 report released in May, the company reported same-venue quarterly sales were down seven percent.

An unsustainable model

 It doesn’t take an MBA from the Wharton School of Business to see that model is unsustainable. If same-venue revenues drop, at some point Topgolf Callaway won’t be able to offset those losses with new-venue sales. They simply can’t keep building new venues.

It’s a problem.

In March of this year, a South Korean newspaper reported that Topgolf Callaway’s three largest investors were joining together to consider selling their ownership stocks and management rights. The Chosun Daily also reported a plan to spin off the Topgolf business and sell the Callaway golf and apparel business.

A South Korean investment firm was said to be a leading candidate to land the Callaway golf business.

At the time, Topgolf Callaway management issued what could be considered a non-denial denial: “We confirm that we are not aware of any such discussions.”

A bigger concern?

Topgolf Callaway has another problem. As part of its Q2 financial report, the company revised its 2024 revenue and EBITDA projections downward.

According to the report, Topgolf Callaway now estimates 2024 revenues to reach $4.2 billion to $4.26 billion, down from the previous estimate of $4.425 billion to $4.475 billion. That doesn’t sound like a lot but it’s $200 million lower.

Almost all of that downward revision comes from Topgolf. The company estimated Topgolf’s revenue to end the year at $1.79 billion, compared to the previous estimate of $1.96 billion. There’s your $200 million right there.

Topgolf has already opened three new venues in 2024 with four more expected by the end of the year. Again, the problem is same-venue sales. The company now says same-venue sales are expected to be down for the entire year by high single digits to low double digits. The previous estimate was slight positive growth to at worst a low single-digit decrease.

Companies provide these projections, called guidance reports, to investors as part of their quarterly financials. They can affect investors’ decision to buy, sell or hold a stock.

Topgolf Callaway’s stock took a bit of a nosedive late yesterday as news of the Q2 performance made the rounds, closing at $12.22 after opening at $14.36.

What does it all mean for Topgolf Callaway?

That’s the billion-dollar question, isn’t it?

A company usually doesn’t lead its quarterly financial report by announcing a “formal strategic review” of its largest revenue-producing segment unless there’s some fire behind that smoke.

Overall, Topgolf Callaway reported Q2 revenues of $1.158 billion (down two percent from last year) and first six-month revenues of $2.3 billion (also down two percent from last year). Golf equipment sales were down over eight percent for the quarter. The company says that’s primarily due to shifts in equipment launch schedules as new irons are due to drop next week. Active Lifestyle sales were down by more than three percent, primarily due to lower-than-expected Jack Wolfskin sales in Europe and China.

Even before the pandemic, Callaway was on a mission to equipment-proof its business by diversifying. Acquisitions included TravisMathew, OGIO and Jack Wolfskin. The big move, however, was the Topgolf merger. Each of Topgolf Callaway’s three business units is a billion-dollar entity on its own but the company hasn’t been able to capitalize on any synergies with Topgolf.

In its 2023 annual report, Topgolf Callaway announced it would make efforts to sell golf equipment through its Topgolf venues. It also made plans to place Topgolf teaching pros on Callaway staff and make its equipment available to rent at each venue.

Brewer said in his statement the strategic review of Topgolf has already started and the company hopes to complete it “expeditiously.”

“Our strategic review…is being conducted with the help of outside advisors,” he said, “and is focused on maximizing long-term shareholder value.”

If it turns out that same-venue sales can’t be turned around quickly or easily, a sell-off would appear inevitable.

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