Callaway Golf Company (CALY) Q4 2025 Earnings Report, Transcript and Summary

Good day, and welcome to the Callaway Golf Company Fourth Quarter 202 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Good afternoon, and welcome to Callaway Golf Company's Fourth Quarter Earnings Conference Call. I'm Katina Metzidakis, Vice President of Investor Relations and Corporate Communications. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer; and Brian Lynch, our Chief Financial Officer and Chief Legal Officer. Earlier today, the company issued a press release announcing its fourth quarter 2025 financial results. Our earnings presentation as well as our earnings press release are both available on our Investor Relations website under the Financial Results tab. Aside from revenue, the financial numbers reported and discussed on today's call are all non-GAAP measures. We identify these non-GAAP measures in the presentation and reconcile the measures to the corresponding GAAP measures in accordance with Regulation G. Please note that this call will include forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from management's current expectations. Please review the safe harbor statements that are contained in the presentation and the press release for a more complete description. With that, I'd like to turn the call over to Chip.

Thanks, Katina, and hello, everyone. Before jumping into our results, I'd like to take a moment to reflect on the significant changes we've made to our business over this past year. In May, we successfully completed the sale of the Jack Wolfskin Outdoor Apparel and Gear business to Anta Sports for $290 million, representing an important first step towards refocusing our strategic priorities on our core golf equipment and apparel businesses. Then just last month, we announced the successful completion of the sale of a 60% stake in the Topgolf business to Leonard Green & Partners in a deal valued at approximately $1.1 billion. We've received approximately $800 million in cash in this transaction and immediately repaid $1 billion of our Term Loan B debt. Following the deal close and the repayment of the debt, we are in a net cash positive position. And we anticipate generating positive cash flow this year, returning capital to shareholders and ending the year with a continued net cash to zero net leverage position. We also expect Topgolf to thrive going forward and that this transaction will provide our investors with the upside of Topgolf without any operational involvement from the Callaway management team and with no financial obligations. Importantly, all Topgolf lease and debt obligations stay with the new Topgolf entity with no recourse back to Callaway Golf. With these transactions behind us, we've returned to our roots as a leading pure-play golf company, including returning to our prior name Callaway Golf Company. I'd like to take a moment to thank the teams for all the hard work they put in to help us make this transition complete. The excitement in our headquarters in Carlsbad is now palpable as we turn our focus to bring the company vision to life, which is to make the game better for every golfer by being the global leader in innovation, performance and craftsmanship across premium golf equipment, apparel and accessories. Now turning to our results. In Q4, Topgolf performed roughly consistent with expectations, finishing the year with a strong second half. We're optimistic about the future of this business. As we are now a minority partner in a private business, we will no longer be reporting on this business during our earnings calls. We're back to being a pure play, and this is back to being a golf-focused call. To that end, I'm pleased to report the Callaway Golf Company's Q4 results were better than expected in both the top line and in EBITDA. This applies to all regions as well as both TravisMathew and Callaway Golf. Now stepping back to look at the big picture. There is no doubt that the last several years have proven that the game of golf is as healthy as it's ever been or certainly as I've ever seen in my career. And according to the National Golf Foundation, 2025 was no exception. The year ended with U.S. rounds played up 1.2%, marking another record year, the third consecutive year of growth and the sixth year of increases over the last seven years. Golf's U.S. reach, including those who play, watch, read about or follow golf, is now more than 136 million or approximately two out of every five Americans. Participation in off-course golf grew once again and is now estimated to be 38 million, an increase of 63% since 2019. And this growth in