Waiting for Godot

About that elusive recession, and a few words on Topgolf's free cash flow

DALL-E via Bing

Highlights:

• Making the case for no recession.

• Topgolf as a read through to how people are spending money.

• New metrics at Topgolf are a red flag.

Face it folks, this recession that has been supposedly just around the corner for nearly two years...

And now, every other story is about the increased likelihood of a soft landing.

Are we there... yet?

For an answer, I turned to one guy who so far has gotten it right, Donald Broughton of Broughton Capital of Broughton Capital... a longtime transportation and freight analyst and consultant who keeps his own sets of data and proprietary algorithms.

I like talking to Donald because he has been around, does his own work… and is not quoted every five minutes everywhere you turn.

I first quoted him on his lack of concern about a recession in May 2022, in a piece headlined, “What One Obscure, Overlooked but Accurate Recession Indicator Is Saying.”

I followed up earlier this year, in a piece headlined, “Why Talk of a recession might be wrong.” He hadn’t changed his tune...

So, given the latest headlines, I wondered what Donald thinks now. In his words...

Nothing that gives me any concern.

If anything, our indicators are signaling an acceleration.

Consumer disposable income on a per capita basis has grown 6.5% to 8.6% in every single month of ’23.

Until recently, they were choosing to spend it on experiences and services. As they begin to spend it on goods, as we predict and freight flows are beginning to signal, the headlines are going to swing toward utter disbelief about how strong the holiday shopping season is.

Fewer Experiences

What Donald is saying about “experiences and services” were evident with the recent results of Bowlero (BOWL) and Topgolf Callaway Brands (MODG), both flagged in my Red Flag Alerts.

Both are down sharply off their highs, with Topgolf having tumbled around 45% since I first red-flagged it in May.

Both companies are victims of getting caught up in post-pandemic pandemonium, when suddenly everybody wanted to get out of the house... many flush with extra cash from the government.

That gave the likes of Bowlero and Topgolf pricing power. Now, with changes in spending, both have had to resort to discounting. As Topgolf CEO Chip Brewer put it on the company’s most recent earnings call, when it reported lower than expected same store sales and lowered guidance...

Given the ‘day of the week’ trends and also believing that, in the current environment, consumers are being offered and are probably looking for greater value to tempt them out during the week, we are immediately doubling down on communicating our Tuesday value offering.

In other words, people have better things to do and other ways to spend their money, especially when it can cost a family of four nearly $200 for a few hours at a Bowlero bowling alley... or well over $100 at Topgolf.

Speaking of Topgolf...

My original focus on Topgolf was nothing outrageous; it had merely hit a few screens at Kailash Concepts, including one that flagged rising debt and falling free cash flow.

Debt, while down last quarter from the prior quarter, is up sharply from a year ago. Free cash flow popped into the positive territory, but that was largely the result of changes in working capital.

The company insists it will be free cash flow positive by year end, but the question is... how will they define free cash flow?

Topgolf has rolled out two new “concepts” that it says “were suggested to us by investors” and “will help better forecast our growth in cash flow”…

• The first is EBITDA less cash venue financing interest, which Brewer says “avoids the complication of us having both operating and finance leases by reducing EBITDA by the cost of both. It essentially captures all cash payments that resemble rent, which is a reasonable way to look at the business both from an EBITDA and a leverage perspective.”

• The second is something it calls embedded free cash flow, “which is free cash flow before growth CapEx or what our cash flow would be if we didn't continue to add new venues or retail stores. Embedded cash flow is what's available to either reinvest in future growth or return to shareholders.”

Here’s what I know...

It shouldn’t be that complicated. When companies start rolling out new metrics to better explain a standard metric like free cash flow it’s often a red flag.

Sure, every company has its idiosyncrasies, some more than others, but the reality is this: Free cash flow is free cash flow is free cash flow... period.

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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!)

Feel free to contact me at herbgreenberg@substack.com. You can follow me on Threads @herbgreenberg.