Topgolf Callaway stock has its worst day in more than 3 years. But analysts say golf equipment's not the problem.

By Bill Peters

'Coming out of COVID, we definitely lost some of the transitory golfers. But we gained more dedicated players,' analyst says

Shares of Topgolf Callaway Brands Corp. on Thursday suffered their worst percentage drop in more than three years, after the golf-equipment and venue giant a day earlier cut its full-year outlook and analyst sentiment on the stock soured.

But analysts say that enthusiasm for golfing, which surged after pandemic lockdowns hit in 2020, isn't the main issue for Topgolf Callaway (MODG). Rather, they say, the difficulties lie with its sports-entertainment chain Topgolf, where higher prices for basics have weighed on demand and interest among corporate event-planners.

Stephens analyst Daniel Imbro, who was among the analysts to downgrade the shares of the company after it reported quarterly results on Wednesday, told MarketWatch that golf-equipment demand was still healthy, and that the sport was driven more far more by enthusiasts than hobbyists.

"Coming out of COVID, we definitely lost some of the transitory golfers," he said. "But we gained more dedicated players."

"As some portion of the people who picked up the game during COVID became more enthusiastic players, things that we tracked, like people keeping handicaps, number of lessons being given, we saw those metrics going higher, even as rounds played normalized last year," he continued.

Topgolf Callaway sells golf equipment under the Callaway brand and runs the sports-entertainment chain Topgolf, which Callaway merged with in 2021. Driving ranges at Topgolf have dartboard-like targets that players can aim toward and are outfitted with ball-tracking technology, and they also offer food and alcohol.

The purchase gave Topgolf Callaway a big revenue driver -- Topgolf is the company's biggest sales segment -- but a different business that involved running both driving ranges and restaurants.

"Increasingly, what has mattered for the stock, and the story, has shifted from golf equipment to Topgolf," Imbro said.

Topgolf Callaway was hit with downgrades from Stephens and JPMorgan, which both lowered their ratings to neutral or the equivalent. Both cited slowing demand at Topgolf as a primary reason.

Shares finished 16.9% lower on Thursday to $10.35. The move marked the stock's biggest percentage drop since Oct. 28, 2020, when it tumbled 18.8%.

The stock is down 48.9% so far this year. However, shares rival Acushnet Holdings Corp. (GOLF) -- which owns golf-ball and equipment maker Titleist and is a more pure-play golf business -- are up 28% over that period. Imbro also said Acushnet had a more conservative balance sheet this year.

Executives at Topgolf Callaway said same-venue sales at Topgolf fell 3% during the third quarter, citing a come-down from a "a post-COVID surge" in corporate events last year, hotter weather in the South kept that visitors away and weaker trends in Asia.

They said they planned to cut around $45 million in costs per year and lower capital spending by $100 million over the next two years. Executives said they expected the company to be cash-flow positive this year, but said the cuts would include staff reductions.

Imbro, in his note downgrading the stock, said he felt investors didn't appreciate the potential benefits of Topgolf. Others said the dimmer view from Topgolf Callaway was expected by investors.

"To be absolutely clear, we cannot sugarcoat the quarter/'23 guidance cut, and investor patience is likely running at threadbare levels after tonight's print/call," Truist analysts said in a note Wednesday. "That said, the 3Q miss/guide down was fully expected by investors, in our view."

However, they said management's efforts to address cash concerns and a more conservative tack on Topgolf's long-term growth prospects "could, ironically, be favorably received in certain camps."

-Bill Peters

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11-09-23 1910ET

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