off-course golf is clearly supporting more interest in the game and creating a greater on-ramp for on-course golf. On-course golf participation is now estimated to be 29.1 million and is up 20% since 2019. Over the same period, on-course participation by women is up 46%. Young golfers aged 6 to 17 years of age is up 58% and participation by people of color is up 61%. These are terrific numbers and trends. The sport and business of golf is clearly in a good spot. At the same time, Callaway, Odyssey and TravisMathew remain impressively strong brands, a position they have enjoyed for some time. On the golf equipment side, Callaway maintains a top 2 market share position in both clubs and balls in the U.S. and a top 1 or 2 club position in every primary market we compete. This past year on global tours, the Callaway and Odyssey brands saw 61 driver, 92 putter and 35 ball wins. We are generally viewed as the leader in technology and innovation globally, and Odyssey remained the #1 putter across global tours. Turning to the Apparel and Gear segment. Our Callaway and OGIO gear and accessory business remains strong, and TravisMathew remains a premium scaled men's apparel and lifestyle brand with a growing presence in women's. Furthermore, on a net of new tariff basis, we drove meaningful improvements in our golf equipment gross margins last year. We also managed two strategic processes at corporate, delivered strong cash flow and transformed our balance sheet. Turning to the year ahead. We are very proud of our new product for 2026 across the company and initial feedback on our new golf equipment from both our green grass and retail partners has been strong. On the club side, we launched our Quantum family of woods and irons as well as our new Odyssey AI dual putters. These are engineered with groundbreaking technology across every category. The new Quantum driver, in particular, introduces a revolutionary Tri-Force Face, which we believe is the most advanced face technology in the world, consisting of three materials, titanium, poly mesh and carbon fiber, engineered for exceptional speed and spin consistency and thus delivering improved distance and dispersion. On the ball side, we're excited about the second iteration of our premium Chrome Tour family of balls, which are designed to deliver more speed along with unmatched consistency and overall performance. As we get ready for the peak spring and summer sales seasons, we are excited about our new product offerings across our business as well as healthy market fundamentals. At the same time, there are some external factors to consider. First, incremental tariff expense of approximately $40 million in 2026 on top of approximately $35 million last year is driving higher than historical price points in several categories. In addition, although the golf consumers remained healthy and engaged over the last year, both overall consumer confidence and job growth have been at lower than desired levels. Taken all together, these dynamics warrant close monitoring. Still, as we return our full focus to our core business, we're excited about the opportunities we see. And we're seizing this moment as a newly focused company to make three fundamental changes that we believe will maximize efficiency and drive long-term improvement in both our share and our margins. First, we are pulling back on sales of some of our lower-margin categories and channels across the business. Secondly, we're making incremental investments into our fitting program, an area that is important for us to maintain our leadership position in equipment. And thirdly, we will be making some changes to our launch cadences, taking a longer-term view on a product line that we would have normally launched this fall and extending product life cycles in another. These changes will have a negative impact on our revenues this year, particularly in the second half, but should improve our long-term profitability and market share going forward. In conclusion, we ended last year on a fantastic note, executing two transformational transactions and returning to our roots as a leader in golf with a strong balance sheet and the opportunity to drive further improvements in our business. However, we're not content. We see opportunity, and we believe that our renewed focus will drive an even stronger company going forward. We know our teams are fired up to take on this challenge. Our management team is entering 2026 clear-eyed, energized and optimistic about our opportunity as a pure-play golf company again. Thank you for taking the time to join our call today. And with that, I'll turn it over to Brian.

