Topgolf Callaway Brands - Earnings Call - Q2 2020
August 6, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by, and welcome to the Second Quarter twenty twenty Callaway Golf Earnings Conference Call. At this time, all participants are in a listen only mode. Mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.
I would now like to hand the conference over to Mr. Patrick Burke, Head of Investor Relations. Thank you. Please go ahead, sir.
Speaker 1
Thank you, Erica, and good afternoon, everyone. Welcome to Callaway's second quarter twenty twenty earnings conference call. I'm Patrick Burke, the company's Head of Investor Relations. Joining me on today's call are Chip Brewer, our President and Chief Executive Officer Brian Lynch, our Chief Financial Officer and Jennifer Thomas, our Chief Accounting Officer. Today, the company issued a press release announcing its second quarter twenty twenty financial results.
A copy of the press release and associated presentation are available on the Investor Relations section of the company's website at ir.callawaygolf.com. Most of the financial numbers reported and discussed on today's call are based on U. S. Generally accepted accounting principles. In the few instances where we report non GAAP measures, we've reconciled the non GAAP measures to the corresponding GAAP measures at the back of the presentation in accordance with Regulation G.
Please note that this call will include forward looking statements that involve risks and uncertainties that could cause the 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. Please note that in connection with our prepared remarks, there is an accompanying PowerPoint presentation that may make it easier for you to follow the call today. This earnings presentation is available for download on the company Investor Relations website under the Webcasts and Presentations tab. Also on the same tab, you can choose to join the webcast to listen to the call and view the slides.
As a webcast participant, are able to flip through the slides. I would now like to turn the call over to Chip. Thank you, Patrick. Good afternoon and thank you everybody for joining us for today's call. Starting on Page four of the presentation, we're pleased to be with you today to discuss our Q2 results, results that have exceeded our expectations over the last few months and strengthen our confidence in the future.
As covered in our press release, although Q2 results were heavily impacted by the various global shutdowns and stay at home orders, By late May, nearly all of our principal markets, manufacturing facilities and distribution centers were open to some degree or another. As the quarter progressed, it became clear our businesses were recovering faster than we initially projected. Our e commerce business has been and continues to be a particularly strong performer, in many cases delivering year over year growth of 50% or higher since reopening. Looking at our principal segments, the golf equipment business has significantly exceeded expectations over the last few months. This business is benefiting from both pent up demand as well as increases in participation.
The National Golf Foundation is now projecting a 20% increase in participation of juniors and either new or returning golfers this year. To various degrees, this is a global phenomenon. But looking more specifically at The U. S. For the month of June, rounds were up 14% year over year.
For those of us trying to book a last minute tea time, it probably felt even stronger than this. Equipment industry stats all suggested double digit increase in sales for the month with Datatech reporting hardgoods sell through up 16% versus the same month one year ago. In golf retail, outside of resort locations remains very strong at present and barring a shutdown situation or an inability to play golf has not been particularly sensitive to any upticks in COVID that we've seen so far. Based on all this, we are hoping there will be a long term benefit from the increased participation and it is logical that this could be the case. However, we cannot be sure yet.
We'll have to keep our fingers crossed and track it over the next year or so. Callaway's global market shares also showed good progress with nice growth trends during the quarter and continued strength on a global basis. According to DataTech, in The U. S. Year to date Callaway remains the number one club brand and the number two ball brand.
Our U. S. Market share increased steadily during Q2 as markets opened up. In Japan, we remain the number two hardgoods brand year to date and had a strong quarter from a market share perspective with an exceptionally strong growth year so far in golf ball, thanks to Chrome Soft and the Triple Track technology, which is resonating across the globe. In Europe, we remain the number one hard goods brand through May, which is the latest data available.
As for market conditions, we already spoke about The U. S. Nice recovery during a quarter which Datatech called down 27% from a sell through perspective and the National Golf Foundation shipment data says was down 37%. Looking elsewhere, Japan was also significantly impacted during Q2, but the market remains relatively sound, only down approximately 7% in the first half of the year and also showed growth in June. As we mentioned, Korea has performed very well all year.
Europe was heavily impacted with no golf being allowed during their lockdown in the very important UK market. And as a result, Datatech reports that market is down nearly 40% through May, but fortunately this market is bouncing back very strongly as well. We have new product launches planned for the second half of this year similar to our strategy most years. As you would hope and expect, I remain confident in our new product pipeline. Our soft goods and apparel segment has also recovered above expectations, but not to the same degree golf has.
Our e comm business in this segment is very strong, while retail, both our own retail and wholesale, is still down double digits and unlike in golf equipment has shown volatility in markets where there has been upticks in COVID outbreaks. Despite this near term volatility, all of which is COVID or macroeconomic based, we still feel very good about our long term position here. We remain confident that we are invested in brands with strong prospects and that are positioned to outperform apparel as a whole, both in the COVID environment and afterwards. After a tough start to the quarter, we're pleased with the recovery of the Jack Wolfskin business in both Germany and China, noting that these are the largest markets for Jack Wolfskin and also two of the most attractive economies globally. As a primarily U.
