Topgolf Callaway Brands Corp

NYSE:MODG

Earnings Call Analysis

Topgolf Callaway Faces Revenue Drop and Strategic Review

Topgolf Callaway reported a 2% year-over-year revenue decline in Q2 2024 to $1.158 billion, driven by softer trends in its Topgolf business. Despite this, the adjusted EBITDA remained flat at $206 million. Non-GAAP net income rose by 10% to $83 million due to increased investment income and tax benefits. Segment performance was mixed, with Topgolf revenue up 5% and golf equipment down 8%. The company lowered its full-year revenue guidance to $4.2-$4.26 billion and same-venue sales to decline very high single digits to low double digits. A strategic review of Topgolf is underway, including the possibility of a spin-off.

Revenue Overview and Performance Metrics

In the second quarter, Topgolf Callaway Brands reported consolidated revenues of $1.158 billion, a 2% decline from the previous year. This decrease was primarily influenced by a drop in same-venue sales at Topgolf, which fell by 8%. However, new venues at Topgolf contributed positively, with revenue growing by 5% to $494 million. This was encouraging, reflecting strong performance and financial returns from recently opened locations. Adjusted EBITDA for the quarter remained stable at $206 million, and non-GAAP net income increased to $83 million, a 10% rise year-over-year. Despite these fluctuations, 12-month trailing adjusted EBITDA grew over 10% year-over-year, indicating effective cost management across operations.

Guidance Update and Market Position

Looking ahead, the company adjusted its full-year revenue forecast downward by $225 million to a range of $4.2 billion to $4.26 billion. This alteration is largely due to anticipated weak performance in same-venue sales throughout the year, suggesting a decline in high single digits to low double digits. Notably, the adjusted EBITDA outlook was revised to $570 million to $590 million, representing a decrease attributed to the softening sales environment. However, Topgolf's new venue strategy remains intact, with plans to open an average of 10 venues annually starting in 2025, which management supports as a strategy to create shareholder value.

Segment Performance: Topgolf and Golf Equipment

Topgolf's operating income jumped by 28% year-over-year to $56 million, aided by improved operational efficiencies. The adjusted EBITDA from Topgolf also rose by 19% to $110 million, demonstrating resilience amidst top-line volatility. In contrast, the golf equipment segment experienced an 8% revenue decline to $414 million, partly due to comparing against last year's significant product launches and unfavorable foreign exchange impacts of approximately $7 million. While operating income in this segment decreased by 20% to $77 million, management expresses optimism toward second-half growth in golf equipment sales, buoyed by upcoming high-profile launches.

Macroeconomic Context and Consumer Trends

The management team acknowledged broader economic pressures, including persistent inflation affecting consumer discretionary spending. This trend has made pricing decisions critical across their segments. They reported that venues with high digital sales penetration have consistently outperformed averages, prompting a strategic emphasis on enhancing digital capabilities and marketing efforts to drive traffic and customer engagement.

Operational Efficiency and Financial Position

With cash flow generation improving by $173 million compared to the previous year and a strong liquidity position of $784 million, the company is positioned to weather the current volatility. An inventory reduction of $193 million has optimized working capital and provided the company the flexibility needed for strategic investments. Additionally, the net debt stood at $2.4 billion, reflecting careful management of leverage ratios. Analysis indicated that excluding the REIT debt aligned with venue financing yields a manageable adjusted net debt leverage ratio of 1.9 times.

Strategic Review of Topgolf

In light of recent performance and investor sentiment, Topgolf Callaway initiated a strategic review of the Topgolf business. This process aims to evaluate both organic growth strategies and potential inorganic alternatives, including the possibility of a spin-off. Management expresses a commitment to enhancing same-venue sales performance, despite acknowledging the challenges from post-COVID normalization effects. The goal is to return to consistent low single-digit sales growth through improved marketing initiatives and venue experiences.

Earnings Call Transcript 2024-Q2

[Operator]

Good day, and welcome to the Topgolf Callaway Brands Second Quarter 2024 Conference Call.

[Operator Instructions]

Please note that 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.

[Katina Metzidakis, executive]

Thank you, operator, and good afternoon, everyone. Welcome to Topgolf Callaway Brands Second Quarter Earnings Conference Call. I'm Katina Metzidakis, the company's Vice President of Investor Relations and Corporate Communications. Joining me as speakers 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 second quarter financial results. We have published an updated presentation, our earnings presentation as well as the earnings press release, are both available on the company's Investor Relations website under the Financial Results tab. Aside from revenue, the financial numbers reported and discussed on today's call are 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. We encourage you to review the safe harbor statements contained in the presentation and the press release for a more complete description.

And with that, I would now like to turn the call over to Chip Brewer.

[Oliver Brewer, executive]

Thank you, Katina. Good afternoon, everyone, and thank you for joining our call. I want to begin by reiterating the announcement we made in our press release about our formal strategic review of the Topgolf business. We remain convinced that Topgolf is a high-quality business with significant future opportunity, it is transforming the game of golf, and we believe it will deliver substantial growth and financial returns over time. At the same time, we have been disappointed in our stock performance for some time as well as the more recent same venue sales performance. As a result, we are in the process of conducting a full strategic review of Topgolf. This review includes the assessment of organic strategies to return Topgolf to profitable same venue sales growth as well as inorganic alternatives, including a potential spin of Topgolf.

