Topgolf Callaway Brands - Earnings Call - Q3 2020
November 9, 2020
Transcript
Speaker 0
Ladies and gentlemen, thank you for standing by and welcome to the Callaway Company Third Quarter twenty twenty Financial Results Conference Call. At this time, all participant lines are in listen only mode. After the Please be advised today's conference is being recorded. It's now my pleasure to hand the conference over to Head of Investor Relations, Patrick Burke. Please go ahead.
Speaker 1
Thank you, Holly, and good afternoon, everyone. Welcome to Callaway's third 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 third quarter twenty twenty financial results.
A copy of the press release and the associated presentation are available on the Investor Relations section of the company's website at ir.callowaygolf.com. Most of the financial numbers reported and discussed on today's call are based on US 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 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's 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 Callaway Investor Relations website under the webcast and presentations tab. Also in the same tab, you can choose to join the webcast to listen to the call and view the slides. As a webcast participant, you are able to flip through the slides. I would now like to turn the call over to Chip.
Thanks, Patrick. Good afternoon, and thank you all for joining today's call. Starting on Page five of the presentation, we are pleased to be with you today to discuss our Q3 results, results that have exceeded our expectations and strengthened our confidence in the future. This call will allow us to do a deeper dive and answer questions regarding the results as well as share some views on what we believe is a positive outlook for our business. With the recently announced plans to merge with Topgolf, we are naturally anticipating further questions on that subject as well.
To the degree we can, we will certainly answer these questions. But due to time constraints, the primary focus of this call is intended to be the Callaway Golf business. To aid analysts and by extension investors in further understanding the Topgolf business, along with the strategic and financial merits of the merger, we are planning a two hour Topgolf deep dive and analyst presentation for 11:00 Pacific Time this Thursday, November 12. This presentation will include certain key members of the Topgolf management team and will be recorded and posted on our website. Having said this and turning to Page six, let's now jump into our results.
As covered in our press release, Q3 represented record results in terms of both sales and earnings. We were pleased with our results in virtually all markets and business segments. Our golf equipment segment has been experiencing unprecedented demand globally as interest in the sport and participation has surged. We saw strong market conditions in all markets globally. According to Golf Data Tech, U.
S. Retail sales of golf equipment were up 42% during Q3, the highest Q3 on record. U. S. Rounds were up 25% in September and are now showing full year growth despite the shutdowns earlier this year.
We also believe there will be a long term benefit from the increased participation as we are welcoming both new entrants and returning golfers back to our sport. Golf retail outside of resort locations remains very strong at present, and barring a shutdown situation, has not been sensitive to the upticks in COVID cases. Inventory at golf retail is at all time lows and is likely these low inventory levels will continue into next year. Callaway's global hardgoods market shares remained strong during the quarter. We estimate our U.
S. Market share is roughly flat year over year. Our share in Japan is up slightly, and our share in Europe is down slightly. On a global basis, I believe we remain the leading golf company in terms of market share and total revenues and the number two ball company. In The US, third party research showed our brand to once again be the number one club brand in overall brand rating as well as the leader in innovation and technology.
Over the last several years, we have shown resilience with these important brand positions. We have also started to show our twenty twenty one product range to key customers and are receiving strong feedback. Turning to our soft goods and apparel segment, with total revenue only down 3.4% year over year, the segment also experienced a rapid recovery in demand during the quarter. The speed and magnitude of the recovery exceeded our expectations. Like our golf equipment business, this segment appears to be well positioned for both the months and years ahead, both during the pandemic and after.
Looking at individual businesses in this segment, both our TravisMathew and Callaway branded businesses experienced significant year over year growth during the quarter. Jack Wolfskin was down year over year, but only 16% on a revenue basis with improved trends continuing into October. The hero of the soft goods and apparel segment is certainly e comm, a channel that was strengthened by investments we've made over the last several years. As a result of these investments, we were able to deliver 108% year over year growth in this channel during the quarter. E comm is now a significant portion of the channel mix of this segment.