S. Brand, TravisMathew was significantly impacted during Q2, but is now bouncing back very quickly with excellent sell through at key retailers and resume brand momentum. E comm has been outstanding for both TravisMathew and Jeff Wolfskin. During the quarter, we also made good progress on key initiatives, including the initial phases of our transition to our new 800,000 square foot Super Hub DC just outside of Fort Worth, Texas. We are now shipping all U.
S. Revenue out of this facility and expect to have this conversion behind us by the end of Q3. As stated during our last call, we are pleased with our financial position and are confident we are not only going to get through this crisis, but also emerge in a position of relative financial strength. That was true then and is even more so now. As discussed in our last call, we were aggressive in taking initial actions to lower our operating expenses and conserve capital.
This was an important initiative and we're still operating under this philosophy. However, as conditions continue to improve, we're also now fully able to invest in innovation, digital competencies and strategic growth initiatives. We believe this ability to invest and our conviction to do so will pay off nicely in the years ahead. In addition, as global hotspots and opportunities transition across the globe, we believe our company will benefit from our global scale, our leadership position in the golf equipment business, as well as the diversity and attractive growth opportunities associated with our family of brands. Looking forward, although we are very pleased with the pace of our recovery, we are unfortunately not comfortable providing quantitative guidance yet.
We believe we are in a strong position now and barring a broad shelter in place initiative in key markets or other unforeseen setback, we expect our business to both continue to improve, but also to remain at least moderately impacted through 2021. In closing, while we're pleased we are now in a position to fully operate our business, the safety and health of the company's employees, customers and partners continues to be paramount in our minds. As we transition back to normal operations, we are careful to follow appropriate protocols for social distancing, in office capacity management, personal protective equipment and other safety precautions. In addition, our thoughts and prayers continue to go out to those directly impacted by the virus and those diligently working on the front lines to protect, serve and care for the rest of us. Brian, over to you.
Thank you, Chip.
Speaker 2
Given the extremely challenging operational environment in the second quarter, we are pleased we were able to achieve positive non GAAP earnings and adjusted EBITDA and are also pleased, if not somewhat surprised, with the pace of recovery in our golf equipment and soft goods businesses, both of which have exceeded our expectations. We are especially pleased with the golf equipment business recovery, which is benefiting from increase in participation from new and returning golfers as well as pent up demand to play golf. We feel fortunate that our golf and outdoor lifestyle businesses support an active and healthy way of life that is compatible with social distancing. Before proceeding with the usual discussion of our financial results, I will elucidate on a couple of the announcements today. First, during the second quarter, we incurred $174,000,000 pretax non cash impairment charge on the carrying value of the Jack Wolfskin goodwill and trade name.
This includes writing off all the goodwill and reducing the carrying value of the trade name by $26,000,000 Based on a conservative view of the impact of COVID-nineteen and with the euro being weaker than originally projected, we believe it is appropriate to take the non cash charge. We remain positive on the ability of this business to contribute to our earnings and revenue growth in the future. Second, we also announced today the suspension of our $01 quarterly dividend. Given the uncertain impact COVID-nineteen will continue to have on the economy and our businesses in the short term, we remain focused on stringent cost management and prudent capital allocation. As we reevaluated our capital allocation strategy, we determined that our dividend was not the most efficient use of capital at this time and that the capital could be best used elsewhere.
Following our convertible note offering during the second quarter, we are confident that we have adequate liquidity with over $480,000,000 in cash and availability under our credit facilities, which will allow us to weather these uncertain times and emerge in a position of relative strength. In evaluating our results for the second quarter, you should keep in mind some specific factors that affect year over year comparisons. First, as a result of the Jack Wolfskin acquisition in January 2019, we incurred non recurring and transition transaction and transition related expenses in 2019. Second, as a result of the OGIO, TravisMathew and Jack Wolfskin acquisitions, we incurred non cash amortization and purchase accounting adjustments in 2020 and 2019, including the inventory step up in the 2019. Third, we also incurred other non recurring charges, including costs related to the transition to our new North American distribution center in Texas, as we are incurring redundant costs during the transition and including implementation costs related to the new Jack Wolfskin IT system and severance costs related to our cost reduction initiatives.
Fourth, the $174,000,000 impairment charge in the 2020 is non recurring and did not affect 2019 results. Fifth, we incurred and will continue to incur non cash amortization of the debt discount on the notes issued during the 2020. We have provided in the tables to this release a schedule breaking out the impact of these items on the second quarter and first half results, and these items are excluded from our non GAAP results. With those factors in mind, I will now provide some specific financial results. Turning now to Slide nine.
