Business context and reporting period
This is Bowlero Corp.’s Form 10-Q for its fiscal first quarter, the three months ended October 1, 2023. Although the request identifies Lucky Strike Entertainment Corp., the filing’s registrant is Bowlero Corp.; Bowlero acquired substantially all of Lucky Strike Entertainment, LLC, including 14 centers, during the quarter. It also acquired three centers in two other transactions.
Bowlero operates bowling and entertainment centers. Revenue is primarily from bowling, food and beverage, and amusement, with media revenue also reported. The company says its business is seasonal, typically with the highest sales in its fiscal third quarter.
Financial results and liquidity
Unless stated otherwise, amounts below are in millions of dollars. The comparable period is the three months ended October 2, 2022.
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $227.4 | $230.3 |
| Gross profit / margin | $44.5 / 19.6% | $65.1 / 28.3% |
| Operating profit / margin | $5.4 / 2.4% | $31.3 / 13.6% |
| Net income (loss) | $18.2 | $(33.5) |
| Net income (loss) attributable to common stockholders | $15.2 | $(36.3) |
| Diluted EPS | $0.09 | $(0.22) |
| Adjusted EBITDA (non-GAAP) | $52.1 | $65.3 |
| Operating cash flow | $16.1 | $35.6 |
| Capital expenditures | $50.7 | $44.7 |
Revenue was down 1.2%; same-store center revenue declined 6.9% to $209.1 million. Revenue by category was bowling $116.4 million, food and beverage $74.9 million, amusement and other $30.4 million, and media $5.7 million. Interest expense, net, rose 58.9% to $37.4 million. Net income included a $40.7 million noncash gain from the decrease in fair value of the earnout liability; the prior-year quarter recorded a $40.8 million loss from that revaluation. The tax benefit was $9.7 million, and the reported effective tax rate was negative 113.4%.
Cash and cash equivalents were $40.1 million at quarter-end, versus $195.6 million at July 2, 2023. Cash used in investing was $176.6 million, including $125.9 million for acquisitions and $50.7 million for property and equipment. Financing provided $5.1 million: $140.0 million of revolver draws was largely offset by $130.1 million of share repurchases. Cash declined by $155.5 million during the quarter.
Debt carrying value was $1.302 billion, including a $1.147 billion variable-rate term loan and $140.0 million drawn on the $235.0 million revolver. The term loan rate was 8.82%; the revolver rate was 7.92%. The company reported compliance with debt covenants. It had $10.4 million of standby letters of credit, which also reduce revolver availability. Current liabilities were $193.6 million; operating and finance lease obligations were substantial, at $568.1 million and $678.7 million long-term, respectively. The filing does not present a conventional net-debt figure.
Material changes and management commentary
- Gross profit fell 31.6%, as costs of revenue rose 10.7% despite lower revenue. Management attributed higher labor, supplies, repairs, depreciation, rent, and utility costs to center growth and inflation; costs rose faster than revenue.
- SG&A increased 16.2% to $37.8 million, primarily due to compensation and professional fees associated with acquisition activity.
- Management attributed lower same-store revenue mainly to weaker walk-in or retail business versus the prior-year consumer environment; stronger league and group-event business partly offset the decline.
- Bowlero completed one new center build-out, had seven signed build-out agreements, and reported renovations or remodels underway at 14 centers. It had signed agreements to acquire two additional centers, expected to close in fiscal Q2.
- The company repurchased 12.1 million Class A shares for $131.4 million, at an average price of $10.83 per share. The remaining authorization was $134.4 million at quarter-end.
Outlook, risks, contingencies, and unusual items
No specific earnings or revenue guidance was provided. Management said it expects to continue investing in acquisitions, new builds, upgrades, and conversions, and believes cash, operating cash flows, credit facilities, and potential financing sources can fund operations and planned investment for the foreseeable future. It cautioned that leverage and lender borrowing restrictions could limit access to capital.
On October 19, 2023, after quarter-end, Bowlero agreed to transfer land and real estate assets of 38 centers to VICI Properties for an aggregate value of $432.9 million and received $404.8 million in cash proceeds. It entered into a triple-net master lease with a 25-year initial term and six five-year renewal options. Management said proceeds may support new builds, acquisitions and conversions, shareholder returns, debt repayment, and general corporate purposes.
Risks highlighted include sensitivity to interest rates, labor and food costs, inflation, and consumer demand. A 1 percentage-point change in effective interest rates would affect annual interest expense by approximately $12.9 million before hedging; interest-rate collars cover $800 million of term-loan notional through March 2026. The company also disclosed approximately 73 pending EEOC age-discrimination claims, including a pattern-or-practice allegation. Bowlero contests the claims and says it cannot reasonably estimate a possible loss range. It reported no material change to previously disclosed risk factors.
The quarter’s reported earnings were materially affected by the earnout fair-value movement and tax treatment. The acquisitions’ purchase-price allocations remained preliminary, including estimates for working capital, intangible assets, property and equipment, and lease assets and liabilities. Adjusted EBITDA is a non-GAAP measure and was lower year over year.
Most important facts for investors to verify
- Whether the 6.9% same-store revenue decline and weaker retail traffic persist, and how acquired centers affect comparable performance.
- Whether margins recover as acquisition, staffing, inflation, and other operating costs are absorbed.
- Debt, revolver availability, interest expense, covenant headroom, and the effect of rate changes after hedging.
- Use of the $404.8 million VICI proceeds, ongoing rent obligations under the long-term lease, and the impact on leverage and capital allocation.
- Final acquisition valuations and integration results, along with the potential exposure from the EEOC matters.