Golf entertainment and gear company Topgolf Callaway (NYSE:MODG) fell short of analysts' expectations in Q1 CY2024, with revenue down 2% year on year to $1.14 billion. Next quarter's revenue guidance of $1.19 billion also underwhelmed, coming in 5.1% below analysts' estimates. It made a non-GAAP profit of $0.09 per share, down from its profit of $0.16 per share in the same quarter last year.

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"We are pleased with our overall first quarter results with consolidated revenue and Topgolf same venue sales being in line with our guidance and our achieving better than expected net income, Adjusted EBITDA, EPS and cash performance," commented Chip Brewer, President and Chief Executive Officer of Topgolf Callaway Brands.

Formed between the merger of Callaway and Topgolf, Topgolf Callaway (NYSE:MODG) sells golf equipment and operates technology-driven golf entertainment venues.

Leisure Facilities

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Sales Growth

A company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones demonstrate sustained growth over multiple years. Topgolf Callaway's annualized revenue growth rate of 25.7% over the last five years was excellent for a consumer discretionary business.

Within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. That's why we also follow more recent performance. Topgolf Callaway's recent history shows its demand slowed significantly as its annualized revenue growth of 10% over the last two years is well below its five-year trend. Note that COVID hurt Topgolf Callaway's business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can better understand the company's revenue dynamics by analyzing its three most important segments: Topgolf, Golf Equipment, and Active Lifestyle, which are 37%, 39.3%, and 23.7% of revenue. Over the last two years, Topgolf Callaway's revenues in all three segments increased. Its Topgolf revenue (venue reservations, dining) averaged year-on-year growth of 16.5% while its Golf Equipment (Callaway) and Active Lifestyle (apparel) revenues averaged 4.1% and 12.3%.

This quarter, Topgolf Callaway missed Wall Street's estimates and reported a rather uninspiring 2% year-on-year revenue decline, generating $1.14 billion of revenue. For next quarter, the company is guiding for flat year on year revenue of $1.19 billion, slowing from the 5.7% year-on-year increase it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 8.1% over the next 12 months, an acceleration from this quarter.

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Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

Over the last two years, Topgolf Callaway's demanding reinvestments to stay relevant have drained its resources. Its free cash flow margin has been among the worst in the consumer discretionary sector, averaging negative 6.1%.

Topgolf Callaway burned through $138.7 million of cash in Q1, equivalent to a negative 12.1% margin. The company's cash burn increased by 49.3% year on year. We also like to analyze expected free cash flow for the next year based on Wall Street's consensus estimates, but there is insufficient data.

Key Takeaways from Topgolf Callaway's Q1 Results

We were impressed by how significantly Topgolf Callaway blew past analysts' EPS and operating margin expectations this quarter. On the other hand, its full-year revenue guidance fell short of Wall Street's estimates. Overall, the results could have been better. The company is down 5.4% on the results and currently trades at $15.46 per share.

So should you invest in Topgolf Callaway right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.