Today, we are reporting consolidated second quarter twenty twenty net sales of $297,000,000 compared to $447,000,000 in 2019, a decrease of $150,000,000 or 34%. The decrease was primarily driven by the COVID-nineteen pandemic, partially offset by an increase in our e commerce business. The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 28% and our soft goods segment, which decreased 44%. This decrease also reflects a decrease in all major regions and product categories period over period, all due to COVID-nineteen. Changes in foreign currency rates also negatively impacted second quarter twenty twenty net sales by $2,000,000 Gross margin was 41.1% in the 2020 compared to 46.3% in the 2019, a decrease of five twenty basis points.
On a non GAAP basis, gross margin was 42.2% in the second quarter compared to 47.5% in the 2019, a decrease of five thirty basis points. The decrease in gross margin is primarily due to the decreased sales and business challenges caused by COVID-nineteen, costs associated with idle facilities for a significant portion of the second quarter, a change in mix of products sold, including a decrease in sales from higher margin retail sales due to temporary store closures and increased sales of packaged sets, entry level golf balls and pre owned products due to the increase in new and returning golfers, combined with an increase in U. S. Tariffs on imports from China. Operating expenses were $300,000,000 in the 2020, which is a $138,000,000 increase compared to $162,000,000 in the 2019.
This increase is primarily due to the $174,000,000 non cash impairment charge related to the Jack Wolfskin goodwill and trade name. Excluding the impairment charge and other items previously mentioned, non GAAP operating expenses for the second quarter were $121,000,000 a $38,000,000 decrease compared to the 2019. This decrease is due to the actions we undertook to reduce costs as well as a reduction of variable expenses associated with lower sales during the quarter. Other income was $2,000,000 in the 2020 compared to other expense of $9,000,000 in the same period of prior year. The $11,000,000 increase was primarily related to a $13,000,000 increase in foreign currency related gains period over period, primarily related to the settlement of a cross currency swap arrangement.
This $13,000,000 increase was partially offset by a $2,000,000 increase in interest expense, primarily related to our convertible notes. Pretax loss was $176,000,000 in the 2020, compared to pretax earnings of $36,000,000 for the same period in 2019. Excluding the impairment charge and other items previously mentioned, non GAAP pretax income was $7,000,000 in the 2020 compared to non GAAP pretax income of $44,000,000 in the same period of 2019. Loss per share was $1.78 or 94,100,000.0 shares in the 2020 compared to earnings per share of $0.30 or $95,900,000 shares in the 2019. Excluding the impairment charge and the other items previously mentioned, non GAAP fully diluted earnings per share was $06 in the 2020 compared to fully diluted earnings per share of $0.37 for the 2019.
Adjusted EBITDA was $29,000,000 in the 2020 compared to $66,000,000 in the 2019. Now I'm turning to Slide 10. First half twenty twenty net sales were $739,000,000 compared with $963,000,000 in 2019, a decrease of $224,000,000 or 23%. The decrease was primarily driven by the COVID-nineteen pandemic, partially offset by an increase in our e commerce business. The decrease in net sales reflects a decrease in both our golf equipment segment, which decreased 19% and our soft goods segment, which decreased 32%.
This decrease also reflects a decrease in all major regions and product categories period over period due to COVID-nineteen. Changes in foreign currency rates also negatively impacted first half twenty twenty net sales by $6,000,000 Gross margin was 43% in the 2020 compared to 46.2% in the 2019, a decrease of three twenty basis points. Gross margins in 2019 were negatively impacted by the non recurring purchase price inventory step up associated with the Jack Wolfskin acquisition. On a non GAAP basis, margin was 43.6% in the 2020 compared to 47.4% in the 2019, a decrease of three eighty basis points. The decrease in gross margin is primarily due to the decreased sales and business challenges caused by COVID-nineteen, costs associated with idle facilities for a significant portion of the second quarter, a change in mix of products sold, including a decrease in sales from higher margin retail sales due to temporary store closures and increased sales of package sets, entry level golf balls and pre owned product due to the increase in new and returning golfers, combined with an increase in U.
S. Tariffs on imports from China, all partially offset by an increase in e commerce business. Operating expense was $454,000,000 in the 2020, which is a $124,000,000 increase compared to $330,000,000 in the 2019. This increase is due to the $174,000,000 non cash impairment charge related to the Jack Wolfskin goodwill and trade name. Excluding the impairment charge and other items previously mentioned, non GAAP operating expenses for the first half were $275,000,000 a $47,000,000 decrease compared to the 2019.
This decrease is due to our cost reduction initiatives as well as a reduction in variable expenses due to the lower sales. Other expense was approximately $1,000,000 in the 2020 compared to other expense of $21,000,000 in the same period of the prior year. The $20,000,000 decrease was primarily related to a $21,000,000 increase in foreign currency related gains period over period, including the $11,000,000 gain related to the settlement of a cross currency swap arrangement. The $21,000,000 improvement was partially offset by a $1,000,000 increase in interest expense related to our convertible notes. Other expense in 2019 was also negatively impacted by 3,000,000 related to hedging losses on the acquisition purchase price hedge.
