Executive Summary / Key Takeaways

• Topgolf Callaway Brands is undergoing a significant strategic transformation, intending to separate its business into two independent companies – a core golf equipment and active lifestyle entity and a pure-play Topgolf entertainment business – to enhance focus and unlock shareholder value.
• Despite macroeconomic headwinds impacting consumer discretionary spending and corporate events, the company demonstrated operational resilience in Q1 2025, with consolidated revenue down slightly but total segment operating income increasing due to cost reduction efforts and margin improvements in the product segments.
• Topgolf's strategic pivot to improve value perception and drive traffic through initiatives like "Sunday Funday" and "Topgolf Nights" is showing early positive signs, though near-term venue margins may be pressured, offset by corporate cost management.
• The core Golf Equipment business continues to exhibit brand strength and market leadership, gaining share in key categories like clubs and putters despite a more competitive launch environment, supported by technological innovation.
• The planned sale of the Jack Wolfskin business is on track to close in Q2/Q3 2025, providing increased focus and financial flexibility as the company pursues the broader Topgolf separation.

A Modern Golf Ecosystem in Transition

Topgolf Callaway Brands Corp. stands at a pivotal juncture, actively reshaping its corporate structure to sharpen focus and potentially unlock significant shareholder value. Born from a series of strategic integrations, including the transformative merger with Topgolf and the acquisitions of brands like TravisMathew, Jack Wolfskin, and OGIO, the company has built a diverse portfolio spanning golf entertainment, premium equipment, and active lifestyle apparel. This evolution has positioned MODG as a unique player in the broader golf and leisure market, operating across three distinct segments: Topgolf, Golf Equipment, and Active Lifestyle.

The strategic narrative today is dominated by the planned separation of the business into two independent entities: a focused Callaway (encompassing golf equipment and the remaining active lifestyle brands) and a pure-play Topgolf venue business. This move, expected in the second half of 2025 via a potential spin-off or sale, aims to allow each business to pursue tailored growth strategies, optimize capital allocation, and present a clearer investment thesis to the market. It represents a direct response to the complexities inherent in managing disparate business models under one roof and a commitment to maximizing value for shareholders.

Within this strategic context, MODG operates in a competitive landscape populated by both specialized rivals and large diversified players. In Golf Equipment, it contends with industry giants like Acushnet Holdings Corp. (GOLF), known for its dominant Titleist and FootJoy brands. While Acushnet often leads in overall market share, particularly in golf balls, Callaway and Odyssey clubs consistently challenge for leadership positions, leveraging technological advantages to gain share in key categories like drivers, woods, hybrids, and putters. The Active Lifestyle segment faces competition from global apparel powerhouses such as Nike Inc. (NKE), Under Armour Inc. (UAA), and lululemon athletica inc. (LULU). Here, brands like TravisMathew differentiate through lifestyle integration and a growing direct-to-consumer footprint, aiming to outperform a generally soft market. Topgolf, in the entertainment space, competes with other leisure and entertainment venues, but its unique tech-enabled golf experience provides a significant defensive moat, supported by high consumer engagement metrics.

Central to MODG's competitive positioning, particularly in its core golf segments, is its commitment to technological differentiation and innovation. The Topgolf segment is underpinned by the proprietary Toptracer ball-flight tracking technology. This system offers players real-time data and engaging game modes, fundamentally enhancing the entertainment experience. While specific, quantifiable performance metrics for Toptracer's accuracy or processing speed compared to alternatives were not detailed, its integration into venues and broadcasts is highlighted as a key differentiator that contributes to Topgolf's high "fun scores" and positive player feedback relative to competitors. This technology is a foundational element of the Topgolf experience, enabling the development of new games and digital features that drive repeat visits and engagement.

