Bowlero Corp. (NYSE:BOWL) Q3 2024 Earnings Call Transcript

Bowlero Corp. (NYSE:BOWL) Q3 2024 Earnings Call Transcript May 6, 2024

Bowlero Corp. misses on earnings expectations. Reported EPS is $0.1271 EPS, expectations were $0.24. Bowlero Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Bowlero’s Third Quarter 2024 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer-session. [Operator Instructions] Thank you. I would now like to turn the call over to Bobby Lavan, Bowlero’s Chief Financial Officer. Please go ahead.

Bobby Lavan: Good morning to everyone on the call. This is Bobby Lavan, Bowlero’s Chief Financial Officer. Welcome to our conference call to discuss Bowlero’s third quarter 2024 earnings. This morning we issued a press release announcing our financial results for the period ended March 31, 2024. A copy of the press release is available in the Investor Relations section of our website. Joining me on the call today are Thomas Shannon, our Founder, Chairman and Chief Executive; and Lev Ekster, our President. I’d like to remind you that during today’s conference call we may make certain forward-looking statements about the company’s performance. Such forward-looking statements are not guarantees of future performance, and therefore, one should not place undue reliance on them.

Forward-looking statements are also subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed. For additional information concerning factors that could cause actual results to differ from those discussed in our forward-looking statements, you should refer to the cautionary statements contained in our press release as well as the risk factors contained in the company’s filings with the Securities and Exchange Commission. Bowlero Corporation undertakes no obligation to revise or update any forward-looking statements to reflect events or circumstances that occur after today’s call. Also during today’s call, the company may discuss certain non-GAAP financial measures as defined by SEC Regulation G.

The GAAP financial measures most directly comparable to each non-GAAP financial measure discussed in the reconciliation of the differences between each non-GAAP financial measure and a comparable GAAP financial measure can be found on the company’s website. I’ll now turn the call over to Tom.

Thomas Shannon: Good morning. Thank you for joining us today. I am Thomas Shannon, Founder, Chairman and CEO of Bowlero Corporation. Bowlero had a solid third quarter with total revenue growth of 8.8%. January was a challenging month because of blizzards and flooding across the country. Following this weather-impacted result, our same-store comp was positive in both February and March, and our total growth was double digits. This follows the company’s second quarter in which we produced same-store sales growth of 0.2% and total company growth of 13.4%. Our results in the second and third quarters are better than most or all of our competitors in the location-based entertainment space. When we acquired Lucky Strike, we were impressed by how much food and beverage they sold to each customer.

We have taken some of the learnings from Lucky Strike and begun to implement that into our F&B business. We are revamping our menus, increasing food and beverage training, and improving our hiring processes to make a strong organic impact on our business. Our new premium menu, which launched in recently opened Lucky Strike Miami, includes salads, gluten-free options, bao buns, honey chicken sandwiches, and more variations of our excellent pizza. Additionally, we continue to instil a selling culture that began last summer with the implementation of the bowling special. I’m excited about the opportunities in front of us as we train and incentivize our employees to sell more. The quarter was marked by substantial investments in traffic-driving initiatives.

These initiatives, though with some added cost, have proven their worth as evidenced by our industry-leading same-store comp growth. Lev Ekster will discuss these initiatives in a few minutes. Our best-in-class events platform continues to outperform. Event revenue increased 27% year-over-year in the third quarter and leagues were up 9% year-over-year as we expanded social league opportunities combined with growing brand recognition from our PBA ownership. We continue to deploy capital in acquisitions and new builds. We opened Lucky Strike Miami in the third quarter with results moving higher weekly and above our expectations. We have four new builds coming online in the next nine months with two openings in Denver this summer, one opening in Beverly Hills in early fall, and another opening in Orange County, California in the late fall, and we are actively engaged on a pipeline of approximately a dozen more new build locations following these.