Pretax loss was $138,000,000 in the 2020 compared to pretax income of $94,000,000 for the same period in 2019. Excluding the impairment charge and other items previously mentioned, non GAAP pre tax income was $48,000,000 in the 2020 compared to non GAAP tax non GAAP pre tax income of $118,000,000 in the same period of 2019. Loss per share was 1.47 or 94,200,000.0 shares in the 2020 compared to earnings per share of $0.81 or 96,200,000.0 shares in the 2019. Excluding the impairment charge in the items previously mentioned, non GAAP fully diluted earnings per share was $0.38 in the 2020 compared to fully diluted earnings per share of $0.99 for the 2019. Adjusted EBITDAS was $89,000,000 in the 2020 compared to $159 in the 2019.
Turning now to Slide 11, I will now cover certain key balance sheet and cash flow items. As of 06/30/2020, available liquidity, which represents additional availability under our credit facilities plus cash on hand, was $483,000,000 compared to $273,000,000 at the end of the 2019. We had total net debt of $621,000,000 including $440,000,000 of principal outstanding under our term Loan B facility that was used to purchase Jack Wolfskin. Our consolidated net sales receivable was $214,000,000 a decrease of 19% compared to $264,000,000 at the end of the 2019, which is attributable to lower sales in the quarter. Day sales outstanding increased to seventy eight days on 06/30/2020 compared to sixty two days as of June 3039.
Despite some of our customers taking a little longer to pay in this COVID environment, they are paying and we remain comfortable with the overall quality of our accounts receivable at this time. Also displayed on Slide 11, our inventory balance increased by 5% to $379,000,000 at the end of the 2020. This increase was primarily due to lower sales volumes in the second quarter related to COVID-nineteen. The teams continue to be highly focused on inventory on hand as well as inventory in the field. Given the circumstances, we are very pleased with our overall inventory position and the inventory at retail, especially on the golf side of the business, which remains low at this time.
Capital expenditures for the 2020 were $25,000,000 a year over year increase of $2,000,000 compared to the 2019, due mainly to the implementation of our Super Hub distribution center in Texas. We do expect our capital expenditures in 2020 to be approximately 35,000,000 to $40,000,000 up slightly from the estimate we provided in May, but down substantially from our $55,000,000 of planned capital expenditures at the beginning of the year due to our cost reduction actions. Depreciation and amortization expense was $18,000,000 in the 2020 compared to $17,000,000 in the 2019. Depreciation and amortization expense excluding the $174,000,000 impairment charge is still estimated to be approximately $39,000,000 consistent with our estimate provided in May. I'm now on Slide 12.
As we previously reported, we are no longer providing other specific financial guidance at this time due to the continued uncertainty surrounding the duration and impact of COVID-nineteen. It is just too difficult to predict with any uncertainty. Amidst all this uncertainty, where does this leave us? There are some things we know for certain. We are on track for another record sales year when COVID-nineteen hit unexpectedly and we had a significant negative impact on our business.
Our team did a very good job of responding to the pandemic with cost cuts, managing our supply chain and shoring up liquidity. The impact of COVID-nineteen will continue to negatively impact our sales and gross margins through 2021, but it is impossible to predict to what degree with any certainty, although we expect the impact to ameliorate as time passes. Both our golf equipment and soft goods businesses are recovering more quickly than we expected, especially in the golf equipment business. We are fortunate in that both our golf equipment and outdoor lifestyle businesses are ideally suited to an active and healthy way of life that is compatible with the world of social distancing. And finally, liquidity is not an issue.
The convertible note offering provided us with ample cushion to weather the pandemic, continue to invest in our businesses where necessary and to prepare us to emerge in a position of strength. That concludes our prepared remarks today. We will now open the call for questions.
Speaker 0
And your first question is from Brett Andrees with KeyBanc Capital Markets.
Speaker 3
Hi, good afternoon. I appreciate the color on June and the sales inflection there. I was hoping you could shed some light on the cadence of April, May and June, just how the Jack Wolfskin business performed in those months compared to the golf equipment business? And then also any color around July as we sit here today?
Speaker 2
Okay.
Speaker 1
Brian, May and June, do you a do you want
Speaker 2
to take that one? Sure. I think with the Jack Wolfskin business, I mean, COVID hit like everyone else and part of their business was affected earlier because in China, the pandemic started over in Asia. And so their business started to get affected a little bit earlier than us. And then it continued to be affected through the full quarter.
And you want to cut on July?
Speaker 1
Brett, are you asking specifically on the April, May, June, July, is that total company, or is that a Jack Wolfskin specific question?
Speaker 2
Yeah. I I guess what I'm really just trying to figure out is
Speaker 3
how the yeah. April, May, and June, just the sales, how those how those track year over year for Jack Wolfskin, but also for golf, the golf equipment business. I just wanna see,
Speaker 1
It scales for Jack Wolfskin, just like our total company, was lower in April and scaled continually with a pickup in June. As previously mentioned, the golf segment grew or recovered faster in June than the rest of business. As we put in the press release, our total revenues for June were up 8% over previous year and the golf segment was up 21%. And Jack Wolfskin, if you compare it within the segment of apparel, gear, and other, outperformed that segment. In other words, it was, in this case, down less, than the segment in general.