Our strategic review of Topgolf is being conducted with the help of outside advisers and is focused on maximizing long-term shareholder value. We're active in this work at present and expect to complete our strategic review of Topgolf expeditiously. We will report back on this when the work is complete. As you can imagine, I'm unable to provide further comments or details on any potential inorganic strategies at this time. I will try to address the organic growth initiatives during my comments and we'll be happy to answer questions on this portion.

Moving on to a review of the second quarter. Total revenue of $1.158 billion was below our expectations, primarily due to lower-than-expected same-venue sales at Topgolf, which I'll discuss in greater detail in a few minutes. Both the golf equipment and the active lifestyle segments performed roughly consistent with expectations, including strong market share performance at both TravisMathew and Callaway golf equipment. Total company Q2 EBITDA of $206 million was ahead of expectations, driven by continued strong operating efficiencies and cost management across the business.

Given these results and current trends, we are lowering our full year revenue expectations by approximately $225 million to a range of $4.2 billion to $4.26 billion and our full year same venue sales estimates to be down very high single to low double digits. As a result, we are revising our EBITDA outlook to $570 million to $590 million, which implies an approximately flat year-over-year EBITDA margin. By segment, we're lowering our second half Topgolf revenue outlook based on our updated same venue sales estimates. This will negatively impact our EBITDA but the flow-through will be mitigated by continued improvement in our venue operating efficiencies as well as cost savings initiatives.

In the legacy or product side of our business, we are revising our second half revenues down by approximately 2% or $55 million. This reflects the potential for further slowing of consumer activity in the second half of this year. However, we believe we can manage expenses to offset the majority of any bottom line impact of this modest revenue adjustment in our products business. Finally, as Brian will discuss in a few minutes, our cash flow and financial position remains strong.

I'll now move to segment performance, starting with TopGolf. I'd like to start with what we're seeing from a macro perspective. As has been well documented, persistent inflation over the last few years has led to belt tightening across wide portions of consumer discretionary spending. We see it in an internal and external survey data where price is the biggest concern of our customers as well as those in both the leisure and restaurant industries. We hear it from our peers, see it in credit card data and observe it firsthand in our venue business, including feedback from our large corporate clients.

In support of this, during the quarter, we saw that our top-performing venues were positively correlated with the overall household income data. I'll now turn to our same venue sales results, including what we saw, what we're going to do about it and our thoughts moving forward. What we're seeing, Topgolf same venue sales declined 8% in the quarter, driven by soft overall traffic trends. The year-over-year data shows both the 1 and 2 Bay and the 3 plus Bay down similarly in the quarter. But when you look at the 2-year stack in the 2019 data, it shows the consumer portion of our business remains stronger than our events business. The 1 to 2 Bay trends appear to be moving directionally with that of other similar entertainment experiences and restaurants.

Turning to Events and 3+ Bay. This is the slowest part of our business, but perhaps the easiest to understand. For the quarter, 3 plus Bay same venue sales was down 9% year-over-year, 27% on a 2-year stack and 5% versus 2019. We previously thought the Events business was stabilizing, but it then deteriorated further in late May and June. We believe the events business results reflect a normalization from a post-COVID surge as well as softness in demand typical of slowing economic conditions and corporate belt tightening.

Based on sales lead data, we now expect this slowness to continue through Q3 with the potential to level off by the end of the year. Looking at the most recent data, we saw our combined U.S. same venue sales deteriorate in June as there was a step change in macro demand starting in late May. This was despite the rollout or more likely partially mitigated by the rollout of our free 30 promotion and advertising campaign, both of which had tested quite well in May.

June's U.S. same venue sales was down 8% when we expected it to be slightly positive. July was down approximately 11% on a retail calendar basis with the last 2 weeks of the month trending better than the first few weeks. With this as the backdrop, we're now forecasting our full year same venue sales to decline very high single digits to low double digits. This implies the trends we've been seeing in June and July continue for the balance of the year. Given the fact that August through mid-December should be a period of relatively easier comps, this forecast also allows for some additional slowing of overall demand.

Now turning to what we're going to do about it. First of all, we're furthering our digital efforts as well as refining our select promotional offerings. As I've noted on the last several calls, we believe the biggest opportunity for us is building out TopGolf's digital business. In fact, our digital sales penetration increased again this quarter by another 50 basis points year-over-year to 35%. This is important as we know that venues with higher digital sales penetration have consistently outperformed our fleet averages. And this is why a significant portion of our investments are focused on strengthening our digital capabilities, both from a technology perspective, such as implementing PIE, our reservation system, and our consumer data platform as well as from a talent and organizational perspective.

To this end, the digital team is going to be investing further in additional performance marketing, loyalty program and consumer insight expertise.