We believe our expanded capabilities and strength here will bolster this business growth prospects and profitability going forward. Long term, we continue to expect our apparel and soft goods segment to grow faster than our overall business and with that growth, to deliver operating leverage and enhance profitability. And although the pandemic delayed our efforts, we still believe we'll be able to deliver $15,000,000 of synergies in this segment over the coming years. During the quarter, we also made good progress on key initiatives, including the transition to our new 800,000 square foot Super Hub distribution center located just outside of Fort Worth, Texas. We are now completely consolidated into this new facility.
We also made further progress in our Chicopee golf ball facility modernization with productivity rates in this plant ramping positively during the quarter. The primary investment phase on both of these significant projects is behind us now. Looking forward, we are in a strong financial position and are pleased with the pace of our recovery and the business trends we have seen. With the resurgence in the virus, there clearly could be some volatility over the next few months. Portions of q four are likely to be at least partially impacted by the increase in restrictions being put into place globally.
Fortunately for us, these are low impact months for our golf equipment business, and we currently expect to continue to benefit from increased year over year demand. In our apparel and soft goods segment, the impact will be larger than our golf equipment business, But these businesses too are fortunate to be well positioned in this environment and also benefit from strong e comm capabilities, which should offset some portion of any potential negative impacts in markets where in store shopping might be constrained. We also benefit from global scale and diversity across all of our segments. As demonstrated by our Q3 results, we are fortunate in that our principal business segments are well positioned for consumer needs and trends both during the pandemic and afterwards. In addition, we are confident that we have both the brands, human capital, and financial strength necessary to not only weather this storm, but to also perform well during it and to emerge stronger than when we entered the crisis.
In closing, while we are pleased with our recent results and outlook, the safety and health of the company's employees, customers, and partners continues to be paramount in our minds. As we operate our businesses, 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 line to protect, serve, and care for the rest of us. Brian, over to you.
Speaker 2
Thank you, Chip. We are happy to report record net sales and earnings for the 2020. We feel fortunate that both our golf equipment and soft goods businesses are recovering faster than expected as both businesses support healthy, active outdoor lifestyles and activities that are compatible with social distancing. This faster than expected recovery has placed us in a position of strength. Our available liquidity, which includes cash on hand plus availability under our credit facilities, increased to $630,000,000 at 09/30/2020 compared to $340,000,000 at 09/30/2019.
We are also excited about our prospective merger with Topgolf, which also provides a healthy active outdoor activity that is compatible with social distancing. And Calaway Topgolf merger is a natural fit. With a significant overlap in golf consumers, there should be significant advantages to both businesses through increased consumer engagement, marketing and sales opportunities and faster growth than could be achieved on a stand alone basis. And the best part is that these synergies provide upside to the financial model we provided. The financial returns of this transaction are so compelling, we did not need the synergies to justify the transaction.
Growing the Topgolf Venue and Toptracer businesses alone will create significant shareholder value. We look forward to discussing the TopScrap business further during the Virtual Investor Conference on Thursday. In evaluating our results for the third 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 nonrecurring transaction and transition related expenses in 2019. Second, as a result of the OJO, TravisMathew and Jack Wolfskin acquisition, we incurred noncash amortization in 2020 and 2019, including amortization of the Jack Wolfskin inventory step up in the 2019.
Third, we also incurred other nonrecurring charges, including costs related to the transition to our new North American distribution center in Texas, implementation costs related to the new Jack Wolfskin IT system, and severance costs related to our cost reduction initiatives. Fourth, the $174,000,000 noncash impairment charge in the 2020 is nonrecurring and did not affect 2019 results. Fifth, we incurred and will continue to incur noncash 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 third quarter and first nine months 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 10. Today, we are reporting record consolidated third quarter twenty twenty net sales of $476,000,000 compared to $426,000,000 in 2019, an increase of $50,000,000 or 12%. This increase was driven by a 27% increase in the golf equipment segment resulting from a faster than expected recovery and the strength of the company's product offerings across all skill levels. The company's soft goods segment is also recovering faster than expected, with third quarter twenty twenty sales decreasing only 3.4% versus the same period in 2019. Changes in foreign currency rates had an $8,000,000 favorable impact on third quarter twenty twenty net sales.
