Chip Shot for Callaway Golf ⛳️
CEO Chip Brewer's savvy capital allocation skills put Callaway ahead of the game
I’m partial to sleeping giants.
Companies that once sat atop their respective fields, but have fallen on hard times and out of the cultural consciousness.
There’s a certain romance about seeing new life breathed into an erstwhile champion — restoring it to its former perch and laying the groundwork for a more sustainable tomorrow.
I’m also partial to sharp capital allocators.
Combine the two together and, in the words of the great Carl Weathers, you’ve got a stew going.
So, when Chip Brewer took over at Callaway Golf in 2012, I started paying attention. He arrived from Adams Golf with a stellar reputation for smart leadership and overcoming obstacles.
In fact, Brewer was universally hailed as the guy to put Callaway back on the map.
And, for once, the crowd was mostly right.
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Callaway first crashed the staid golf scene back in the 1990s with the world-famous Big Bertha drivers. Those stainless steel behemoths proved a big hit with players looking for a little extra length off the tee — and who didn’t want that?
The company rode the elevator up and then, after struggling to capitalize on the Big Bertha craze with a worthy successor, right back down again into the golf equipment wilderness.
A decade into the Chip Brewer era, Callaway remains a work in progress — albeit one trending in the right direction. Brewer has reinvigorated the company’s bread-and-butter equipment segment and inked impressive sponsorship deals with some of the sport’s biggest stars (at least in the non-Tiger division).
But it’s Brewer’s capital allocation game — particularly in terms of acquisitions — that really stands out. As Warren Buffett has been known to say, effective capital allocation is an oft-neglected, but hugely important, part of any CEO’s job.
Brewer once said, “[Ely Callaway and Dick Helmstetter] placed big, outrageous bets on resources that had not been in and around golf.”
And, although he never worked with either of those two Callaway pioneers, Brewer has followed in their footsteps by continually reimagining what a modern golf company should look like.
With two purchases in particular, Brewer successfully pivoted Callaway from a pure-play golf equipment maker into a company horizontally integrated across the entire spectrum of the sport.
One that encompasses much more than just the traditional eighteen holes on a country club course.
🏌️♂️ Topgolf (acquired in 2021)
The whole Topgolf concept arises out of an inconvenient truth: there’s a certain barrier to the sport of golf that’s simply unavoidable.
You need golf clubs, balls, tees, greens fees for the course, and more. It adds up pretty fast, all but ruling out any type of organic, “pick up” game of golf among amateurs as is commonly found in basketball, football, or soccer.
Plus, golf is not a terribly forgiving sport for beginners. When you struggle to even make contact with a ball sitting obligingly on the tee, you’ll probably want to avoid the expense (and potential embarrassment) of a full eighteen holes.
Newcomers might enjoy the occasional round of putt-putt or blasting through a bucket of balls at the driving range, but golf doesn’t make it easy to transition from intrigued beginner to full-fledged player.
That’s where Topgolf comes in.
For anyone who hasn’t had the chance to experience Topgolf, these quasi-driving ranges feature micro-chipped golf balls (equipped with TopTracer ball-tracking technology), games for all skill levels, food and drinks, loud music — all combining to form a party-like atmosphere.
Despite the fact that I’ve written about Topgolf numerous times for Cleveland Magazine and Destination Cleveland, I didn’t know that Callaway owned the upstart company until reading about it on Twitter a few months ago.
No one ever accused me of being on the ball.
But it’s easy to see why Callaway would be willing to shell out $2.66 billion for Topgolf. The golf-meets-technology-crossed-with-a-party vibes open up the sport to an entirely new (and younger) audience. Any group can show up, rent a driving bay by the hour, and experience golf in a whole new way. No equipment or talent needed.
For this reason, Chip Brewer called Topgolf “the keystone of our modern golf thesis”.
According to the National Golf Foundation, golf participation increased by 600,000 players in the United States in 2021. About one-third of that growth came at so-called “off-course” facilities like Topgolf.
The company already topped $1 billion of revenue in 2021 and Brewer projects that it will eventually account for more than half of Callaway’s overall earnings as soon as 2025.
With numbers like that, Topgolf remains firmly in growth mode — with plans to open up to ten new locations each year for the foreseeable future. There’s still a huge runway for expansion in both America and international markets.
And, whether Topgolf players eventually graduate to the real links or not, Callaway will keep raking in money. Preliminary research shows that somewhere between 30-50% of Topgolfers go on to play more traditional golf than before.
Even if they don’t, 90% of Topgolf visitors say they will return to the venue in the future — where they will spend money on hourly rental fees, food and drinks, and maybe even a trip to the pro shop.
So, although new builds don’t come cheap ($10-50 million depending on size and location), they quickly become cash cows for Callaway — with top spots earning an impressive $20 million per year.
Money very well spent.
👕 TravisMathew (acquired in 2017)
If you’ll permit me to mix sports metaphors for a moment, Callaway’s $125.5 million purchase of golf apparel brand TravisMathew turned out to be a real grand slam.
In Q1 2022, the California-based clothier posted phenomenal 50% same store sales growth — and, with the recent launch of a women’s apparel collection, TravisMathew’s growth story might just be getting started.
This expansion into women’s apparel could propel the brand’s growth into a $1 billion business within the next five years.
“The truth is, TravisMathew doesn’t need women’s to have success,” says company CEO Ryan Ellis. “We’re already growing 80% a year. But we feel like we have an understanding about what we want to do on women’s, so it makes a ton of sense and it’s going to add a ton of value to the brand.”
Beyond that aforementioned rocket-like growth, TravisMathew also counters a weakness in Callaway’s financial profile: seasonality. Both the golf equipment segment and Topgolf earn much more during the first half of the year than the second half, creating an uneven distribution of revenue and profits company-wide.
But TravisMathew, which nimbly straddles the line between golf-centric apparel and more versatile casual wear, spreads its sales relatively evenly throughout the entire year.
Every Rose Has Its Thorn 🌹
Of course, nothing in life comes free.
And these acquisitions — particularly Topgolf — meant loading up the balance sheet with more debt than Callaway probably feels comfortable with.
The company’s long-term debt jumped from practically nothing in 2018 (just $7 million) to over $1 billion at the end of 2021. Although the Topgolf acquisition was an all-stock affair, Callaway took on $535 million of its debt as part of the deal.
This would be less of a worry if capital expenditures (for Topgolf expansion) didn’t put the company’s free cash flow deep into the red.
To Callaway’s credit, this heavy investment is in a proven, high-growth, high-ROI business. But I’ll still feel better when FCF turns positive and Brewer starts to pay down the company’s debt.
Another entry on the “jury is still out” front comes from Callaway’s recent investment in LinksDAO — an entity that dabbles in Web3, blockchain, and NFTs.
All things that make my head spin.
I don’t have anything intelligent to say about LinksDAO. I can wrap my head around the plusses and minuses of Topgolf, TravisMathew, or the latest golf club technology. I can’t say the same about decentralized autonomous organizations that sell NFTs to members and allow them to make decisions over a blockchain.
I’ll stop now before I embarrass myself and misuse one of these terms — if I haven’t done so already — and chalk this up as one of those “outrageous bets” that have been a part of the Callaway DNA since the start.
My old-man-yelling-at-the-clouds skepticism about LinksDAO aside, I’ve enjoyed following (and learning from) Chip Brewer’s capital allocation acumen as he pushes forward with Callaway’s turnaround story.
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Disclosure: This is not financial advice. I am not a financial advisor. Do your own research before making any investment decisions.