Turning to promotions. To protect long-term profitability and brand value, any promotions that we offer need to be selective and targeted. With this in mind, we have analyzed our [ free 30 ] promotion and found it to be effective in driving traffic and interest from existing customers, smoothing out demand and driving an improved overall results, but it has been less effective in attracting new customers. Many new customers generally visit for the first time by walking in, and we believe they may be reluctant to book it to our reservation. Given these insights, we will be utilizing our consumer data platform and targeting new customers with a walk-in version of our free 30 promotion that is redeemable anytime not only 9 to 5 week days and not requiring a 2-hour reservation while continuing to drive our existing efforts via reservations for customers who value the reservations model we have built. We are trialing this now and look forward to seeing the results.

Partnerships are another way to increase awareness and drive incremental traffic. As we have gained scale, we've been able to find bigger, more national partners. Our recently announced partnership with Visa is a good example of this. With this partnership, Topgolf is being promoted to cash at Visa cardholders via special offers intended to drive both new and repeat visits. Lastly, but importantly, we're going to be stepping up our game on delivering newness, continually improving the quality of our experience and reasons to visit. We are a premium experience and thus, by design, we are not made to be cheap, but we are unique and we can provide more fun in this value than other offerings.

By refocusing on newness, we believe we can give customers more reasons to give Topgolf a try or come back and visit us again. From this point forward, on a national basis, we will be delivering exciting and fun new reasons to visit at least 3 to 4x per year. For Q3, this includes the recently launched Sure Thing Golf Club which was designed by the Callaway engineers in consultation with the Topgolf team and is geared towards new golfers. It features a unique and innovative design that makes it easier to get the ball airborne and [ forward ]. Then in Q4, we'll be launching our next new in-venue game and if you're a fan of video games, we think you'll love it. In addition to these big national programs, there will also be more local initiatives to drive incremental visits and excitement such as concerts and live DJ nights.

Turning to my thoughts moving forward. Overall, I firmly believe we are already doing a lot of the right things to drive growth in same venue sales over time, including constantly improving our teams and initiatives. As evidence of this, I point to the fact that since launching our spring and summer initiatives, we have seen purchase intent, brand recommendation and price perception scores improve.

And perhaps most importantly, our fund scores are up, which we believe is a leading indicator for future growth and has historically been highly correlated to our consumers' likelihood to both return and recommend Topgolf. At the same time, we've also identified a fewer areas where we can do better, and we're putting in the plans and resources to quickly address these going forward. Although it is clear that some of these initiatives will take some time to implement and the macro environment remains choppy.

I continue to believe in Topgolf's ability to drive same venue sales growth over time. Shifting gears to our second key performance driver margin expansion. Our team has consistently shown its ability to drive venue operating margins, both in positive and difficult market conditions. For the quarter, despite soft top line trends, we were able to expand total segment adjusted EBITDA margin by 260 basis points year-over-year. That said, given our lowered revenue outlook for the back half of the year, we now expect full year venue EBITDA margins to be roughly flat versus last year at approximately 34%, which is still quite healthy considering our lower revenue expectations and is a full 100 basis points ahead of our 2022 margin with plenty of room to grow as top line improves.

Moving to new venue openings. We remain on track to add 7 venues this year. We added Bryan, Texas in Q1, successfully opened [indiscernible] Montebello in Q2 and and the 4 remaining 2024 venues are under construction and on schedule. Venues continue to open well and are achieving our high financial targets. In conclusion on the Topgolf segment report out, TopGolf is performing well in 2 of its 3 key performance drivers, including venue margins and new venue development. On the same venue sales front, results have been below our expectations, and we are committed to improving here.

However, I believe that the vast majority of what we are seeing is an economic cycle and/or a post-COVID normalization in the events portion of our business. Importantly, we are continuing to strengthen our capabilities and expertise to drive positive same-venue sales in a normalized environment. I believe the enduring strength of Topgolf remains intact. This being that consumers really enjoy the experience. In addition, the sport of golf remains on trend as does Topgolf and Topgolf retains a strong economic model, a model where the core profitability of our venues as measured on a normalized revenue level is increasing over time.

This combines well with an outstanding growth outlook as we can identify and build new venues with high confidence and unmatched execution and the business benefits from a uniquely strong defensive moat. Turning now to golf equipment. The Callaway brand remains strong with growing market share positions. This quarter, Callaway held its position as the #1 U.S. market share brand in driver, ferry woods and hybrids. Our AI smoke line maintained the #1 U.S. model market share position in driver [indiscernible] and irons and Odyssey also maintained its position as the #1 putter brand. One stat that I'm particularly proud of is our June green grass woods market share of 38%. 38% is a terrific number. it showcases the outstanding performance of our Ai smoke woods in a fitting environment. And the fact that we can deliver this at green grass also showcases our scale and strengthened distribution in this important channel.

Turning to golf ball. The significant and strategic investments we've made in golf ball over the last several years continue to pay dividends for the Callaway brand. A major focus for Callaway this year was to grow in our tour ball segment with our new Chrome tour product line. Our results show that we're doing just that. As you may recall, last quarter, I announced we will be hosting Chrome Tour, ball speed and spin challenges. We have now done hundreds of these and the results have been impressive.

