Callaway Golf Co Q4 FY2025 earnings call

• In May 2025, completed sale of Jack Wolfskin Outdoor Apparel and Gear business to Anta Sports for $290 million. - In January 2026, completed sale of 60% stake in Topgolf business to Leonard Green & Partners for ~$1.1 billion, received ~$800 million in cash, repaid $1 billion of Term Loan B debt, and now in net cash positive position. - Q4 Topgolf performed roughly consistent with expectations, with strong second half. Now a pure - play golf company. - Callaway Golf Company's Q4 results were better than expected in top line and EBITDA. - Golf has healthy trends: U.S. rounds played up 1.2% in 2025, off - course golf participation at 38 million (up 63% since 2019), on - course golf participation at 29.1 million (up 20% since 2019), women's on - course participation up 46%, young golfers aged 6 - 17 up 58%, participation by people of color up 61%. - Callaway, Odyssey, and TravisMathew are strong brands. Callaway maintains top 2 market share in U.S. clubs and balls. - In 2026, new product for golf equipment launched, including Quantum family of woods and irons, Odyssey AI dual putters, and second iteration of Chrome Tour family of balls. - Making three fundamental changes: pulling back on sales of lower - margin categories and channels, making incremental investments into fitting program, changing launch cadences to extend product life cycles.

Consolidated net sales were down slightly, primarily due to a 1.4% decrease in the soft goods segment. Golf Equipment sales were approximately flat. Fourth quarter consolidated sales of $368 million decreased 1% year-over-year. 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. Adjusted EBITDA of negative $25 million declined $30 million. Full year consolidated gross margin declined approximately 60 basis points to 42.2% due to $34 million of incremental tariff costs, but Golf Equipment gross margin increased 10 basis points net of tariffs.

• For 2026 full year revenue, anticipate range of $1.98 billion to $2.05 billion, down slightly at midpoint due to fundamental changes. - Expect full year adjusted EBITDA in range of $170 million to $195 million, including incremental tariffs of ~$40 million, ~$16 million less in dividend income, and savings in interest expense. - Anticipate 2026 CapEx in range of $35 million to $40 million. - Expect to generate approximately $100 million of free cash flow in 2026. - For Q1 2026, forecast total revenue of $635 million to $665 million (approx 3% year - over - year increase at midpoint) and adjusted EBITDA of $110 million to $125 million, with incremental $24 million of tariff expense and lapping a $12 million benefit from early termination of former Japan headquarters lease.

• Incremental tariff expense of approximately $40 million in 2026 on top of ~$35 million in 2025 driving higher price points. - Overall consumer confidence and job growth at lower than desired levels.

Q: 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.

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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.

A: 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? Brian Lynch: 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. Oliver Brewer: The net would have been up with... Brian Lynch: Without those two things, we'd be up. Oliver Brewer: Right.

Q: 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.

A: 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.

Q: 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?

A: 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我们'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. Brian Lynch: And just a reminder, Casey, the tariff impact over the two years is $75 million, which has obviously impacted margins significantly.

Q: 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?

A: 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这些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.