Last week, we acquired Raging Waves, the largest water park in Illinois, and a transaction that came with approximately 53.5 acres of land. With this acquisition, we acquired a superb, very profitable property and partnered with a strong operator in the regional waterpark space at an attractive valuation. We think there is a significant upside in this property. I’m also happy to provide a positive update on the status of the EEOC matter. On April 12 of this year, the EEOC issued closure notices for the approximately 73 individual age discrimination charges that have been filed, in most cases, many years ago. The notices communicate that the EEOC has dismissed the charges and will not bring suit against the company in the individual cases. Additionally, on this most recent Friday, May 3, the EEOC issued an additional closure notice for the pattern and practice directed investigation.

In that notice, the EEOC wrote, “The commission has determined that it will not bring a civil action against Bowlero under the Age Discrimination Employment Act.” And also on Friday, we received a positive court ruling in Richmond, Virginia that the case CNBC had breathlessly reported related to a former employee’s attempt to countersue Bowlero had been denied. Over 8.5 years, the company has vigorously denied and contested the false allegations made against it and is pleased to see that the EEOC has closed its files. We are disappointed that media outlets, mainly CNBC, have told only one side of the story, no matter how preposterous, acting as a shill for attempts to damage our reputation and leverage an unwarranted settlement. We are pleased to report these very positive developments on behalf of our shareholders.

Let me hand it over to Lev Ekster to talk about our internal initiatives and then Bobby will review the financial details.

Lev Ekster: Thanks, Tom. As I discussed last quarter, there is material white space to provide the consumer a better experience and increase wallet share in our locations. This quarter, we saw the benefit in traffic coming from two internal initiatives. First, with amusements, we have improved guest satisfaction through increased gameplay. We have seen benefits to traffic as exhibited in our February, March, and April comparatives. This should help continue to drive traffic in the slower months. Second, we have invested materially in our PBA programming. Since the start of the year, 18.5 million viewers have watched the PBA on Fox, FS1 or FS2, which is 16% more than at the same point last year. The increase is even higher among younger viewers with the male 18 to 34 demo reach up 22% year-over-year.

Viewers are watching more PBA than ever before as average minutes viewed per viewer have steadily increased each year, and so far in 2024, that is already 15% higher than it was in 2019, the first year the PBA aired on Fox Sports. We have more stops than televised shows, which means more awareness and ultimately supports the value proposition of the PBA to Bowlero and the industry overall. Lastly, as Tom mentioned, we are leaning heavily into increasing food and beverage sales. This has become my primary focus. New menus and updated pricing roll out over the next few months. Additionally, in-kitchen training and the continued development of the sales culture will lead to improved F&B uptake, benefiting from the foot traffic generated by initiatives like our new Summer Season Pass.

And then, leading into the critical holiday period, we will continue to optimize our offerings to improve customer satisfaction, traffic and increase spend as we look to be the out-of-home entertainment destination of choice. That is how we will continue to outperform our peers. Now, let me turn it over to Bobby.

Bobby Lavan: Thanks, Lev. In the third quarter of 2024, we generated total revenue ex-service fee of $336.4 million and adjusted EBITDA of $122.8 million compared to the last year of $309.1 million and adjusted EBITDA of $127.6 million. As a reminder, service fee revenue is a pass through, a non-contributor earnings, and is being phased out. Our total growth was positive 8.8% and same-store comp was negative 2.1%. January was the full contributor to the negative comp for the quarter. Adjusted EBITDA was $122.8 million compared to $127.6 million in the prior year. While worse than we expected, we’re excited about the top-line contribution and customer satisfaction from two meaningful traffic driving initiatives. Amusement’s comp gross profit year-over-year in the quarter was minus $5 million as we invested in better experiences for the consumer.

As Lev discussed, the PBA has seen significant growth this year as we increased stocks and TV coverage throughout the quarter. This swung PBA to a $2 million loss in the quarter. This will continue into 4Q ’24 as we ramp up incremental sponsorship on the better results. We continue to invest in our people, with our same-store comp payroll up $4 million year-over-year, which is better than last quarter at $6 million. Our cost structure, primarily employee payroll, normalizes after double-digit bump to payroll in March 2023. Corporate expenses are down while we continue to invest in our event sales team. Non-comp centers contribute $11 million of EBITDA on approximately $35 million of revenue. Lucky Strikes outperformed our expectations with the $6 million contribution to EBITDA in the quarter compared to $5 million in the previous year.