In the Golf Equipment segment, technological innovation is a continuous process embedded in the R&D function. Recent product launches like the Ai Smoke woods and irons, and the Odyssey Ai-ONE and Square-to-Square putters, are direct results of these efforts. Management emphasizes that these products are designed to be "demonstrably superior," driving performance benefits for golfers. For instance, the Ai Smoke line achieved #1 model market share positions, and the Ai-ONE putters propelled Odyssey to the #1 U.S. dollar market share position in Q1 2024. The new Square-to-Square putter, featuring a "zero-torque design," is expected to perform well in a growing category. While precise, quantifiable performance improvements (e.g., specific percentage increases in ball speed or forgiveness) for these products over previous generations or competitors were not uniformly available, their market reception and share gains serve as tangible indicators of their competitive effectiveness. The company's R&D initiatives aim to maintain this edge, contributing to the premium positioning and enabling favorable pricing and product mix, which supported gross margin improvements in Q1 2025. This technological focus across segments is a critical component of MODG's strategy, reinforcing its brands and providing a basis for challenging competitors on performance and experience.

Performance Amidst Headwinds

The company's recent financial performance reflects the interplay of strategic initiatives, operational execution, and macroeconomic pressures. In the first quarter of 2025, consolidated net revenues totaled $1,092.3 million, a decrease of 4.5% compared to $1,144.2 million in Q1 2024. This decline was primarily attributed to a decrease in Topgolf same venue sales, the anticipated impact of rightsizing the Jack Wolfskin business, and unfavorable foreign currency exchange rates, which had an $8.9 million unfavorable impact on international net revenues in the quarter.

Despite the top-line pressure, operational efficiencies and cost management initiatives contributed to an increase in total segment operating income, which rose 9.7% year-over-year. This was driven by stronger performance in the Golf Equipment and Active Lifestyle segments, partially offset by a decline in Topgolf's segment operating income.

The Golf Equipment segment saw revenues decrease slightly by 1.4% to $443.7 million in Q1 2025, primarily due to a more competitive launch environment. However, segment operating income increased significantly by 23.8% to $101.6 million. This margin expansion was a result of improved gross margins driven by favorable pricing and product mix, coupled with lower operating expenses, including a gain from a lease termination incentive in Japan.

The Active Lifestyle segment's revenue decreased by 6.1% to $254.9 million, mainly due to the planned rightsizing of the Jack Wolfskin business in Europe, although growth continued in China. Despite the revenue decline, segment operating income increased by 23.9% to $30.6 million, benefiting from operational leverage improvements from cost reduction efforts and the lease termination incentive gain, which more than offset the impact of lower sales volume.

Topgolf segment revenue decreased by 6.9% to $393.7 million, primarily due to a 12% decline in same venue sales, partially offset by revenue from new venue openings. The segment reported an operating loss of $11.9 million, a decrease of $14.8 million compared to the prior year's loss of $2.9 million. Adjusted EBITDA for Topgolf was $44 million in Q1 2025, down from $60 million in Q1 2024. This decline was attributed to lower same venue sales, partially mitigated by ongoing cost reduction initiatives and operational efficiencies, including management of labor costs. Venue-level EBITDAR margins are expected to see a near-term decline of 100-200 basis points to approximately 32% due to investments in value initiatives and softness in the events business, though management remains confident in long-term margins exceeding 35%.

Consolidated net income for Q1 2025 was $2.1 million, down from $6.5 million in Q1 2024. Diluted earnings per share were $0.01, down from $0.04. The decrease in net income was largely influenced by a significantly higher income tax provision ($9.5 million in Q1 2025 vs. $5.0 million in Q1 2024), driven by discrete items including stock compensation adjustments and a $7.0 million impairment loss on assets held for sale related to the Jack Wolfskin business, which is expected to be non-deductible.

Liquidity remains a key focus. As of March 31, 2025, cash and cash equivalents were $317.0 million, a seasonal decrease from $445.0 million at December 31, 2024, primarily due to cash used in operating and investing activities. Available liquidity, including cash and capacity under credit facilities, stood at $805 million, an increase from the prior year, providing confidence in the ability to fund operations, CapEx ($155 million estimated for FY 2025, $95 million for Topgolf), debt repayments, and contractual obligations for at least the next 12 months. Net debt was $2.74 billion, with REIT adjusted net debt at $1.22 billion, reflecting increased venue financing offset by debt paydowns. REIT adjusted net leverage improved to 2.5x, a level management is comfortable with. Inventory levels decreased, notably due to the reclassification of Jack Wolfskin inventory as held for sale.