Thank you, Chip, and good afternoon, everyone. As you will see, following the sale of the Jack Wolfskin business and the 60% interest in Topgolf, both businesses have been reflected as discontinued operations in our financial results. As required and to make prior periods comparable, the prior periods have also been restated to reflect the discontinued operations presentation. On today's call, I will be discussing our financial results for our continuing operations on a non-GAAP basis. Unless otherwise noted, all comparisons are on a year-over-year basis. Before jumping into results, I want to review some details surrounding the Topgolf transaction, which you can see on Slide 7 and 8. As Chip mentioned, we are very pleased with our recent Topgolf transaction, which reestablishes us as a pure-play golf business, while our 40% minority stake preserves our ability to participate in any future upside at Topgolf. In terms of the specifics of the transaction, we sold a 60% stake in Topgolf based on a $1.1 billion valuation. The sale proceeds and related financing transactions resulted in approximately $800 million in cash proceeds, net of working capital adjustments and transaction costs. We subsequently used this cash as well as a portion of the cash on our balance sheet to pay down $1 billion of the $1.2 billion term loan debt. In addition, immediately following the repayment of our loan, we had approximately $480 million in outstanding debt, which includes $258 million of convertible notes and $166 million in remaining term debt as well as unrestricted cash and cash equivalents of approximately $680 million. As a result, there is currently no net leverage on our business. We are in a net cash position. We intend to settle the $250 million of convertible notes due May 2026 in cash and expect to end the year in a net cash to 0 net leverage position. Looking ahead, Callaway Golf's capital allocation priorities are to: one, reinvest in our business; two, maintain a healthy balance sheet; and three, return capital to shareholders through the $200 million stock purchase program we announced last month. Before moving to our results, I want to reiterate one point that Chip made. Callaway Golf has no future cash obligation to Topgolf. All of Topgolf's debt, including its venue financing debt and operating leases as well as any new debt raised in the transaction went with Topgolf as part of the transaction. There is no recourse against us for any of Topgolf's debt, venue financing or operating leases. Now turning to our financial results. We are pleased to report a strong close to 2025 with fourth quarter and full year financials exceeding our expectations for revenue and adjusted EBITDA. Starting with full year results. Consolidated net sales were down slightly, primarily due to a 1.4% decrease in our soft goods segment, which was impacted by soft market conditions globally. Golf Equipment sales were approximately flat. With regard to tariffs, in 2025, the company incurred $34 million of incremental tariff costs, of which $25 million impacted our Golf Equipment segment, with the remainder impacting the soft goods segment. Our full year consolidated gross margin declined approximately 60 basis points to 42.2% due to the $34 million of incremental tariffs, which impacted gross margins by 166 basis points. Our Golf Equipment gross margin, however, actually increased 10 basis points and importantly, would have increased 189 basis points, excluding tariffs. These results are a testament to the hard work and good progress our teams have made on our gross margin initiatives. Our operating expenses increased 1% as our cost savings initiatives offset almost all normal inflationary pressures and the year-over-year increase in annual compensation expense. As a reminder, we paid very little annual incentive compensation in 2024. Adjusted EBITDA was $222 million, representing a $39 million decrease. This result was better than expected. FX had a minimal impact on our full year 2025 results. Moving to quarterly results. Fourth quarter consolidated sales of $368 million decreased 1% year-over-year. This decrease was due to an $11 million decline in golf equipment sales due to fewer second half product launches, partially offset by a $7 million increase in our soft goods segment. Q4 gross margin declined 220 basis points to 37.4% due to a 340 basis point impact from incremental tariffs. Q4 operating expenses increased $19 million due to a $19 million increase in annual incentive compensation expense. As a reminder, we are lapping a reversal of the amount of incentive compensation accrual in Q4 last year. Adjusted EBITDA of negative $25 million declined $30 million. This decrease was better than expected and was impacted by the $12 million of incremental new tariff expense and the higher annual incentive compensation expense. Moving to liquidity. As of January 2, 2026, we had approximately $480 million in outstanding debt and had unrestricted cash and cash equivalents of approximately $680 million, putting the company in a net cash positive position. And as I mentioned earlier, we expect to maintain this net cash to 0 net leverage position in 2026. Capital expenditures for 2025 were $32 million. Now moving to guidance, which you will see on Slides 13 and 14. Given our renewed pure-play focus, as Chip noted, we are making some fundamental shifts to our business to prioritize long-term margin expansion and free cash flow. For 2026 full year revenue, we anticipate a range of $1.98 billion to $2.05 billion, down slightly at the midpoint versus last year due to the fundamental changes Chip discussed earlier. As a reminder, these changes include rationalizing and reducing sales of some of our lower-margin categories and channels, and we are also planning to increase product life cycles in certain golf equipment areas, which will impact our financial results in the back half of the year. We believe both of these changes will positively impact gross margins over the long term. Moving to EBITDA. We expect full year adjusted EBITDA in the range of $170 million to $195 million. This outlook includes incremental tariffs of approximately $40 million compared to 2025 or a gross tariff impact of approximately $75 million versus 2024 and approximately $16 million in lower dividend income due to a significantly lower cash balance compared to 2025 due to the $1 billion of cash we used to pay down debt. This will, of course, also mean that we realized savings in interest expense in 2026 and is overall cash flow accretive. We anticipate 2026 CapEx to be in the range of $35 million to $40 million. Free cash flow will remain a top priority, and we expect to generate approximately $100 million of free cash flow in 2026. Now turning to Q1 guidance. For Q1, we are forecasting total revenue of $635 million to $665 million, representing an approximate 3% year-over-year increase at the midpoint and adjusted EBITDA of $110 million to $125 million. In Q1 2026, we expect an incremental $24 million of tariff expense compared to Q1 2025, and we are lapping a $12 million benefit from the early termination of our former Japan headquarters lease in Q1 last year. This is an exciting period of transformation for Callaway. As Chip mentioned, in the last seven months of 2025, we sold the Jack Wolfskin business and a 60% stake in Topgolf. These transactions and the subsequent use of transaction proceeds to reduce our debt profile, not only returned us to our core golf heritage, but also changed our capital structure such that we are now in a net cash position. We are now in the process of resetting our business by emphasizing our most profitable products and channels and reducing costs while continuing to invest in the areas that matter most for the health of the business. From this reset base, we believe we can grow sales more profitably, generate stronger free cash flow and be in a position to return significant capital to shareholders. We have strong brands and with our renewed focus on our core business, we are excited about the future. With that said, I will turn the call back over to the operator to begin Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] In the interest of time please limit yourself to one question and one follow-up. [Operator Instructions] And the first question will come from Simeon Gutman with Morgan Stanley.

