Buried within Topgolf Callaway Brands Corp.'s recent earnings call lies a revelation that seems to have slipped past the radar of Wall Street analysts. It's not about flashy new product launches or aggressive expansion plans. Instead, it's a quiet, almost unassuming detail that hints at a powerful profit engine humming beneath the surface of the Topgolf venue business: the venues are appreciating assets.

This isn't just a vague, feel-good statement. Topgolf Callaway Brands Corp. backs up this claim with hard data, revealing a fascinating trend within their venue cohorts. While new venues naturally generate excitement and strong initial revenue, what's truly remarkable is that venue profitability doesn't decline with age. In fact, it appears to increase over time.

The data presented on Slide 18 of the earnings presentation paints a compelling picture. Venue adjusted EBITDAR margins, a key indicator of profitability, not only remain stable but actually trend upwards with each passing year. This effect becomes even more pronounced when examining venue pre-tax income, as depreciation and amortization costs, often front-loaded in the initial years, begin to taper off.

Think about it: in a world where businesses often grapple with declining margins as assets age and require more maintenance, Topgolf venues defy the norm. They are defying the traditional depreciation cycle and emerging as appreciating assets, much like well-maintained real estate.

Why This Matters

Firstly, it speaks volumes about the durability and resilience of the Topgolf business model. It suggests that the appeal of Topgolf transcends fleeting trends and taps into a deep-seated desire for social, interactive entertainment. The venues, carefully chosen and strategically located, become embedded within their communities, evolving into enduring entertainment hubs.

Secondly, this appreciation phenomenon has profound implications for long-term profitability. As Topgolf Callaway Brands Corp. continues its expansion strategy, adding new venues to its portfolio, each new addition has the potential to not only generate strong initial returns but also contribute increasingly larger profits over time. This creates a snowball effect, with each venue adding to the overall profitability of the business in a compounding manner.

Crunching the Numbers

Let's delve into the historical data to understand this trend better. The following table showcases the average historical venue sales and EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent) data for Topgolf venues, reflecting the upward trend in both metrics over time.

To further illustrate this, let's visualize the average venue EBITDAR over time.

The Future is Bright

Approximately half of Topgolf's venues have opened within the last five years. This means that a significant portion of their portfolio is still in its early stages of profitability ramp. As these venues mature, their profit contribution is poised to expand dramatically, driving a surge in overall profitability for the entire business.

So, while Wall Street fixates on short-term same-venue sales fluctuations, perhaps overlooking the bigger picture, this hidden gem within Topgolf's financial data reveals a company poised for substantial long-term profit growth. It's a testament to a business model that is not only resilient but strategically positioned to leverage the ever-growing popularity of off-course golf, transforming each new venue into a profit machine that gets stronger with time.

"Fun Fact: The Topgolf concept originated in the United Kingdom, where the first three venues were built. The company expanded to the United States in 2005 and has experienced phenomenal growth ever since."