Our test data shows that we are faster in 86% of the test and that we deliver an advantage in pitch shot back spend in 66% of the test. Our overall June U.S. ball market share increased by 120 basis points year-over-year to 21.9% and our premium ball share achieved a new record market share of 12%, up 150 basis points year-over-year. Our brand has also had an outstanding year on tour with [indiscernible] winning her second U.S. women's open and Xander winning both his first and his second major championships, the PGA championship and then the Open Championship.

Looking at global markets. The core golf markets of the U.S. Japan and Europe all remain healthy with field inventories, consumer demand and overall market conditions steady, if not slightly positive. In each of these markets, we believe we are slightly outperforming the overall market as measured by revenues and market share. The Korean market, on the other hand, remains soft, down double digits this year and unfortunately, we have also underperformed in this market.

As a result, we have recently made changes aimed at improving our relative performance here, and we are seeing positive signs. For the balance of the year, we're excited about our recent upcoming product launches. We just launched our new OPUS wedge, and they are already a popular choice on tour. In my opinion, this is the best wedge we have launched in my time here at Callaway. Congrats and well done to the teams that drove this. And looking only slightly forward, on next Monday, we will be announcing the launch of our new Apex line of irons. This is our most premium line of irons and the product is both beautiful and innovative. I'm particularly excited about the new tie Fusion technology that will be introduced as part of this exciting new lineup, and I invite you to tune into our launch communication to learn more.

Looking at our full year forecast for this segment, we now see revenues being approximately flat for the full year, but up slightly on a currency-neutral basis. Switching gears to our active lifestyle segment. Q2 revenues were in line with expectations. TravisMathew had a solid quarter, delivering share gains at wholesale and also opening 5 new retail stores. They are on track to open 10 stores for the full year for a total of 57. The women's initiative also continues to develop nicely and is now approaching 10% of revenues. It appears to be on its way to being a significant portion of this business.

In addition, the TravisMathew team has done a great job growing their outerwear business, which in turn is helping them be a less seasonally focused brand. Moving to Jack Wolfskin. I'd like to commend the team for their hard work as we took significant steps to rightsize the business since we last spoke on our Q1 earnings call. The brand has successfully shifted its strategic focus back to its core markets in Central Europe and China. We are encouraged by recent results, including achieving our sales targets for Q2 and we still expect a positive EBITDA performance in 2024.

Consistent with last quarter's communication, we expect revenues in this segment to decline year-over-year as we form a new base in which to resume growth. In conclusion, we are pleased with the overall performance of both our golf equipment and active lifestyle segments. At Topgolf, we are working through what we view as a short-term cycle of volatility in our same menu sales, while at the same time, significantly improving organization's ability to drive positive results in a normalized environment. We continue to demonstrate our ability to drive improved operating efficiency within our venues to reliably deliver strong performance in newly opened venues with highly attractive financial returns to grow our digital acumen and penetration and to build on the overall strength of the consumer experience. and experience, which continues to resonate with Topgolf players as one of the most fun entertainment options available.

As we look forward, we remain confident that we have the proper strategy in place to drive long-term growth in both revenue and profitability. With that, I'll turn the call over to Brian.

[Brian Lynch, executive]

Thank you, Chip, and good afternoon, everyone. Chip covered our announcement regarding the strategic review of Topgolf, so I will jump right into our financial results. I will start with some financial highlights for the quarter. Q2 non-GAAP net income of $83 million, adjusted EBITDA of $206 million and EPS of $0.42 were all ahead of expectations despite a 2% year-over-year decrease in revenue. First half cash provided by operations improved $173 million compared to first half last year. Our inventory reduction initiatives were successful with our consolidated inventory decreasing $193 million since Q2 last year. We made a $50 million discretionary payment against the outstanding principal of our term loan debt at the end of May. Our available liquidity remains strong and increased $136 million compared to Q2 last year.

Now turning to the specifics. Q2 consolidated revenues decreased 2% year-over-year to $1.158 billion and were 3% below the midpoint of our guidance, primarily due to softer trends in our Topgolf business. On a year-over-year basis, the decrease was attributable to an 8% decrease in golf equipment and 3% decrease in active lifestyle, both of which were largely in line with our expectations. This decrease was partially offset by revenue growth at Topgolf driven by new venues. Changes in foreign currency rates negatively impacted consolidated revenue by approximately $11 million. Q2 adjusted EBITDA of $206 million is approximately flat compared to last year and trailing 12-month adjusted EBITDA increased over 10% year-over-year. These results exceeded the high end of our Q2 2024 guidance range, driven by strong operational efficiencies at Topgolf and reduced cost and expenses across the business. Q2 non-GAAP net income was $83 million, up approximately 10% year-over-year. This increase in net income is primarily due to an increase in investment income and a tax benefit for the quarter. Net income also benefited from lower term loan interest expense as a result of our refinancing.

