Lucky Strike Entertainment Corp quarterly report, Q3 FY2023

Filing and reporting period

Issuer in the supplied filing: Bowlero Corp. (NYSE: BOWL), not Lucky Strike Entertainment Corp. The filing is a Form 10-Q for the quarter ended April 2, 2023, and covers the three and nine months ended on that date. This does not match the request metadata’s “2022 Q3.” Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.

Financial results and liquidity

Quarterly same-store revenue increased 17.1%; management attributed growth to demand, pricing, events, leagues, an expanded offering, and more centers. Costs of revenue rose 21.0%, slower than revenue growth; gross margin improved 0.7 percentage points. Nine-month gross margin improved 0.8 percentage points. Adjusted EBITDA, a non-GAAP measure, was $127.6 million for the quarter and $372.2 million for the trailing twelve months.

At April 2, 2023, cash and cash equivalents were $150.7 million and restricted cash was $10.4 million. Current assets were $200.8 million and current liabilities $146.9 million. Long-term debt, net, was $897.4 million, with $5.6 million of current maturities; total debt before unamortized financing costs was $914.9 million. Long-term capital-lease obligations were $393.9 million. The company reported no Revolver borrowings and was in compliance with debt covenants.

Material changes and unusual items

• Quarterly revenue grew 22.5%, including 17.1% same-store growth. For the nine months, revenue grew 27.2%, including 20.8% same-store growth. Center count expansion also contributed: the company acquired 12 centers in 10 transactions during the nine-month period.
• Operating profit improved substantially year over year. The prior-year nine-month comparison included $68.4 million of Business Combination transaction costs in SG&A; excluding those costs, SG&A as a share of revenue increased from about 12% to 13%.
• Net losses included noncash fair-value expense on earnout liabilities: $87.2 million for the quarter and $158.8 million for the nine months. The $15 share-price threshold was met on March 2, vesting and settling 11.4 million earnout shares. The quarter also included $5.3 million of refinancing-related costs within other expense.
• Interest expense rose 30.6% in the quarter and 15.9% for the nine months, primarily due to higher rates and debt and lease obligations.
• On February 8, 2023, the company refinanced with a $900 million variable-rate term loan maturing in 2028, at Adjusted Term SOFR plus 3.50%; it repaid the prior term loan and Revolver borrowings. The Revolver commitment increased to $200 million. The company entered into SOFR interest-rate collars covering $800 million of the term loan, with a 5.50% cap, after quarter-end trade/designation dates.

Outlook, risks, and contingencies

Management cited continuing demand and positive momentum, and expects to pursue acquisitions, new-center build-outs, upgrades, and conversions. It reported six signed agreements for new-center build-outs and a pipeline of potential acquisitions. Management said available cash, operating cash generation, the undrawn Revolver, and potential sale-leaseback or other financing should fund foreseeable needs, while noting that leverage, borrowing restrictions, and business disruption could constrain access to capital. No numerical revenue or earnings guidance is provided.

Risks highlighted include inflation in labor, food, utilities, and other operating costs; the ability to pass costs through pricing; interest-rate exposure (a 1 percentage-point rate change was estimated to affect annual interest expense by about $9 million before hedging); competition, consumer demand, staffing, supply chains, and the lingering effects of the pandemic. The company reported approximately 73 pending EEOC age-discrimination claims, including probable-cause determinations on 55; it contests the claims and cannot estimate a possible loss range. It also reported material weaknesses in controls over acquisition accounting, fixed assets, disclosures, and system access/segregation of duties; disclosure controls were deemed ineffective. Management stated the financial statements were fairly stated and described remediation plans.

Substantially all net deferred tax assets remained subject to valuation allowances. Management said a significant release could become supportable within the next several quarters, producing a material noncash tax benefit, but the timing and amount are uncertain. The company also disclosed its planned adoption of lease accounting standard Topic 842, estimating balance-sheet assets and liabilities could each increase by approximately $700–$800 million; it did not expect a material income-statement or cash-flow effect.

Investor verification priorities

• Confirm the issuer and period: this is Bowlero Corp.’s quarter ended April 2, 2023, not a 2022 Q3 filing for Lucky Strike Entertainment Corp.
• Assess the quality and sustainability of revenue growth, including same-store trends, pricing contributions, acquisitions, and inflation-related costs.
• Reconcile GAAP losses with the large noncash earnout remeasurement and review the assumptions behind management’s Adjusted EBITDA measure.
• Review variable-rate debt, lease obligations, interest-rate collar terms, covenant headroom, and the availability of the Revolver after letters of credit.
• Track remediation of the disclosed material weaknesses and developments in the EEOC matters, for which the company could not estimate a loss range.
• Check subsequent events: the filing reports preferred-stock repurchases on April 24 and April 27, 2023, and replenishment of the repurchase-program authorization on May 16, 2023.