Gross margin was 42.2% in the 2020 compared to 44.9% in the 2019, a decrease of two seventy basis points. On a non GAAP basis, gross margin was 42.7% in the third quarter compared to 44.9% in the 2019, a decrease of two twenty basis points. This decrease is primarily attributable to a decline in gross margin in the soft goods segment due to the impact of COVID-nineteen on that business, including our proactive inventory reduction initiatives, partially offset by favorable changes in foreign currency exchange rates, an increase in e commerce sales and a slight increase in overall golf equipment gross margins. Operating expenses were $137,000,000 in the 2020, which is a $14,000,000 decrease compared to $151,000,000 in the 2019. Non GAAP operating expenses for the third quarter were $135,000,000 a $12,000,000 decrease compared to the 2019.
This decrease is due to decreased travel and entertainment expenses and the actions we undertook to reduce costs in response to the COVID pandemic. Other expense was $6,000,000 in the 2020 compared to other expense of $7,000,000 in the same period of the prior year. On a non GAAP basis, other expense was $3,000,000 in the 2020 compared to $7,000,000 for the comparable period in 2019. The $4,000,000 improvement was primarily related to a net increase in foreign currency related gains period over period, partially offset by a $1,000,000 increase in interest expense related to our convertible notes. Pretax earnings was $58,000,000 in the 2020 compared to pretax earnings of $33,000,000 for the same period in 2019.
Non GAAP pretax income was $65,000,000 in the 2020 compared to non GAAP pretax income of $37,000,000 in the same period of 2019. Diluted earnings per share was $0.54 on 96,600,000.0 shares in the 2020 compared to earnings per share of $0.32 on 96,300,000.0 shares in the 2019. Non GAAP fully diluted earnings per share was $0.60 in the 2020 compared to fully diluted earnings per share of $0.36 for the 2019. Adjusted EBITDAS was $87,000,000 in the 2020 compared to $57,000,000 in the 2019, a record for Callaway Golf. Turning now to Slide 11.
The first nine months of twenty twenty net sales are $1,200,000 compared to $1,400,000 in 2019, a decrease of $174,000,000 or 13%. 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 7% and our soft goods segment, which decreased 21%. 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 positively impacted 2020 net sales by 2,000,000.
Gross margin was 42.7% in the 2020 compared to 45.8% in the first nine months of two thousand nineteen, decrease of 310 basis points. Gross margins in 2020 were negatively impacted by the North America warehouse consolidation, and in 2019 were negatively impacted by the nonrecurring purchase price step up associated with the Jack Wolfskin acquisition. On a non GAAP basis, with Fluency's recurring item excuse me, nonrecurring items, gross margin was 43.3% in the first September 2020 compared to 46.6% in the first September 2019, a decrease of 330 basis points. The decrease in non GAAP gross margin is primarily attributable to the decrease in sales related to the COVID-nineteen pandemic, costs associated with idle facilities during the government mandated shutdown and the company's inventory reduction initiatives. The decrease in gross margin during the first nine months was partially offset by an increase in the company's e commerce business.
Operating expense was $592,000,000 in the first nine months of twenty twenty, which is a $111,000,000 increase compared to $481,000,000 in the first nine months of twenty nineteen. This increase is due to the $174,000,000 noncash 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 '9 months of twenty twenty were $410,000,000 a $58,000,000 decrease compared to $468,000,000 in the first nine months of twenty nineteen. This decrease is due to our cost reduction initiatives, decreased travel and entertainment expenses, as well as a reduction of variable expenses due to lower sales. Other expense was probably $7,000,000 in the first September of twenty twenty compared to other expense of $28,000,000 in the same period of the prior year.