Moving to segment performance. At Topgolf, Q2 revenue grew 5% to $494 million, driven primarily by the new venues opened since Q2 last year. The new venues are performing well and consistent with the financial targets and returns we previously communicated. Topgolf operating income was $56 million in the second quarter, up 28% compared to the prior year, while adjusted EBITDA increased 19% year-over-year to $110 million. The adjusted EBITDA growth was driven primarily by the increased revenue and continued strong operating efficiencies, including benefits from our new labor model and cost management initiatives. We commend the team at Topgolf for their ability to drive profit in a volatile top line environment.

Moving to Q2 results for golf equipment. Overall, the underlying golf equipment business continued to see strong momentum from this year's club and ball launches with strong market shares, as Chip discussed earlier. Revenue decreased 8% year-over-year to $414 million consistent with our expectations, primarily due to lapping last year's launch of our big birth of woods and irons, which had an approximate $30 million impact compared to Q2 this year. This is just timing between quarters, and we still expect golf equipment to be up for the full year on a constant currency basis. Our golf equipment segment was also negatively impacted by approximately $7 million related to foreign exchange headwinds during the quarter.

Golf equipment operating income of $77 million decreased 20% year-over-year due to the lower revenue, higher air freight costs and foreign exchange headwinds, which were partially offset by management of operating expenses. In our Active Lifestyle segment, Q2 revenue decreased 3% year-over-year which is in line with our expectations and was primarily from softness in Jack Wolfskin due to high field inventories, along with unfavorable changes in foreign currency rates. Operating income decreased to $15 million compared to $20 million in the prior year, primarily due to the lower sales.

Moving to balance sheet and liquidity highlights. We continue to have ample liquidity. As of June 30, 2024, our available liquidity, which is comprised of cash on hand and incremental borrowing capacity under our credit facilities, increased $136 million to $784 million compared to the prior year due to better cash flow generation as the company continues to manage costs and more efficiently manage working capital, especially with regard to inventory.

At quarter end, we had total net debt of $2.4 billion, which excludes convertible debt of approximately $258 million compared to $2.2 billion for the same time last year. This increase is attributable to increased venue financing debt related to new venues, partially offset by a reduction in term loan debt due to our recent debt paydown. We also think it is helpful to evaluate our net leverage position by excluding the REIT debt associated with our Topgolf venue financing, which is akin to capitalize rent with no additional principal or bullet repayment required. Excluding the REIT debt from our balance sheet, our REIT adjusted net debt is $981 million compared to $1.2 billion as of Q2 2023. Our net debt leverage which exclude convertible debt, was 3.9x at June 30, 2024, compared to 4.1x in the prior year. This improvement was driven by increased EBITDA and improved cash flow, which more than offset the increased venue financing debt. A REIT adjusted net debt leverage ratio, which burdens EBITDA with the REIT interest expense payments was 1.9x compared to 2.5x in the prior year. We remain comfortable with these leverage levels. Speaking of REITs, I want to provide a quick update based on what we are seeing in the market. First, our venues continue to be viewed as very attractive investments and we are seeing strong demand and in fact, increased interest from new REIT partners for these venues.

Second, the cap rates on new venues remain steady and in line with the rates we have seen over the last several quarters. Switching gears, our inventory balance decreased $193 million or 23% to $647 million at the end of Q2 2024. We continue to feel comfortable with the current level and quality of our inventory and believe we are essentially at normalized levels for our business with small opportunities in each brand or region that we will continue to pursue. Capital expenditures for the first 6 months of 2024 were $149 million, and we received reimbursements of $55 million from our REIT partners for net capital expenditures of approximately $95 million.

Now turning to our balance of year outlook. As Chip mentioned earlier, given our revised outlook for same venue sales coupled with our expectations for a potentially softer consumer environment across our businesses, we are lowering the midpoint of our full year 2024 revenue guidance range by $225 million or approximately 5% to a range of $4.2 billion to $4.26 billion. Approximately $170 million or approximately 75% of this decrease is attributable to the Topgolf business and the other $55 million to our products business. As a result, we are also lowering the midpoint of our full year adjusted EBITDA outlook by approximately $50 million to a range of $570 million to $590 million. We were able to mitigate the impact of the change in revenue and EBITDA through cost reductions and strong operational efficiencies. By segment, at Topgolf, we are lowering our guidance to approximately $1.79 billion in revenue and approximately $310 million in adjusted EBITDA, which compares to our prior guidance of $1.96 billion and $350 million, respectively. Our outlook now assumes a softer back half of the year with updated same venue sales guidance of down very high single digits to low double digits for the year.

In golf equipment, our updated forecast now allows for a range of outcomes that includes both a continuation of current trends or some softening of the consumer in the second half of the year. Despite this potential softness and unfavorable foreign currency rates, we expect second half growth in golf equipment and are very excited about our Q3 launches of Apex irons and OPUS wedges. For the full year, we anticipate golf equipment to be approximately flat year-over-year and slightly up on a currency-adjusted basis. In Active Lifestyle, TravisMathew continues to perform in line with expectations. And as Chip noted, we have successfully rightsized the Jack Wolfskin business to focus on its 2 core markets in Central Europe and China. Overall, we continue to expect full year revenue and operating income to be down year-over-year in this segment due to lapping the $35 million corporate channel filling last year for TravisMathew and lower sales at Jack Wolfskin. Foreign exchange rates have improved since we last gave guidance, we are now expecting a full year negative impact on revenue of approximately $35 million and an operating income of approximately $19 million.