Outlook and Strategic Momentum

Management's outlook for the remainder of 2025 reflects a commitment to executing strategic initiatives while navigating a challenging macroeconomic environment. The full year consolidated revenue guidance is reiterated at $4.0 billion to $4.185 billion, though the company is currently tracking below the midpoint due to revised Topgolf revenue estimates. Despite this, the full year adjusted EBITDA guidance is also reiterated at $415 million to $505 million. This confidence in maintaining EBITDA is attributed to the strength of the core business, the benefits of the FX hedging program, and the impact of ongoing cost savings and operational efficiency initiatives across the segments, which are expected to offset revenue headwinds and the estimated $25 million unmitigated impact of current tariffs.

For the Topgolf segment, the full year same venue sales guidance has been revised to a range of down 6% to 12%, reflecting the softer start to the year and economic uncertainty. Q2 same venue sales are expected to be in a similar range of down 7% to 12%. Full year Topgolf revenue estimates have been lowered by $45 million to $1.680 billion to $1.790 billion. However, the full year adjusted EBITDA guidance for Topgolf is maintained at $240 million to $300 million, underscoring the expected impact of cost savings initiatives in offsetting the revenue decline. Management is focused on driving traffic growth and improving value perception through targeted initiatives, which are showing early positive signs in traffic trends, although average spend per visit is currently pressured by value offers and lower alcohol attachment rates.

The core Golf Equipment and Active Lifestyle businesses are expected to benefit from continued operational improvements and strategic adjustments. The sale of the Jack Wolfskin business for $290 million is expected to close in late Q2 or early Q3 2025, providing capital and allowing for greater focus on the remaining brands. The strategic separation of Topgolf remains a key priority, with management actively evaluating spin-off and sale options to maximize shareholder value. In a potential spin scenario, the capital structure is being reassessed to ensure both resulting companies are well-capitalized with manageable leverage levels, with the core business targeting a path to approximately 3x or less leverage in a reasonable timeframe.

Key assumptions underpinning the guidance include the impact of current tariffs net of mitigation actions, no further tariff escalation, and no meaningful worsening of economic conditions. The company expects to be free cash flow positive at both the total company and at Topgolf in 2025, a critical indicator of financial health and sustainability.

Risks and Considerations

While the strategic direction and operational focus are clear, several risks could impact the investment thesis. Macroeconomic conditions, particularly sustained inflation and high interest rates, continue to pressure consumer and corporate discretionary spending, posing a risk to demand for both Topgolf's entertainment services and the company's discretionary products. The volatility and potential escalation of tariffs could increase costs, impacting margins and potentially requiring price increases that could dampen demand. Foreign currency fluctuations remain a headwind, partially mitigated by hedging programs but still capable of impacting reported results.

Execution risk associated with the planned separation of Topgolf and the sale of Jack Wolfskin is also present. While management is actively working towards these transactions, their successful completion and the realization of expected benefits are subject to various conditions, including regulatory approvals and market conditions. The ability of Topgolf's new value initiatives to sustainably drive traffic and improve same venue sales, while managing profitability, is critical to its segment outlook. Competition across all segments remains intense, requiring continuous innovation and effective strategic positioning.

Conclusion

Topgolf Callaway Brands is navigating a period of significant strategic change, aiming to simplify its structure and unlock the inherent value within its diverse portfolio. The planned separation of Topgolf and the sale of Jack Wolfskin represent bold steps towards creating more focused, potentially higher-growth entities. While macroeconomic headwinds and competitive pressures present challenges, particularly for Topgolf's same venue sales, the company's operational discipline, cost management initiatives, and investments in technology and value propositions are demonstrating resilience and supporting profitability.

The strength of core brands like Callaway and Odyssey, coupled with a commitment to technological innovation in both equipment and entertainment, provides a solid foundation. As the company executes on its strategic divestitures and pursues the Topgolf separation, investors will be closely watching for signs of sustained operational improvement, successful traffic generation at Topgolf, and the realization of the anticipated benefits from a more focused corporate structure. The outlook for free cash flow generation in 2025 underscores the improving financial health, positioning MODG to potentially deliver value as its strategic transformation unfolds.