And when you compare it to others in similar categories, so North Face or Columbia who've reported, our revenue performance in the quarter outperformed theirs. So we're pleased with the Jack Wolfskin business. We're seeing good return to closer to our normality there, although it is not as robust as the golf segment, which is clearly showing a remarkable turnaround, both because of new participation and pent up demand.
Speaker 3
Another July? July.
Speaker 1
July, overall, it recovered for the total company faster than June. So we're showing improved performance in the golf segment and total company in July. And I don't have any specific Jack Wolfskin July data at this point.
Speaker 3
Okay. And then the last one here, I think that the June inflection in retail and then the lean channel inventories here in The U. S. For the golf industry is pretty understood with the data we have. But can you give us any color on where retail and channel inventories stand in Europe, Japan and Korea?
Just trying to think about the international markets.
Speaker 1
Again, in the golf segment?
Speaker 3
Yes, sorry, in the golf segment.
Speaker 1
Okay. The U. S. Market opened up faster than Europe, but Europe is seeing similar trends. The inventories in the channel are very low in Europe and there's been a surge in demand and interest in the game and participation, etcetera.
So very similar and very positive developments. Asia was a little less impacted as you know from COVID. So Korea managed it very successfully and that market is up for the full year. And Japan was down I think 20% for the quarter, but they're only down 7% for the year total market. And they're also showing much lower field inventories and growth since they reopened to the degree that they closed.
They closed less than The U. S. And Europe, but they still had impacts significant impacts really in Japan during the quarter, and they're recovering very well.
Speaker 2
Appreciate the color.
Speaker 0
Thanks. Your next question is from Mike Swartz with Truist Securities.
Speaker 4
Hey, guys. Good evening. I'm just maybe wanted to touch on, Chip, your comments just regarding the outlook for 2021 in a very general sense, talking about continued headwinds in terms of sales and margins. Could you give us a little more color there?
Speaker 5
Is that just a
Speaker 4
high level commentary? Is there more kind of specific or acute issues you're kind of referring to with that commentary?
Speaker 1
Very much a high level comment, Mike. Our ability to predict out through 2021 is very limited right now. We're very pleased with what we're seeing near term. We on our internal operating models that it's likely that COVID is still going to be a factor for some portion of 2021. And without great insight beyond that, we expect it to have an impact on the global markets.
But we are in segments with both in golf apparel and outdoor apparel that are well positioned for both the COVID environment and beyond. So very much a big picture comment that we don't have any more insight on than probably many others.
Speaker 4
Maybe just to frame it in a different way, it just to say that 2021 is probably not going to get back to 2019 levels? Or do you think 2021 will actually be worse than 2020?
Speaker 1
We were very trying to be we think it may not get back to 2019 levels, but we also want to discount our ability to forecast out there. So we do expect it to continue to improve. We're seeing it the data that we're seeing right now is unequivocal in that regard. There's been quick improvement, and we're feeling very positive about the near term trends.
Speaker 4
That's helpful. And then just a follow-up on I think you also said you've got some big product launches slated for the second half of the year. I know you're guarded on those as usual. But just in terms of timing, last year, you had a number of big launches, and I believe it was August, September, so in the third quarter. How should we think about the timing this year?
Is there any reason to believe that some of that stuff got pushed back further into the year?
Speaker 1
It got pushed a little further back, but the timing isn't way off from last year. So if you're trying to build your quarters, you shouldn't think there's any significant impact relative to last year's quarters.
Speaker 4
Okay, great. Thank you.
Speaker 1
Thank you.
Speaker 0
Your next question is from Susan Anderson with B. Riley.
Speaker 6
Hi. Thanks for taking my question. I was wondering if you could give a little bit more color on just kind of the gross margin outlook as we look into the back half. Are you expecting mix to improve, especially on the golf club side to more custom at all? Or are there any other puts and takes we should be thinking about?
Speaker 2
Susan. This is Brian. The margins in the golf equipment business were more impacted than the soft goods business in the second quarter. And that largely had to do with the idle facilities. We have the manufacturing facilities and for mall and clubs and DCs.
So that was more impacted. We do expect it to recover more quickly than the soft goods business for the balance of
Speaker 7
the year. Now a lot of
Speaker 2
that is volume related. Chip mentioned the ball the golf equipment business is picking up very quickly. And so they will improve as you go through the back half of the year.
Speaker 6
Got it. That's helpful. And then just on Jack really quick, I guess, the inventory issues you guys had last year, I guess it's kind of muddled by COVID now this year. But how are you feeling over in Europe now and in China? And then also I think you rolled out North America online.
Are there any early reads which obviously is being muddled by COVID too, but any early reads on the consumer response there? Thanks.