Shifting gears. While we continue to expect to be cash flow positive in 2024, we are lowering our outlook for free cash flow. We now expect free cash flow to be approximately $130 million compared to $165 million for our prior guidance. TopGolf is also expected to be free cash flow positive for the year. From a net CapEx perspective, we estimate approximately $190 million for the full year with $60 million coming from the non-Topgolf business and $130 million coming from Topgolf.

Now turning to Q3 specifically. In Q3, we expect consolidated revenue of $970 million to $990 million versus $1.041 billion in Q3 2023. We estimate adjusted EBITDA to be in the range of $95 million to $105 million compared to $163 million in the prior year. This decrease is due to the revenue deleverage, increased marketing spend and more hedge losses compared to the prior year. In Q3 at Topgolf, we expect to be down low single digits in revenue, and we expect operating income to be down more than revenue due to the revenue deleverage and the change in timing of marketing expenses year-over-year, partially offset by continued efficiencies. We also expect same venue sales to be approximately the same in Q3 and Q4. Golf equipment sales are expected to be down slightly in Q3, primarily due to unfavorable changes in foreign currency. Q4 revenue is expected to grow due to launch timing and year-over-year growth in golf ball. Operating income is expected to be down in Q3 due to the revenue decrease and increased marketing spend related to the new product launches. Operating income is expected to be up in Q4 due to the expected revenue growth.

Moving to active lifestyle. We expect Q3 revenue to decline compared to last year due to lower sales estimates for Jack Wolfskin and the Europe wholesale channel. We expect growth in Q4 at both TravisMathew and Jack Wolfskin. Operating income is expected to be down in Q3 due to the revenue decrease and is expected to be up in Q4 due to the revenue leverage. As we conclude, I want to emphasize that the fundamentals of our business remain strong. Participation in interest in golf remains very strong. The TravisMathew and Jack Wolfskin brands are leaders in their core markets and the fund scores are high and improving. However, outside of our golf equipment business, we are clearly seeing some consumer softness in the current macroeconomic conditions. This is the less fun part of the economic cycle we all expected at some point. While it is having some impact on revenue, we have been able to offset much of the bottom line impact through operational efficiencies and cost management. We are free cash flow positive and have strong liquidity. We are in a great position to be able to maximize opportunities during this cycle and to take advantage of better conditions as the consumer strengthens again.

With that said, I would now like to open the call for questions.

[Oliver Brewer, executive]

Before actually opening the call for questions, I want to comment on the trading halt in our stock shortly before market close. Our long-term provider we use to manage our Investor Relations website, prematurely posted our investor presentation to our website prior to market close. Although it was quickly taken down, it had already been picked up in the media. We immediately notified the NYSE in a halted trading pending publication of our earnings announcements today. We will be discussing this matter further with our provider and apologize for this disruption. Operator, with that said, please open the call for questions.

[Operator]

[Operator Instructions]

And our first question today will come from Alex Perry with Bank of America.

[Alexander Perry, analyst]

First, I wanted to ask about Topgolf a little bit. I guess, does the current same any sales trajectory sort of make you think about pausing future unit growth beyond this year? And then maybe a little color on sort of traffic versus ticket for Topgolf in the quarter and how you're thinking about it.

[Oliver Brewer, executive]

Sure. Alex, this is Chip. With regard to the venue expansion. So that's obviously something we've given a fair amount of thought to. And the short answer is that we believe the correct answer for creating shareholder value is to continue to build the venues. We expect to add an average of 10 per year some years a little more, some years a little less again starting in 2025. add a little color on that, though. As previously communicated, we have very attractive returns for these venues, 18% to 22% return on gross investment, 50% to 60% cash on cash and less than 3-year cash payback. We've confirmed and looked at the new venue performance recently, and they are delivering in the financial metrics consistent with our pro formas even in the recent period of volatility. We believe the recent same venue sales volatility is just that. It's volatility.

Over time, in a normalized market, we believe we'll be able to deliver low single digit or better same venue sales growth. To give you a little color on that, just looking at the consumer side of it, the 1, 2 Bay, same venue sales over the last few years in 2022 was up 7%. In '23, it was up 4%, in '24 through the first half, it's down 7%, but it's up on a 2-year stack in 2019 and versus a 2019 basis even this year. We're strengthening our team and our ability to drive same venue sales through this period of volatility, and we'll exit it in a stronger position. And in case we're wrong, we ran downside sensitivities and the returns are still good and still far exceed our cost of capital. We're going to continue to assess this and respond to new information and circumstances.