On a non GAAP basis, other expense was $3,000,000 for the first nine months of 2020 compared to $24,000,000 for the same period of 2019. The $21,000,000 improvement is primarily related to a $22,000,000 increase in foreign currency related gains period over period, including the $11,000,000 gain related to the settlement of the cross currency swap arrangement. Pretax loss was $80,000,000 in the first nine months of twenty twenty compared to pretax income of 127,000,000 for the same period in 2019. Excluding the impairment charge and other items previously mentioned, non GAAP pretax income was $113,000,000 in the first nine months of twenty twenty compared to non GAAP pretax income of $155,000,000 in the same period of 2019. Loss per share was $0.92 or $94,200,000 in the first nine months of twenty twenty compared to earnings per share of 1.13 or 96,200,000.0 shares in the 2019.
Excluding the impairment charge and the items previously mentioned, non GAAP fully diluted earnings per share was $0.98 in the 2020 compared to fully diluted earnings per share of $1.35 for the 2019. Adjusted EBITDAS was 175,000,000 in the first nine months of twenty twenty compared to $216,000,000 in the 2019. Turning now to Slide 12. I will now cover certain key balance sheet and cash flow items. As of 09/30/2020, available liquidity, which represents additional availability under our credit facility plus cash on hand, was $637,000,000 compared to $340,000,000 at the end of the 2019.
This additional liquidity reflects improved liquidity from working capital management, our cost reductions and proceeds from the convertible notes we issued during the second quarter. We had a total net debt of $498,000,000, including 443,000,000 of principal outstanding under our term loan B facility that was used to purchase Jack Wolfskin. Our net accounts receivable was $240,000,000, an increase of 7% compared to $223,000,000 at the end of the 2019, which is attributable to record sales in the quarter. Days outstanding decreased slightly to fifty five days as of 09/30/2020 compared to fifty six days as of September 3039. We continue to remain very comfortable, if not pleasantly surprised, with the overall quality of our accounts receivable at this time.
Also displayed on Slide 12, our inventory balance decreased by five percent to $325,000,000 at the end of the 2020. This decrease was primarily due to the high demand we are experiencing in the golf equipment business, partially offset by higher soft goods inventory related to COVID-nineteen. Our teams have done an excellent job being proactive with regard to managing inventory as soon as COVID hit us. They continue to be highly focused on inventory on hand as well as inventory in the field. We are very pleased with our overall inventory position and the inventory at retail, particularly on the golf side of the business, which remained low at this time.
Capital expenditures for the first nine months of 2020 were $31,000,000 compared to $37,000,000 for the first nine months of 2019. We expect our capital expenditures in 2020 to be approximately 35 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 $203,000,000 for the first September of twenty twenty. On a non GAAP basis, depreciation and amortization expense, excluding the $174,000,000 impairment charge, was $29,000,000 for the first September of twenty twenty and is estimated to be $35,000,000 for the full year of 2020. Depreciation and amortization expense was $25,000,000 for the first nine months of 2019 and 35,000,000 for full year 2019.
I'm now on slide 13. 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. Although we expect some level of continued volatility due to the ongoing pandemic, third quarter trends have thus far continued into the fourth quarter.
Speaker 1
Perhaps more importantly,
Speaker 2
all of our business segments as well as the Topgolf business support an outdoor, active, and healthy way of life that is compatible with the world of social distancing. And we now appreciate even further that all of our businesses are likely to be favored in both the realities of the current environment as well as anticipated consumer trends post pandemic. These circumstances, along with our increased liquidity, will allow us to weather the pandemic and emerge in a position of strength to the benefit of our businesses and the Topgolf business post merger. That concludes our prepared remarks today, and we will now open the call for questions.
Speaker 0
As
Speaker 2
Chip mentioned in his remarks, due to time constraints, the primary focus of their Q and A should be the Callaway business, and we have scheduled a virtual conference on Thursday to discuss the Topgolf business further. Operator, over to you.
Speaker 0
And our first question is going to come from the line of Daniel Imbro with Stephens.
Speaker 3
Yes. Good afternoon, guys. Thanks for taking our questions.
Speaker 2
Hi, Dennis. Just starting on
Speaker 3
the industry, you know, obviously, the headlines today around a vaccine. If we do get that in the next few months, do you think the game of golf has done enough to convert some of the more transitory golfers into repeatable core players? And if so, you know, how do you feel about your production capacity and supply chain heading into 2021 assuming demand stays strong?
