Why Topgolf Callaway Plunged Today

Topgolf Callaway (NYSE: MODG) shares were falling on Tuesday, down 13.4% as of 1:42 p.m. ET, despite the overall S&P 500 (SNPINDEX: ^GSPC) rallying about 1.1% at that time on the back of this morning's softer-than-expected inflation report.

Topgolf Callaway reported earnings last night that actually beat analyst expectations, while management reiterated its full-year outlook. However, that same revenue and profit outlook included a decrease in expectations for the Topgolf segment, offset by a better-than-expected outlook in the company's legacy golf equipment and active lifestyle clothing segments.

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Topgolf is thought to be the more exciting growth driver for the company, so the decreased expectations for it appear to be outweighing the lift in the company's legacy segments.

Undoing an ill-timed acquisition

In late 2021, Callaway acquired Topgolf. At first, it seemed like a smart deal. Callaway's core golf equipment business had surged in 2021, as golfing activity increased during the pandemic due to golf being one of the few social recreational activities that could be done safely outside in the open air.

Meanwhile, Topgolf's combined riving range, restaurant, and bar complexes had seen decreased activity, even though Topgolf had been on a solid growth path prior to the pandemic. So with economic reopening on the horizon, the deal appeared to make sense.

However, things haven't gone particularly well for Topgolf, perhaps as the post-pandemic inflationary period crimped consumer budgets. Last year, the company announced it would spin off 80.1% of Topgolf into its own stand-alone entity, which is scheduled some time for late 2025.

Despite Topgolf Callaway beating overall revenue and adjusted non-GAAP (generally accepted accounting principles) earnings last night, the company now expects the Topgolf segment to generate $1.68 billion to $1.79 billion in revenue in 2025, down from a prior range of $1.73 billion to $1.84 billion. Topgolf's same-venue sales are now forecast to decline between 6% and 12%, whereas the initial guidance was for just a mid-single-digit decline.

Management noted Topgolf is currently perceived as a somewhat "expensive" night out for the "middle income" consumer, so the company is now responding with discount events like Sunday Funday and Topgolf Nights, each with lower pricing.

Image source: Getty Images.

What kind of demand will Topgolf stock get?

It's good that Callaway's core equipment business outperformed, although much of that was from cost cuts in order to preserve margins. Revenue still declined in all segments, including Golf Equipment and Active Lifestyle, though not as much as Topgolf.

It will be interesting to see if the company still executes the spinoff later this year. Although Callaway will retain all of Topgolf's financial debt and the stand-alone Topgolf will retain a significant cash balance, Topgolf will retain its location-secured financing. With same-venue sales projected down as much as double digits, one wonders what kind of reception the stand-alone segment will generate in the market later this year.

Spinoffs sometimes offer opportunities due to the shareholder turnover when they happen, so with the stock already down so much this year, investors should keep their eyes peeled. The spin could lead to a deep value opportunity in either Callaway or Topgolf, if and when the spinoff occurs.

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Billy Duberstein and/or his clients have no position in any of the stocks mentioned. The Motley Fool recommends Topgolf Callaway Brands. The Motley Fool has a disclosure policy.