I first have a question about sales and the way you approach the guidance with all the newness. Would you say you built it based on moderate product success with the newness, very successful with launch with the newness? And maybe if you think about like drivers, balls and irons, did you build in the simple price and inflation component? Or are you thinking that there's a lot more unit growth on top of that as well? And then I have one follow-up.

Simeon, I would guess that we're looking at it from a moderate perspective in direct answer to that question. We are cautiously optimistic based on what we know right now. The golf market, as you know, is healthy. We feel good about our product, our plans. We've got a proven track record where over the last 12 years, 9 of them, we were #1 in clubs. We've delivered steady growth in golf ball. We feel good about the brand, R&D delivering innovation edge, and we should benefit from greater focus being a pure play. But with all that said, it's too soon to be sure. We're not yet in peak season, and we have to see how our products and the price points perform at that time, how the weather is, et cetera. Our Q1 revenue is forecast to be up. And perhaps that's a cleaner look, but it's also a little preseason. And in the second half of the year will be impacted by the revised launch cadence. But we feel good about our position. We feel really good about the market, and we're making some fundamental improvements in the business. Specific to the second part of your question, we feel really good about all the products, but the driver in particular, we're getting very strong feedback and the technology in that product is simply outstanding.

And then the follow-up on margin. Are you in a position to say how much better the margin profile of the business could look like? And is this iterative process for you, Chip, where there are certain things you'll keep doing? And then do you reinvest what you get or you let it flow and let the business just look more profitable?

Well, we certainly are extremely focused on driving improvements in the margin and just overall strengthening the business over the long term. So we're taking a long-term perspective on this, which I think is clear. And the margin is a top priority. I also want to point out that net of tariffs, we increased our equipment gross margins nearly 200 basis points last year. And we're forecasting our total company gross margins to be approximately flat this year despite $40 million of incremental tariffs. So, on the margin front, we're on it. We're not providing specific long-term targets at this time, but we've got a good track record, and we feel good about the direction.

The next question will come from Anna Glaessgen with B. Riley.

I'd like to start with the discussion around exiting some lower-margin profile businesses across category and maybe channel. Could you expand a bit on what you're exiting and put a finer point on what the headwind is for the back half?

Sure. Sure, Anna. That really touches two of these improvement initiatives that we're making in our business this year. One is, as we mentioned, pulling back on sales of some lower-margin products and categories. And that's really a mix optimization. We're focusing on the higher octane products and categories that are most profitable and have the highest long-term potential. It will include less closeout off-price and second year product, some SKU rationalization, less low-margin products. Some examples here may be range balls, certain SMU product, things like that. And then in the second half of the year, we're making some changes on our launch timing and product cycles. Normally, Anna, we have more launches in the second half of the year in even years, if you would. And we're making a change this year, which will make that not the case. We're doing that because we believe that will provide long-term benefits, longer overall life cycles, greater focus, hopefully more impactful launches, again, less closeout, greater efficiency on our launch assets and tooling. So it will have a little bit of an impact in the second half of this year on that launch cadence item, but we believe it will help both profitability and margins going forward.

And then thinking through the annual guide, could you maybe share some perspective on general expectations around the broader golf equipment market performance and what you're assuming as far as potential market share gains on top of that?

Sure. And we feel good, as I mentioned, about the golf market. It's been excellent over the last year. And as I mentioned in my prepared comments, the fundamentals of the golf business participation continue to be fantastic. So there's a lot of variables that will go into how this specific year plays out in our share. And I hope I answered that reasonably well in Simeon's question. We're cautiously optimistic from that perspective. But the golf market itself has been quite good, and we would expect it to remain there.