The first four weeks of April 2024 have been strong, but due to the investments we made in the third quarter, we’re taking our full year guidance to the low end of the range previously disclosed. This still implies double-digit revenue growth for the year and significant revenue and EBITDA growth in the fourth quarter. Please note that in the quarter, we closed one center, which was reflected in the end center count of 352. In the quarter, we spent $13 million on growth CapEx, $9 million on new builds, and $7 million on maintenance. We spent $12 million on acquisitions. We also updated our capital guidance for the year. We are increasing our M&A spend to $220 million from $190 million. We are lowering conversions from $80 million to $70 million as we focus on internal organic opportunity to drive returns.

New builds will be higher as we continue to ramp up well, adjusting new builds CapEx this year to $45 million from $40 million. We plan to continue to balance investing in our growth and rewarding our shareholders. Our liquidity at the end of the quarter was $437 million, with nothing drawn on a revolver, and $212 million of cash. Net debt was $943 million and the bank credit facility net leverage ratio was 2.4 times. Thank you for your time, and we look forward to taking your questions. Operator?

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Q&A Session

Operator: Thank you. We will now begin our question-and-answer session. [Operator Instructions] Your first question comes from the line of Steven Wieczynski from Stifel. Please go ahead.

Steven Wieczynski: Yeah. Hey, guys. Good morning. So, I want to start with going back to the third quarter, and I guess if we go back and think about when you guided, I think it was early February, you pretty much had an idea what the weather headwinds were going to be. So, I guess, what we’re trying to figure out is what kind of then drove the underperformance relative to the third quarter guidance. Was it really just driven by some of the investments that you guys talked about in your prepared remarks in terms of trying to drive more foot traffic? I’m just trying to tie the guidance to versus where the quarter came in. Thanks.

Bobby Lavan: Yeah, it was entirely cost, Steve. So, we’re pretty aware of where our revenue is kind of going, but at the time of the February report, we weren’t completely clear of both payroll costs and sort of the cost from investing in amusements and PBA. If you go back to January, is our highest profit quarter — or month. And so, when that month just has a massive drawdown, it creates a little bit of uncertainty on the cost. We’ve gotten a handle of that in February, March, and so if it were just for February, March, we would have handily beat our numbers. But it’s a myth and we’re moving forward.

Steven Wieczynski: Sure. Okay. And then second question is, we’ve gotten a lot of questions this morning about the acquisition outside of the bowling space. And I guess, first, can you help us think about what you paid for that acquisition and then maybe what that waterpark is doing in EBITDA? And then kind of the second part of that question is, one of the questions we’ve gotten is why go outside the bowling, let’s call it, arena, and look at other entertainment options, given in your presentation, you guys still believe there’s a huge opportunity in terms of driving your bowling store count?

Thomas Shannon: Hey, this is Tom Shannon. Good morning. Yeah, there’s still a remaining market for bowling, that’s quite large, but bowling in the U.S. is only a $4 billion TAM. And when you look at location-based entertainment, it’s more like $100 billion TAM. So, we were presented an opportunity to buy a really beautiful asset, very well maintained, well located 53 acres, right, sort of on the edge of the western suburbs of Chicago, and to partner with a really good operator with decades of experience running these at an attractive valuation, and we thought it was a great foray into looking at this sort of asset that goes beyond bowling but shares many of the fundamental similarities with bowling. Very low variable cost. We understand, I think, the consumer in this segment very well.

And I’ll say this, about a year ago, or maybe nine months ago, we purchased an asset called Mavrix and Octane in Scottsdale, Arizona, and half of that business was a indoor go-kart track. And there was a lot of negative sentiment about buying the go-kart track, and had we sort of lost faith in the bowling business. And we’re about seven months into that acquisition, on the run rate it’s on, it’s going to do $8 million of EBITDA against a purchase price of $33.5 million, and really no subsequent investment after that. So, there are a lot of really, really good businesses in location-based entertainment that share fundamental similarities with bowling, but aren’t bowling. And we’re availing ourselves of that, rather not get into what we paid for it, but on a multiple basis, commensurate with what we paid for the majority of our bowling acquisitions over the last couple of years.