We've proven that we can and will slow down venue growth if needed, to protect the company's cash flow goals or if we question the wisdom of the investments, neither of those apply at present, and we remain confident. On the traffic versus spend per visit and ticket, it really is mostly a traffic issue right now. So our business, like much of the other outside data we've seen is experiencing slowness in traffic. And there's a little bit of difference there between the event business and the consumer as well with the consumer business being stronger when you look at it in detail.

[Alexander Perry, analyst]

Got you. That's really helpful. And then I just wanted to ask about the 3Q golf equipment guide, what's the sort of expected 3Q benefit from the launch timing with Apex versus Bertha that occurred in the quarter. I guess it sort of implies with the golf equipped guide down that the core is maybe down more given that last quarter, you sort of talked about a 3Q benefit. So are you seeing lower wholesale orders from your partners? Or what sort of the puts and takes there?

[Oliver Brewer, executive]

Yes, I'll take it and Brian, you jump in. But basically, we have Apex launch now. We have other launches coming in Q4. We're slightly more favorable from a launch timing perspective in Q4 versus Q3 for the second half of the year. We're anticipating golf equipment to be up in the second half of the year. Our market shares are good. Our markets are good. We feel good about our -- the category and our position in it.

[Brian Lynch, executive]

No, it's it's really just some timing noise between Q3 and Q4. As Chip mentioned, we expect to be up for the second half and even on currency neutral for the full year.

[Operator]

And our next question will come from Matthew Boss with JPMorgan.

[Matthew Boss, analyst]

So Chip, you cited pricing as 1 of the largest concerns for consumers today. I guess what's your comfort with the current pricing architecture or value proposition at Topgolf venues today and just further initiatives that you're considering to drive improvement in traffic over time?

[Oliver Brewer, executive]

Pricing is absolutely a topic of conversation for all consumers right now. You can't open up the media without hearing about it. And we know that there are portions of the consumer segment that are definitely feeling inflationary pressures and some level of stress. And that varies across businesses, but you can clearly see it in the Topgolf business and some of the data there. We have been fairly selective and targeted in our promotional efforts at Topgolf, and I think that is why in the right answer for the long term. If you look at the promotion that we are running the free 30, it's both select and timing, and it's relatively modest in the offering that it gives. It's proven to be effective in driving increased demand in the time period of smoothing demand and driving incremental profitability. We also think we can kind of continue to refine this and do this in an intelligent way that builds and protect brand value for the long run, and we've talked about on this call, how we're expanding that offering for -- to make it more interesting and available to new visitors that don't use the reservation model and allows us to satiate different consumers in the manner that most satisfying for them. So we're going to continue to drive that. And we've got a lot of exciting initiatives that we're working on in the same venue sales front. The promotional side is just one of them.

[Matthew Boss, analyst]

Great. And then maybe as a follow-up, could you just elaborate on the Topgolf review that you've initiated, and just what strategic alternatives could be considered or possibly on the table?

[Oliver Brewer, executive]

Sure. There's not much I can say on that right now because it's a process that we're right in the middle of it. We're considering all alternatives, but we're mentioned specifically a potential spin. We're looking at how do we best maximize long-term shareholder value. And we'll report back on that. When that work is done, we're in the middle of that work at present.

[Operator]

And our next question will come from Eric Wold with B. Riley Securities.

[Eric Wold, analyst]

A couple of questions on the non-Topgolf business. I guess -- as you think about pricing being a headwind to Topgolf and you're making a difference there, what are your thoughts on pricing within the golf equipment or Lifestyle segment the short term and long term? And how do you think about the golf equipment consumer versus the Topgolf consumer right now and their ability to spend.

[Oliver Brewer, executive]

Sure. They're very different, Eric. And the golf equipment consumer is wealthier, more passionate and has proven to be not especially sensitive to modest economic downturns or changes in the economic condition. And we continue to see that. The markets are remaining solid, robust across the globe with the exception of Korea. And our business is at or better than most markets out there right now. So we feel very good about that. The Topgolf consumer is an average demographic household income of about $100,000, which means that there are portions of them that might feel more pressure than the average golf equipment consumer.

[Eric Wold, analyst]

Got it. And so the comment before about Topgolf being more of a traffic issue than take an issue. Safe to say that those that are visiting Topgolf, you're not seeing any degradation in their ticket and their spend kind of per person that's more just getting that lower income demographic or maybe more pressure consumer in the door for the first place.

[Oliver Brewer, executive]

It's primarily a traffic issue, Alex. So there's a little bit of noise between -- in all segments of it, but traffic is the primary issue, and we've got a lot of initiatives underway on that. And we also share data that shows that the consumer side of this -- of the business is actually performing significantly better and directional with what you're seeing in other similar concepts and restaurants. The event business has had some more volatility in it. There's a little bit of a post-COVID reversion going on in addition to the economic slowness that we see in the general economy right now.

[Operator]

Our next question will come from Megan Alexander with Morgan Stanley.