Speaker 1
Daniel, obviously, yeah, I'm speculating on the long term impact of the positive increase in participation that we're seeing now. But I I can't imagine it can be anything but positive. Right? We're getting returning golfers, and we're getting new entrants. And the new entrants are from multiple demographics.
It's a dictive game. It's a game that once you play it, you're more likely to play again. So, you know, the only conclusion that I can make is that it is a net positive for the long term health of the industry and that it will favor our, long term growth rates. But I'm unable to quantify that for you at this point of time. And clearly, golf is gonna be one of those uniquely, attractive segments that's gonna perform well, in the pandemic, and, one would also believe post pandemic based on the logic we're talking about.
And our supply chain is laboring to keep up currently, but it's one of our strengths of our business. And, we have, you know, high confidence in it, and, you know, we're making progress against those fronts. And, it should be an asset for the company and for our shareholders going forward.
Speaker 3
Great. And then my follow-up is on the online business and really where direct to consumer can go. You know, we're about eight months into this. You know, has anything surprised you about the strength in the direct to consumer business? And, you know, do you think longer term your DTC channels can become a bigger part of sales, either in apparel or golf equipment?
And then what does that mean for margins? Thanks.
Speaker 1
Sure, Daniel. The direct to consumer has been a strategic focus for us, particularly on the apparel and soft goods segment. It's something that we viewed as a long term trend and an area of the focus for the company and one of the reasons that we've invested so aggressively in that. And clearly, the strength of that channel in the mix has been, you know, something that we've been very gratified with during the pandemic period, and it's accelerated the movement there. Our e com channels now in that segment are quite significant.
And, you know, for instance, on the Jack Wolfskin side, we've more than doubled our e commerce business in that business since we've invested in it over the last several years. The TravisMathew business is now has a significant online percentage. And both of those businesses also have a strong and profitable retail base, which, we think are strategic assets for them, going forward. So, that clearly is attractive from a strategic basis, and it's attractive from a profitability and a margin basis.
Speaker 3
Great. Really helpful. Thanks, guys. Best of luck.
Speaker 1
Thanks, Dan.
Speaker 0
Our next question will come from the line of Susan Anderson with B. Riley.
Speaker 4
Hi. Good evening. Nice job on the third. I was wondering if you could talk about so it looks like their performance in Europe significantly underperformed The US. Just curious the breakout between Jack driving that and the golf segment.
Maybe if you could talk about the comparison of golf in Europe versus The US in the quarter. Thanks.
Speaker 1
Sure, Susan. The, so you're if I you broke up a little bit there, but I think the question was Europe specifically?
Speaker 4
Correct. Yes.
Speaker 1
Okay. Great. And, that was, specifically the, overall movement there where we were down in the, quarter in Europe was due to Jack Wolfskin business. The Jack Wolfskin business, as I mentioned in my comments, was down on a US dollar basis 16% for the quarter, which exceeded our expectations. And I think it's worth noting, exceeded the number one and number two players in that category during the quarter.
So the brand has shown itself to be exceptionally resilient and strong. Our golf business in Europe was up significantly for the quarter as you would have expected. And, what you're seeing in the regional breakout is just the, the sum of those two businesses added together.
Speaker 4
Great. Perfect. And then just a follow-up on Jack. Maybe if you could talk about it. Sounds like you feel like in the fourth quarter, all of the businesses continue to perform similar to third.
I guess, for Jack specifically, are you expecting some sequential improvement there from third into fourth? And then looking out to next spring, how are you feeling about the business? And maybe just any color you could give around, the wholesale part of the business and what you're hearing from your wholesale partners? Thanks.
Speaker 1
Sure. Susan, as we've mentioned, we're very pleased with the Jack Wolfskin business on a global basis and how strong that business has bounced back. The we are expecting some volatility in q four because of the business' strong position in Germany. As you know, that market is, has all restaurants and out a lot of the restaurants and bars, etcetera, are closed. The stores are open, but it's a partial stay at home order, if you would, in that market.