Steven Wieczynski: Okay. Great. Thanks for the color, Tom. Appreciate it.

Thomas Shannon: Sure thing.

Operator: The next question comes from the line of Matthew Boss from JPMorgan. Please go ahead.

Matthew Boss: Great. Thanks. So, Tom, could you elaborate on trends that you’ve seen with walk-in retail traffic as the third quarter progressed? Maybe what exactly have you seen from same-center comps in April? And how best to think about expectations for comps in the fourth quarter?

Thomas Shannon: So, Matt, the problem with our business in terms of making predictions is it’s a very short cycle, right? So, we were positive in December, we fully anticipated a positive January. And we were surprised by the weather, unfortunately, but we were — we had a positive comp in February, we had a positive comp in March. And in the period that just ended yesterday, in fact, our preliminary numbers are that on a same-store basis, we’re up over 6%. And on a total company basis, revenue is up 20%. So, on a same-store basis, we’re up four out of the last five periods. I think we would have been up in January except for the weather. But regardless, the trend is very positive. It’s a tough environment. We see that the consumer is spending, but the consumer is being more discerning.

The good news is that I think we’re winning the market share battle. You can’t be up 6% when everyone else is down, in some cases, meaningfully down, and not be picking up market share. So, I think the company is executing extremely well. We were cycling a lot of legacy costs. As you recall, around March of last year, we gave sizable increases in compensation to all of our managers in the field, between 12% and 17.5% increases, and we’re just cycling that now. So, you had a combination of two factors over the last year. We were comping against very, very, very high post-COVID same-store comps year-over-year, up double digits, up wildly. So, we’re comping against that. And at the same time, we instituted a massive wage increase to create more stability and tenure among our managers, which has been successful in achieving its goal.

So, you had the combination a year ago of a very tough comp on the revenue side, and we created a very tough comp on the cost side. Those trends have now reversed themselves. We now have relatively easy same-store sales comps, and we’ve cycled that enormous wage increase that we put through. And that’s why — partially why on a comp basis, in February, we’re up 6%, which is, I mean, it’s orders of magnitude versus what everyone else is doing. I take no joy in saying that, other than to illustrate the point that it’s a very tough environment for everyone in this space. And 6% is a massive outperform. It didn’t happen by accident, though. It’s happened by a very, very focused effort by Bobby and Lev to drive traffic in a variety of ways; optimizing our online booking process, streamlining that, driving more traffic to the website economically, we’ve driven down our customer acquisition cost by half on a year-over-year basis.

And now we have the summer pass, which is our season pass for the summer, where you can come in and bowl. There are various packages, but the standard packages, you get two games every day for one low cost upfront, akin to what the ski areas do for their winter season passes. And the pass doesn’t become eligible for use until around Memorial Day. Through yesterday, we’d already sold $1.5 million against our goal in the $10 million to $15 million range. You may recall that last year we eliminated that. So, again, this summer, we have a lot of tailwinds. We’re doing all the right things. We are driving traffic, and we’re coming up against a relatively easy comp. Four out of five of the last periods, positive same-store sales on a consolidated basis, we’re seeing the impact of the Lucky Strike acquisition, a handful of other individual center acquisitions, and also, year-to-date, we’ve opened three new builds in San Jose, Moorpark, California and in Miami.

And they’re all outperforming. So, from where I sit, the news is very, very good.

Matthew Boss: Yeah, Tom, that’s encouraging, particularly the 6% comp in April. I guess, what’s your confidence in sustaining positive low- to mid-singles from here? And historically, how has bowling held up in more recessionary backdrops? And then, Bobby, I just had one for you. If you could just help walk through the drivers in the fourth quarter of the EBITDA margin expansion, just relative to the third quarter contraction, I think that would be really helpful.