Speaker 1
Sure, Susan. This is Chip. The very early days in North America as it relates to Jack Wolfskin and making progress, but we're delayed in our efforts there to the COVID. So, some early wins, but also some delays as we were able to execute the new business and put the people in place and the support infrastructure that goes with that. So the net of it is too soon to barely get a good read on that one.
But we are up and running now and remain as excited as ever about that long term opportunity. Was the second question, Susan, about the inventory of Jack Wolfskin in Europe and China?
Speaker 0
Yes, correct. Yes.
Speaker 1
Our inventories are a little bit higher in the apparel space. They're very low in the golf space because of, as you well know, the seasonality of that with the spring drops that we already had the inventory when we shut down and so customers didn't have the opportunity to sell through that. Quite a bit of that we're going to repurpose for next year. So we're basically packing that and holding it and we're going to be able to use that for next year. And, you know, we were very aggressive in addressing some of the shipments.
So it's it's it's a little higher than we'd like it on the apparel side, but not not alarmingly so. And we, like many others, are repurposing much of that inventory.
Speaker 6
Great. That's really helpful. Thanks so much. Good luck next quarter.
Speaker 1
Thank you.
Speaker 0
Your next question is from Joe Ottevelo with Raymond James.
Speaker 8
Hi guys. This is actually Adam on for Joe. Hope you guys are staying safe. I was just curious kind of I know it may be too difficult given the limited visibility, but would you expect Jack Wolfskin to be EBITDA positive this year or perhaps too far fetched or too difficult to say? Just any outlook on that business moving forward more specifically?
Speaker 1
Adam, this is Chip. No, we do not expect Jack Wolfskin to be EBITDA positive this year. The apparel businesses were heavily impacted as you can see by our segment profitability information and it is also indicated by the charge against goodwill. But we remain very confident in that business long term and that is a business segment that has attractive growth rates and profitability opportunities and we have a scale position. Clearly, COVID should be a net positive relative to outdoor apparel space over the long run.
So but it is heavily impacted this year.
Speaker 8
Right. That makes sense. And is there any update you guys can provide on Topgolf perhaps the likelihood of any sort of near term monetization? Is that limited at this point either through IPO or sale? Or is it something you guys just aren't really prioritizing right now?
Speaker 1
Adam, we are certainly always prioritizing opportunities such as Topgolf and we continue to serve on the board there and we're pleased to be an investor. Their business was impacted by COVID as you'd expect, but they're back in the position of majority of the locations being open and trending very positively. And we're pleased to be a minority investor there. We don't respond to any rumors or that might be out there on that front and cannot really provide any more information beyond that at this point.
Speaker 8
I hear you. That's helpful nonetheless. And then my last one was kind of more of a housekeeping question, guess.
Speaker 9
I was curious when do
Speaker 8
we count the shares from convertible debt offering? Just more on how that's treated? Is it just when they
Speaker 1
go above the cap call price?
Speaker 8
Or is there a certain way we should be treating them, just speaking moving forward for the convertible?
Speaker 2
Sure. We're not including anything in there until essentially above about $27 The base amount we're assuming we repay back in cash And then there's incremental dividends once you get a net dividends, incremental share count once you get above $17.61. But a large portion of that will be in actuality, we have with our CapCall transaction, there's no additional shares that we're subject to until $27
Speaker 1
Perfect. Wish you best
Speaker 8
of luck. Thanks for
Speaker 7
the help.
Speaker 10
This is Jennifer. Just for purposes of the weighted average shares, it will be dilutive over $17.61 the conversion price. But upon settlement, we won't have any additional shares until over the cap call price.
Speaker 1
Cap versus adjusted. Yes.
Speaker 0
Your next question is from Daniel Ambrose with Stephens Inc.
Speaker 7
Chip, I want to start on the golf industry. Obviously, things appear to be more resilient than we would have thought. And Brian mentioned, I think, more packaged club sets. Are we seeing the demographics of the golfer changing? I mean, we seeing new golfers come into the industry?
Are you thinking about
Speaker 2
the long term impacts of that?
Speaker 7
Is this growing the market longer term you think? Is this going be sticky share?
Speaker 1
Daniel, yes, is. It's bringing new entrants in juniors, beginners, returning entrants and in a significant move right now. NGF estimates that as much as 20%. And that can't help but be positive for the long run. As we look at the short run, the surge we have right now, some portion of that is pent up demand.
And some portion of that is the increased interest in the game and the increased participation. The participation and the interest of the game, I can't help but believe are positive indicators for long run. I don't know how to quantify that at this point. We'll have to track that as we go forward, but it has to be a positive for golf, I would think over medium to long term.
Speaker 7
That's helpful. That's helpful. And then thinking about a growing market, BrightSpot obviously continuing to take share in the golf balls category. That's been a story for a number of years. But can you talk about just what you guys long term thoughts are on market share?
Where can that get to longer term when you guys pencil out the opportunity in the golf ball category?
Speaker 1
Yes. I don't want to get ahead of ourselves on providing share guidance on the golf ball category. It's obviously an important category for us. We're pleased with our progress. You've seen our commitment there, the investments that we've made into our Chicopee facility in order to ensure our competitiveness there and our ability to further differentiate ourselves going forward.