The UK market is is really shut down, and France, which we don't do any business in to speak of, is shut down, and Germany is going to be impacted for the month of November. So I would expect there to be some volatility in the results for q four. I wouldn't call it overly meaningful, but it will impact, some of the trends. We were, continuing to see very strong results, prior to the recent, constraints that are put into place. And then if you look forward, you know, we're pleased with the overall trajectory of that business, and we're expecting next year to have some volatility in it and a very difficult time predicting it given, you know, what we're seeing as upticks in the the virus and, you know, volatility around that.
But the long term trend of that business is very positive. We're hearing good sell through results, and, you know, the investments that we've made into that business are starting to resonate.
Speaker 4
Great. That's helpful. Thanks so much. Good luck next quarter.
Speaker 1
Thanks, Susan.
Speaker 0
Our next question will come from the line of Joe Altobello with Raymond James.
Speaker 5
Hey, guys. Good afternoon. I just wanted to go back to gross margin for a second. You did a nice job of explaining the decline year over year and all the puts and takes there. But but I think you mentioned that there was only a slight increase in the equipment gross margin in the quarter despite the fact that sales were up pretty nicely.
So maybe speak to why the gross margin on the equipment side wasn't up more in the quarter.
Speaker 2
Sure, Joe. This is Brian.
Speaker 6
Hey, Brian.
Speaker 2
Over like we said earlier, I think it was up golf equipment was up about 20 basis points. And I think that the the golf club portion was up more than that. It was offset a little bit by the ball segment. As you know, we were working on improving gross margins in that business, and then COVID hit, which slowed us down a little bit, but we've been making good progress since then. So that's that's coming back, but there was a little bit delay in the improvement in that all business gross margins during COVID.
And is that temporary, or is
Speaker 5
that is that something that's gonna recur in the fourth quarter?
Speaker 2
It's it's it's temporary. It it was again, recently, they're making very good progress, and so it'll continue to improve, I think, as we go through the quarter.
Speaker 5
And just a follow-up. I think, Chip, you mentioned earlier that if look at retailer inventories, there are historical lows at this point heading into 2021. Is there a way to quantify perhaps the sales tailwind that you guys could get from replenishing those inventories in 2021?
Speaker 1
Joe, we're not quantifying that at this point, but, yeah, you're correct in that the low inventory levels are unlikely to be they won't desire to sustain those. And so in due course, we will catch up to some degree on the field inventories. They are at levels right now that are below where our trade partners would like to keep them.
Speaker 2
Okay. Thanks, guys.
Speaker 0
And our next question will come from the line of Casey Alexander with Compass Point.
Speaker 7
Hi, good afternoon. A lot of people are spending time on the revenue side. I'd like to flip over to the cost side here for a second because your SG and A as a percentage of sales is down to what you're selling used to be as a percentage of sales, which I understand comes from rightsizing the business and unfortunately having to eliminate some positions. But are you learning to operate more efficiently? And so can you sustain at a lower cost level?
And also, have are you learning to operate with potentially a lower real estate footprint as your leases come up in the future?
Speaker 1
Casey, it's Chip. You're exactly right. We we experienced really unprecedented levels of operating expenses as a percentage of revenue during the quarter. And a lot of that, unfortunately, is not sustainable. You know, some of that was during the quarter, we were, continuing to operate, you know, with reduced salary levels for employees, etcetera.
And, you know, that's not gonna be able to be continued nor would it be desirable to do so. But there are a few areas that we are learning, and will be more efficient going forward. Our our travel and expense, expenditures was significantly down during the quarter, and it won't be sustainable at this level. But there should be some net benefit in that area going forward. And on the real estate side, I I think you're right in that I don't believe we will shrink our real estate, but I will be hesitant to in expand real estate as the business grows because we have learned that we can do things remotely and in a more efficient manner going forward.
So there will be some positives from the learnings that we've experienced during this pandemic.
Speaker 7
Okay. Thank thank you for that. I would then peel down to the r and d line because we know how the company builds its products based on innovation, and your R and D is 22% below where it was tracking prior to the pandemic. Should we expect that to come back up to former levels? Or does artificial intelligence actually, once you've made the investments, give
Speaker 8
you some sort of cost advantage?
