Callaway Golf Company, a publicly traded firm long associated with golf equipment, recently rebranded as Topgolf Callaway Brands Corp. and changed its ticker symbol from NYSE:ELY to MODG.
CEO Chip Brewer said the company changed the name to improve investor communications and to give the company a name that better reflects what the business has become—and where it is going. “When we talk about revenues, [Topgolf is] already bigger than golf equipment [as a vertical within the business], and it’s growing faster,” he said.
MODG plans to continue investing heavily in new Topgolf centers in the years ahead. The belief is that in addition to the revenues and profits generated, those facilities will help to grow overall participation in the game and create a flywheel effect that spawns new buyers of Callaway golf equipment and Travis Mathew apparel.
“It makes sense. It is a scalable business,” John Kernan (managing director, Cowen and Company) said. “We just think the growth is reflected in its current valuation which is why we rate the stock Market Perform.”
MODG is currently trading at $17.46.
JWS’ Take: MODG decided to rebrand after receiving feedback from investors and the investment community that it could be beneficial to identify with the company’s off-course business. “By 2025 we’re [expecting Topgolf] is going to be more than half of our EBITDA, and the general investment community doesn’t recognize that we own it,” Brewer said.
John Kernan (managing director, Cowen and Company) was not pushing for a rebrand. “Investors in the market are going to analyze cash flows, returns on capital and risk; I don’t think a name change really alters any of that,” he said
There is no historical evidence that a corporate name change influences future returns. “To suggest [investors] are going to be more predisposed to buying a company because it’s changing its name is inaccurate,” Kernan said.
To date, the early September rebrand has not unlocked any shareholder value. In fact, MODG’s share price is down ~18% since. But the decline is less a reflection of company fundamentals and more about general market sentiment; the S&P 500 is down -8% over the same period. (FWIW, save 2009, the golf business has historically been resilient during economic recessions.)
“I also don’t think the stock is screaming cheap based on traditional financial metrics,” Kernan said.
MODG did not anticipate the name change creating a short-term pop. But Brewer believes it should have a “long-term positive impact” on the company, and he foresees talent recruitment and retention improving as a result. The new name reflects a business that is “going to have more growth, more business opportunities,” he said.
Golf has changed dramatically over the last several years, in large part because of Topgolf. “There are [now] as many people playing off-course golf as there are on course,” Brewer said.
The National Golf Foundation estimates there are 24.8 million golfers in the U.S. Topgolf expects to draw 30 million unique visitors in 2022—and less than half of those visiting identify as golfers. Topgolf has provided them an entryway to the game. Brewer also points out that off-course golf businesses are helping to shift the demographics of golfers as well, making the sport more inclusive.
Traditionally, golfers are about 45 years old, 70% male, and Caucasians with high income levels. By comparison, the typical Topgolf visitor is 31 years old, split 50-50 female to male and has a more modest income level. In terms of diversity, visitor demographics tend to match the venue market.
Brewer views the combination of traditional golf and the counterculture that has emerged around the sport in recent years as the future. He calls it “modern golf,” hence the new ticker symbol.
MODG believes it can create significant long-term synergies by blending its on-course and off-course golf businesses, but it will rely on the latter to drive the combined entity forward. “We’re going to be able to grow our business because we’re putting in new Topgolf venues, and they’re highly successful,” Brewer said.
Topgolf stated that new venues generate 40-50% cash on cash returns. However, Kernan was quick to note that figure excludes all capital expenditures and interest expense financing from the calculation. “In our opinion, it is not an accurate reflection of the financials,” he said.
MODG’s business economics are improving. The company is “going to burn free cash flow this year. Next year they will probably reach a run rate of $180-200 million in free cash flow,” Kernan said. But it remains a capital-intensive business that will require investment to expand, according to Kernan. The company is currently spending north of $200 million a year on facilities; each new location requires a $25-$50 million investment. Of that total development cost, Topgolf’s REIT partners typically put up approximately 75%, making the company’s average cash outlay about $7.5 million after financing, plus interest expense paid to the REIT.”
As Topgolf locations multiply, participation rates in traditional golf should rise. The hope is Topgolf’s relationship with these new golfers will give Callaway an edge when they begin buying equipment.
While Topgolf participation and Callaway equipment sales will continue to lead the way, MODG has built a diverse business across the sport. It has a fast-growing golf apparel brand that contributes more than a billion a year in revenue to the top line (TravisMathew), a media arm, a golf range technology business (Toptracer) and a minority investment in Five Iron Golf, another off-course concept.
MODG is the dominant player in the modern golf space. The company will have 81 owned-and-operated locations by the end of this year. None of its competitors (think: BigShots Golf, Drive Shack) have 10.
It is hard to see that changing. The moat around the business is large. “You need a high expertise and a high install base to make it successful,” Brewer said. Topgolf “didn’t make much money through 2019, and [it] had 50 locations.” The business’ economics improve with scale.
MODG remains focused on Topgolf expansion, but it’s easy to envision the company introducing another off-course golf business. “We will have a bit of a competitive advantage around all of these concepts in the ecosystem because of our scale and our consumer reach,” Brewer said.
Puttshack, an “upscale, tech-infused version of mini golf”, recently raised $150 million. It is among a growing number of companies trying to tap into the off-course golf trend.
(This article has been updated in the 18th paragraph to provide more information on costs of new locations.)