This is really our first year of operating under that new infrastructure. And on an internal perspective, I'm pleased with what I'm seeing there. It's still a work in progress, but we believe it will pay off over the long run and we do believe we have further growth opportunity in category, but I would prefer not to quantify that at this point.
Speaker 7
Got it. And then just last one for me, a follow-up to an earlier question. On Jack Wolfskin, so EBITDA down this year, not a huge surprise, but you mentioned the long term benefit, attractive growth rates, positive for outdoor apparel. If we think back to the original EBITDA that asset generated, I think it was around $40,000,000 when you bought it. Is that number multi years out, but is that still an achievable target to get back to that you guys could unlock from Jack Wolfskin, you think, today?
Speaker 1
Without getting tied down to a specific date, yes.
Speaker 7
Got it. Thanks so much guys. Best of luck.
Speaker 0
Your next question is from Casey Alexander with Compass Point.
Speaker 11
Hi, good afternoon. Can you tell me to what extent you've had to utilize the proceeds of the convertible offering? And if at some point in time you realize that you don't need to use all of the proceeds of the convertible offering, what would
Speaker 1
you do with the balance?
Speaker 2
Hi, Casey, this is Brian. We have not had to use the convert proceeds so far. And it's providing a very nice cushion and safety net. So we're not worried about weathering the pandemic at this point. As we go through and emerge from the pandemic, as always, we look at what available liquidity and capital we have and evaluate it against our priorities, which always invest back in the business first, pay down debt, which is an important piece for us.
It's taken over importance in the recent years. And then we look at returning money back to shareholders. And then lastly, I guess, would be acquisitions. But right now, it's just trying to just using it to get through the pandemic and make sure we don't have to worry about liquidity.
Speaker 11
Well, assuming that you don't have to use it, I mean, to pay down debt, I'm assuming you're talking about the term loan that was taken out for Jack Wolfskin?
Speaker 5
Yes.
Speaker 11
Yes. Okay. Chip, I'm just wondering what your expectation is for promotional activity in the back half of the year. Even if some of your inventories aren't sideways, certainly other people's inventories in some categories are sideways. And the competitive aspect of promotional activity sometimes is driven by what someone else does.
So I'm curious what your thoughts are on the outlook for promotional activity in the back half of the year.
Speaker 1
Sure, Casey. I'll give it to you by segment. So in the golf equipment, I'm not expecting it to be particularly promotional. You know, the just giving you a look at months on hand for the total industry according to Datatech was two point five months. I've never seen it that low.
And so that's an industry in our months on hand of our inventory in the field was lower than that. There are going to be some normal seasonal stuff with people phasing out and preparing for some launches and related. So you'll see something that I would call normal. But I think the golf equipment space will be not very promotional towards the second half of this year. And then in the apparel space, the inventories are a little bit higher there, but it and there will be spotty pieces
Speaker 2
of business.
Speaker 1
But also, when you bring in the fallwinter lines, which is where the majority of the revenue came from, we adjusted those. So we're not going to have excess inventory of where the majority of the meat of the market is going to be. What we're going to have excess inventory in is the springsummer stuff, and we'll have to liquidate that a little bit carefully around the fringes, but not, the fallwinter product in general. At least that's what I'm seeing.
Speaker 11
Given how light you say that the golf equipment is, how would you characterize the cadence for new product introductions over the next three quarters or so?
Speaker 1
I'm currently planning no change in the cadence of our launches relative to where we have been historically. And listening to competitors, I'm hearing them all return to similar cadence as the only we're all having a little harder time developing new products because of our inability to fly. And so we can't get into Asia to work with the foundries to develop new product. But we're getting through that well, but we'll that plus clogged airfreight channels might push some of these launches back a month or so, but it's not going to be a meaningful push.
Speaker 11
Okay, great. Thanks for taking my questions.
Speaker 5
I appreciate it.
Speaker 1
Thank you. Your
Speaker 0
next question is from George Kelly with Roth Capital Partners.
Speaker 9
Hi, everybody. Thanks for taking my questions. So just a few for you. First, I wanted to make sure that I understood your commentary just about the recent trends. So did I hear you right that both the consolidated business and the golf equipment business both improved in July versus what you disclosed about June?
Yes. And secondly about that, you haven't seen any slowdown in these states that have kind of emerged as COVID hotspots?
Speaker 1
Not in golf equipment. We have in the apparel space, we do. So the apparel space where you talk about going into a mall or store where there's been a COVID outbreak that has slowed down traffic and the sales trends. But in the golf equipment space, even though it's off same retail or Greengrass location, we have not seen it be we haven't seen any impact quite frankly.
Speaker 9
Okay. And then second question for me is more of a longer term post COVID, whenever that happens. Are there parts of your business and parts of your expense structure, I don't know if it's sales and marketing or advertising anywhere else where we think once we're all through this and I'm talking about the golf equipment business, You could actually have a somewhat different kind of margin structure on the other end. I know it's a long time off, but I don't know if this has caused you to rethink how you operate at all and you think it will be longer lasting.