Speaker 1
We should continue to leverage that over time, but it will, largely bounce back to more traditional absolute levels. And then we should be able to leverage that, as we continue to grow the business.
Speaker 7
Okay. And then last question. In in the first quarter, any sort of onetime windfall from the absence of the PGA merchandise show?
Speaker 1
Yes, Casey. It has to be, but it's not a meaningful number for us at at this stage. So but, with the PGA show going virtual, you know, we will not have the expenditures associated with the PGA show and the travel and entertainment associated with that. That is not a meaningful number, but every little bit helps, and that will be a net benefit in q one.
Speaker 7
Well, we'll miss the entertainment portion of that travel and entertainment. But No. I look and I look forward to your presentation on Thursday. And thanks for taking my questions.
Speaker 1
Thanks, Katie.
Speaker 0
And our next question is going to come from the line of John Kernan with Cowen.
Speaker 8
Yes, excellent. Thanks for taking my question. And congrats on a nice quarter. We'll focus on the Callaway brand and business here.
Speaker 1
I wanted to just
Speaker 8
pose a longer term question. ASPs have risen quite a bit the past several years. The innovation profile support obviously supported that. Just wondering where you think the long term gross margin profile of the business can go to given that soft goods are now becoming a bigger portion of the overall business? You sound more confident on the Jack Wolfskin piece of the business.
Can you when you look at that those targets you gave us at the on the prior call with Topgolf included, how does the overall margin profile and particularly the gross margin profile of the Callaway business fit into that? Thank you.
Speaker 1
John, this is Chip. The, clearly, we're anticipating over, time to be able to continue to grow our gross margins. And we've been able to do that through increased operating leverage in our business as we've grown the business and making investments in efficiencies, etcetera. As we talked about right now, we just finished big investments in terms of the distribution center. We're, for the largest part, finished with our golf ball modernization.
And as those ramp up in scale, you will see gross margin improvement within that. You're also gonna see gross margin improvement with the soft goods segment at large and the movement of that business to its direct to consumer, portions, which are meaningful portions of those businesses. So, a lot of long term positive outlooks relative to gross margin. We're not quantifying those at this point. And to the best of our ability, know, baked those into, the only guidance that we have given, which is the the Topgolf merger twenty twenty two guidance, but all positive trends moving forward on the the gross margin basis.
Speaker 8
It's helpful. Thanks. And maybe just one question focused more on the shorter term. It sounds like you're gaining confidence in Jack Wolfskin. The apparel business, honestly, in the third quarter had a better quarter than a lot of your peers did.
So I'm just wondering how we should think about the soft goods part of the business going into the first half of next year? And any signs of what signs we should be looking for in terms of Jack Wolfskin and the targets that you laid out for that brand and progress towards those targets into next year? Thank you.
Speaker 1
Sure, John. Yeah. I think that it's fair to say we're we're gaining confidence in all of our our businesses. We're we're in a very fortunate position right now. The golf business is you know, experiencing unprecedented growth and in a position of strength, and our brands are very strong.
And the TravisMathew business is is, very resolute. I mean, it it grew nicely during the quarter, and bouncing back very strong. We believe very much in the long term potential there. And some of the investments we've made in the Jack Wolfskin business are also coming in nicely. And as you can see over the last two quarters, it's outperformed its largest competitors.
And so we've clearly made some nice progress there, and we're showing some strength there. I think looking into the first half of next year, you know, you've gotta be very confident in the long term outlook, but you're gonna need to also be, aware there's likely to be continued volatility. So we don't feel confident predicting anything other than, long term trends right now, and the long term trends, are very positive for these businesses.
Speaker 8
Got it. Thanks, Jeff.
Speaker 1
Thank you.
Speaker 0
And our next question will come from the line of Alex Maroccia with Berenberg.
Speaker 3
Hi. Good afternoon, guys. How much of the Jack Wolfskin U. S. E comm business contribute to that 108% year over year increase?
Have you started making any inroads in building out a wholesale network for that business here in The States?