The next question will come from Arpine Kocharyan with UBS.

I was hoping you could bridge a little bit more the growth guidance for revenue for 2026 and more importantly, EBITDA from what you did in 2025. I know you've talked about incremental tariff of $40 million. But you have taken, I think, 8% to 10% pricing in the core product line. First, does that sound right? Second, if you could maybe help us bridge then how much of that tariff impact you're able to offset through pricing and how that flows through to your revenue and EBITDA? And then I have a quick follow-up.

Sure. I'll start. On the pricing, we did take some select pricing. I do not believe it's 8% to 10% across the core product line. I think that would be more aggressive. And then Brian, why don't you talk about the delta between EBITDA between the years?

Sure. At the midpoint, it's down about $40 million, and that represents the $40 million of incremental tariffs that we'll have in this year as well as $16 million less in dividend income in 2024. I mentioned during my script that we'll have -- our cash balance is a lot lower than last year because we paid down $1 billion of debt, and therefore, we'll just have less dividend income.

The net would have been up with...

Without those two things, we'd be up.

Right.

Okay. And Chip, I did want to ask you about new product lineup this year, specifically about Tri-Force. What is the response you've seen from Pro shops and mainly in Sunbelt regions, although we are early in the season, obviously. But in terms of that initial feedback, it sounded like you were pretty positive and upbeat about Tri-Force.

I really am. I'm very excited about the technology. This is the type of thing that Callaway does so well and really fires us up, quite frankly. This is, we think, a breakthrough product. But just to give you an idea how early it is, the product hasn't launched yet. It launches tomorrow. So it's premature to know definitively, but we are cautiously optimistic, and we think we've got a terrific product.

The next question will come from Casey Alexander with Compass Point Research & Trading.

Looking at your guidance for 2026, and I understand tariffs, but you did also say that there have been some price increases to offset some of the tariffs. But it presumes about a 9% EBITDA margin. Your last year prior to purchasing Topgolf, you had about a 12% EBITDA margin. How do you refill that golf? What's different between now and then? Because that's a pretty substantial difference. And how do you eat into that golf and make up some of that ground?

Yes. Great question, Casey. And as we're back to being a pure play, we can't be more focused on that. We're excited about that opportunity. And -- to give us some color on that as well, over the last year, we would have grown our Golf Equipment margins by 200 basis points net of tariffs. So we've got more work to do. And some of that is baked into the things that you're hearing about with these three improvement initiatives, changing the mix, refocusing on the higher octane, higher-margin products and pieces of business, changing some launch cadence and the life cycles, reinvesting in fitting and driving even a higher percentage of our business there and creating some differentiated approaches. So those are the types of initiatives intended to move us back into the direction that you mentioned.

And just a reminder, Casey, the tariff impact over the two years is $75 million, which has obviously impacted margins significantly.

The next question will come from Noah Zatzkin with KeyBanc Capital Markets.

I guess kind of adding on or continuing in that kind of train of thought, structurally, how are you thinking about kind of the change in mix and product launch cadence in terms of opportunity to margins? And then on the $75 million of tariffs, how are you feeling about ability to offset that, if at all, looking ahead?

Sure. Noah, those are fundamental questions. So structurally, we believe that these three improvement initiatives are what we're doing to invest in the long term and improving the long-term margin profile, but as well as improving share going forward. So these are structural investments in the further improvement of the business. And the $75 million of tariff impact, that's obviously significant. And we've been working through that over the last year plus. We've taken that very seriously. We talked about last time we spoke, restructuring efforts. We've talked about how we are working with our vendor partners. We are we're changing our mix. We're redesigning product where appropriate, and we're taking some pricing. All of these things are having the intended impact in the business. And although we're absorbing these, you can see that our projection for gross margin, which is a forecast at this stage in 2026 is for gross margins to be approximately flat. That plus the structural improvements and then further initiatives because we're building momentum on these is the plan going forward.

This concludes our question-and-answer session. I would like to turn the conference back over to Chip Brewer for any closing remarks.

Well, thank you, everybody, for joining our call today. We're excited about the opportunity being back to Callaway Golf Company, a pure play with excellent balance sheet and opportunity going forward. We look forward to updating you our progress on our Q1 call, which will occur in May. Thank you, and have a great golfing season.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.