[Megan Christine Alexander, analyst]

I wanted to take another shot at the Topgolf strategic review question, maybe just ask it a little bit differently. So in the release, you talked about assessing organic strategies to get Topgolf back to profitable same venue sales growth, understand you don't want to talk about the inorganic alternatives today. But as far as that organic strategy part of the review goes, I guess I'm just trying to understand a little bit more about what exactly is the mandate for the external advisers that you've hired? You did just say you think it's mostly macro, mostly just volatility and that you can get back to low single digits. So is it just that you want them to confirm that's the case? Or are they looking at something else as far as that organic strategy goes? And is there a timeline in terms of -- or is it more so that there's kind of a timeline to get back to same venue sales positive growth. Just trying to understand, I guess, a little bit more about the decision tree as far as the strategic alternative goes.

[Oliver Brewer, executive]

Yes, sure. So on the organic side, we do have outside advisers working with us to look at our business and how we're approaching continually improving our ability to drive same venue sales. There's -- and although I do believe that there's a lot of what we're seeing is macroeconomic volatility. I also want to be clear that we can and are going to do better. We recognize that we have to operate in the environment as it exists. We are making significant efforts to continue to strengthen the team, its organization, our capabilities to drive better and better performance on the same venue sales side. We talked about that in the script, the more newness and energy at venues, the fun, the reasons to visit. We talked about the sure thing Golf Club, which has launched new games, concerts, et cetera, that will continue to give both new visitors and returning visitors a reason to come back.

We're upping our game on the digital and performance marketing side. We're working through our promotional efforts, as I articulated already. We're investing further in the digital and commercial teams and adding significant resources to that. We hired a new Chief Operating Officer, who came from the casino business, and she will undoubtedly be additive to our efforts here. And I'm excited about our direction. And I believe we're going to come out of this period of volatility significantly stronger and our efforts will pay dividends in the long run. So it's not, Megan, and I'm sure you realize that. It's not that we're sitting here and just taking a macro cycle and waiting it out, we're far from it. We're using this as an opportunity to strengthen this organization, build the resources to drive that same venue sales even better when the conditions really do normalize. Did that answer your question?

[Megan Christine Alexander, analyst]

Yes, yes, that's helpful. And maybe sticking with Topgolf. Could you maybe tell us how much better the second 2 weeks of July look relative to the first 2 weeks? And maybe just in the context of that, you said the second half implies the trends you're seeing continue for the balance of the year. You did say compares get easier. I'm assuming that's on a 1-year basis. Would there be any way to kind of talk about what compares versus '19 look like given they did see a pretty big step down in 2Q. I'm just trying to understand whether you think the second half guide is kind of sufficiently derisked at this point.

[Oliver Brewer, executive]

Well, what we saw, as mentioned, in June and July. So the U.S. business in June, down 8%, 11% in July. And our guide assumes that those trends continue. And so if you just do the math, we would have to be down in a double-digit number for the second half. So it's not only that the guide would say you're going to be at where the point you were, but there would continue to be weakness and the comps versus last year are easier. In other words, on at least a 1-year basis, we are comping negative, small negative numbers, but small negative numbers last year. Does that answer the question on that one?

[Megan Christine Alexander, analyst]

Yes. Any -- I guess, can you contextualize at all how much better the second 2 weeks of July versus the first 2 weeks, I guess just asking because wondering if...

[Oliver Brewer, executive]

I understand the question and the reason to ask and Megan, that we're not going to get level of specificity. There is enough noise within week to week that I think you could read too much into that one way or the other, and I think it would be a bad practice to start getting into that level of granular detail.

[Operator]

[Operator Instructions]

Our next question will come from Joseph Altobello with Raymond James.

[Joseph Altobello, analyst]

So not surprisingly, I want to go back to Topgolf here for a second. So Chip, you mentioned throughout the call today that your view on the business and the long-term opportunity really hasn't changed. So if you believe that the issues at Topgolf are cyclical or temporary post-COVID normalization, then what's the point of the review?

[Oliver Brewer, executive]

Well, I think that it's good practice to evaluate if there's an inorganic option that would be in the better interest of long-term shareholder value.

[Joseph Altobello, analyst]

Okay. So it's really a frustration with the stock, not that anything...

[Oliver Brewer, executive]

Oh, absolutely. Yes. So right. There are 2 factors of our strategic review, Joe. There's one that's our inorganic or structural and that's alternatives to maximize long-term shareholder value. And that is strictly due to our point of view that the shares have underperformed and they've underperformed for a period of time now. The organic side of it is relative to the same venue sales. And that's recent same venue sales that we're committed to, obviously, be best-in-class and drive those low single-digit or better same venue sales growth over time.

[Joseph Altobello, analyst]

Got it. Okay. And just a follow-up on that. Could you quantify potentially the dissynergies for Topgolf, if it were, let's say, a stand-alone business?

[Oliver Brewer, executive]

That's something we'll be looking at as part of this process, but we're not going to comment on that at this time.

[Operator]

And at this time, I would like to turn the call back over to Mr. Brewer for any closing remarks.

[Oliver Brewer, executive]

Well, thank you, everybody, for tuning in today. We appreciate your time, and we look forward to continue to communicate with you in the future.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines at this time.