Speaker 1
The Jack Wolfskin North America was a very minor contributor, but we had started to see some nice progress there. So, we're starting to get good, or much improved return on our asset spends there and, you know, starting to see positive signs coming out of that, business. But it's very small at this point contributor relative to that 100 and, 8% that we just talked about. It is gonna be an ongoing investment, thesis for us. Not central to our success story, but we like, what we're seeing there.
And if it does hit, we've got significant upside. So, pleased with what we're seeing there. What was the second part of the question, Alex?
Speaker 3
The wholesale network. I know you've been trying to build that out. Have you made any inroads?
Speaker 1
No. We have not intentionally, Alex. We are, focusing that business in, North America on, ecom at this stage.
Speaker 3
Okay. Understood. And then a second one on golf. Given the uptake in newer entrants to the sport, can you talk about any changes you're seeing in the product price mix and how you're trying to upsell people that might be new to the brand?
Speaker 1
You know, we haven't really had a chance to get to Pet Head, Alex. The we're just chasing demand right now. You know, our brand is uniquely good for this type of environment, though, because the research shows that we appeal to all types of golfers. Now we are a premium brand, so it's, but we can have new entrants and higher handicappers as well as the world's elite players all fall in love with our brand and recognize its benefits. So, you know, we think there's a nice opportunity there, but we have not yet had the opportunity to work on transitioning them between their segments.
Speaker 3
Okay. Thanks, Jeff.
Speaker 1
Thank you.
Speaker 0
And our last question for the day will come from the line of Randy Konik with Jefferies.
Speaker 6
Yes. Thanks a lot. Good afternoon, everybody. Got on a little late. Just back on Jack Wolfskin for a second shift.
The when you think about, you said, asset spend, are you primarily focused on incremental spend there to raise awareness in the North American market? Just want to get some thoughts on, you know, where you're, incrementally investing on, that that, brand at at the moment.
Speaker 1
Yeah. No. It's a lot of, search and, specifically, e comm marketing spend to drive both awareness and sales since we're on a e com direct to consumer model there. So it's one of those ones you can measure, you know, very quickly and adjust your model almost on a daily basis as they are building that e comm engine there.
Speaker 6
Understood. Good. And then on back on Callaway, did you give a perspective on any differences you're seeing in the ASP increases in the different categories within STICS that we that are interesting or of note? Or anything sticks out between, you know, return customers that you'd probably have on file versus new ones coming in? Anything unique about any trends you're noticing in the in the, order patterns?
Speaker 1
You know, Randy, at the moment, the business is so strong. We're seeing it in every segment grow and, you know, across markets and demographics. So it's a very unique period, at the moment. So nothing unique. We're we're experiencing strength across the line.
Speaker 6
Got it. And my last question would be just on the, the investments you talked about with the ball plan kinda having been made in the past and kind of, being been now complete, when would you expect or when should we anticipate some of those efficiencies kind of impacting the numbers, if you will, on the margin side of things? When would that something like that from a timing standpoint? Is that first half next year, second half, 2022? Just getting some first just any kind of help there would be great.
Speaker 1
It should continue to ramp. So we saw ramping during the quarter. You know, the ball plant was shut down during q two, opened up during q two was were a lot of inefficiencies and scrap associated with the shutdown restart. Then we're also learning to operate new equipment and new processes there, and, the productivity rates have ramped nicely, you know, during q three, and we'll we expect to, continue to improve going forward. So you we should start to see improved operating results on a year over year basis, you know, starting now.
Speaker 6
Great. Thanks, guys. Talk to you Thursday.
Speaker 1
Yep. Thank you. See you, man.
Speaker 0
I'd now like to turn the call to Chip Brewer for closing comments.
Speaker 1
Well, thank you everybody for dialing in. We appreciate your interest and the opportunity to spend time with you. We also look forward to talking to you Thursday. And in the good things side of the world, I also wanna congratulate Patrick Burke on twenty five years with the company today. So selling it celebrating an anniversary that, I know you can congratulate them on on your after calls.
And, thank you so much for your time.
Speaker 0
Thank you for participating in today's conference call. You may now disconnect.