Speaker 1
It's definitely causing us to rethink how we're going to operate. We were talking about that today and we will continue to talk about that. Our ability to do more with less travel or do more with less real estate is a topic of constant discussion. And and the so transition to digital is clearly accelerating in all of our businesses, but including the golf segment. So I think there will be some repercussion here and I think it'll be more positive than negative once we get all the way through this.
Speaker 9
Okay. And then last question for me. Fort Worth, can you just update provide a little more detail just on what's happening there and how much what's the timeline for you to bring more stuff there?
Speaker 1
Yes. So we're consolidating and moved DCs. So we currently we're operating our apparel business. TravisMathew had a DC in Huntington Beach. We had a separate DC in Indiana for soft goods and then a DC in Roanoke, Texas for the hard goods or golf equipment portion of our business.
We have commissioned to be built and are now moving into an 800,000 square foot facility which will consolidate all of those businesses as well as the Jack Wolfskin North America business and provide room for further growth. We've been operating and are continuing to operate two DCs down there right now, which turns out during efficient, we found out. And but we have everything moved into the new warehouse, the warehouse management system kicked off and running, we're shipping out of that one. We still have the second warehouse and we're phasing out of that and will be fully consolidated by the end of Q3. Okay.
Thank you.
Speaker 0
Your next question is from John Kernan with Cowen.
Speaker 9
Hey, good afternoon, guys. Thanks for
Speaker 5
taking my question. Good to see, Sanders Shockley one shot off the leaderboard in Harding Park.
Speaker 1
Yes, thanks. He's been playing great.
Speaker 9
Most of my questions have been answered.
Speaker 5
Just wanted to Brian, on SG and A, you managed it down really nicely, certainly better than a lot
Speaker 7
of the other companies we cover
Speaker 5
across a few consumer verticals. How do we think about SG and A dollars in the back half of the year and the need for that some of the fixed versus variable as your top line begins to grow again? Thanks.
Speaker 2
Yes. We did have some good success with the cost reduction actions in reducing our operating expenses this quarter and first half. As the business is picking up though, we will begin to reinvest back in the business. As you pointed out, we'll certainly have increased variable expense with the higher sales and then we will start to reinvest in employees and marketing and other expenses like that. So we will not be down to 20% planned operating expenses that we originally had talked about because we have the opportunity to reinvest back and keep the business growing and getting back to more normal levels.
We think we are very focused on cost management and so the investments will be measured and hopefully commensurate with the way the business is picking up.
Speaker 5
Got it. Thanks guys.
Speaker 1
Thank you.
Speaker 0
Your next question is from Alex Maroccia with Berenberg.
Speaker 5
Hi, good afternoon guys. Thanks for taking my questions. Can you provide any insight into the impact that stimulus checks may have had on golf equipment and how you're viewing the potential for another round in Q3?
Speaker 1
It was interesting when the stimulus check there's so much else going on at the same time, but we saw with the stimulus check a fairly I think there was a noticeable impact in entry level comp equipment at that time. It could have been other factors. You know, you can't separate that, But we did see a surge in, you know, entry level package set, the lower priced golf balls, etcetera, associated. I'm I'm not sure that's what the government intended, but it was at that point, which if I remember correctly, it was April, we were glad to see it.
Speaker 2
Great thing, just earmark it, Got
Speaker 7
you.
Speaker 2
That's helpful. Thank you. And what
Speaker 5
has been your thoughts on marketing spend as it relates to products released earlier this year? We launching any products given the early season weakness?
Speaker 1
Repeat the question.
Speaker 5
What have been your thoughts on marketing spend as it relates to products released earlier in the year? And did you have to kind of relaunch anything given early season weakness?
Speaker 1
Well, we shut down the marketing spend as you saw very hard during Q2 in the golf segment, but it didn't hurt us because nobody was playing golf at that time. So and as we've seen the business improve, we've started to ramp that back up and we do but our shares performed very well during the quarter. So as it relates to the Maverick line and our woods and club lines, we were very pleased with it and didn't really skip a beat. The golf ball side, we're pleased with the progress now. The X product, didn't get a good launch on because of the timing.
So we'll have to revisit how we bring energy around that, but it's a small percentage of the overall side. Your point is a good one. We'll have to take a look at that, but the macro trends that we're looking at indicate what we did was effective and we're seeing our shares globally recover and improve as time progresses, which we're obviously pleased with.
Speaker 5
All right. That's great. Thank you. Stay safe out there.
Speaker 1
Thank you.
Speaker 0
There are no further questions in queue at this time. Mr. Chip Brewer, your closing comments please.
Speaker 1
Well, thank you everybody for your time today and dialing in. We're obviously pleased with the progress of the business and we'll look forward to updating you again
Speaker 5
in
Speaker 1
a few months. Thank you very much.
Speaker 0
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.