Thomas Shannon: Like I said, Matt, it’s really hard for us to make predictions, because it’s such a short cycle business. From where we are now, I would expect that the trend that we have of low to middle single digit same-store sales comps will sustain itself through the rest of the year. I mean, we’re seeing strength really in all parts of the business. For example, in the April period that just ended yesterday, the same-store event comp was up over 15%. I expect when all those numbers are fully baked, it’ll end up being up more like 16% or 17%. The league business is performing extremely well. We’re doing well in the retail walk-in business. We have a lot of initiatives to drive organic food and beverage sales in center, which is something we’ve always underperformed on, but we’re no longer going to accept that as the status quo.

And that’s a comprehensive redo from training to menus to presentation and center and all that. So, all the things that we can control, I think are driving this result. Now, if you have some exogenous shock to the economy or other things that we can’t predict, again, all of this goes out the window. But based on where we are now and based on the trend, I feel very confident that low- to mid-single digit same-store sales comp is readily achievable through the end of the calendar year.

Bobby Lavan: Matt, so if you go to just the EBITDA expansion you would expect, or EBITDA margin and EBITDA dollars expansion we expect in the fourth quarter, it really comes down to, we need to have a few points of positive comp, yet EBITDA up. But the second that you’re above a 2% comp, the dollars flow through at anywhere between 75% and 90%. In this circumstance, we’ve taken costs out over the past year. There are some legacy costs. We’ve been very clear about this litigation we’ve had going on for the past year, and all those are going away. So, we feel very strong going into the fourth quarter. We sort of have lapped a year of frothiness plus wage increases. We can see those real-time and those are flat now, but the end of the day and we are taking costs out of our sort of centers as well as you’ve seen the cost coming out of corporate.

Matthew Boss: It’s great color. Best of luck.

Operator: The next question comes from the line of Jason Tilchen from Canaccord Genuity. Please go ahead.

Jason Tilchen: Yeah. Thanks for taking the question. Good morning. I’m just curious on the events business, revenue remained really strong, up about 30% year-over-year for the second consecutive quarter. I was wondering if you could call out anything in terms of the mix between corporate, non-corporate, anything to comment on there would be really helpful.

Thomas Shannon: Yeah. We’ve seen a pickup in corporates, birthday parties and online. So, really the mix has been strong across the board as we continue to upgrade systems, processes, and we’ve simplified pricing on our events platform. So, we’ve talked about pretty openly about having a pricing consultant in here. We used to have sort of 12,000 different SKUs and 100 different open bar packages. We simplified that significantly. And the team also continues to just punch above its weight.

Jason Tilchen: Great. That’s helpful. And just to follow-up, you mentioned the pricing consultant. I think you talked about that sort of contract running up soon, and you just recently instituted some other price changes sort of across the board. I was curious what the customer response was to those over the past few months, and sort of any update on where any remaining pricing changes that we would expect throughout the balance of this year?

Thomas Shannon: Yeah. We took shoe pricing down at the beginning of April, which we feel like shoe is one of these things that the customer feels is overpriced. We’ve seen only positive reaction to it based on our traffic data. I mean, I just look at some of the centers we took shoes down the most, they were up the most last week. We will take pricing up on food in the coming months as we roll out the new menu, and we’re excited about both the pricing and the uptake there.

Jason Tilchen: Great. Thank you very much.

Operator: The next question comes from the line of Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin: Thanks. I wanted to just come back to cost for a second here and just understand a little bit about the seasonality that we should expect here in the fourth quarter. So, as you noted, Q3, typically your strongest quarter in terms of revenue, also your highest in terms of embedded cost to operate. I imagine you get a downtick in terms of that cost to operate in Q4, but also wanted to understand in terms of some of the investments that you noted in PBA. How should we be thinking about that here as we look forward to Q4? Presumably may be some sequential declines in SG&A spend, and then also in terms of the cost to operate in Q4?

Bobby Lavan: So, you’ll continue to see SG&A spend coming down. So, that has been the tip of the spear for us on how to manage inflationary dynamics. From a payroll perspective, payroll in the comp centers in 3Q ’24 was $68 million. That comes down by about 15% sequentially into the fourth quarter. And that’s just a seasonality dynamic. We are looking at other opportunities there. From a center fixed cost perspective, that holds, because while some of the seasonal — winter seasonal issues go down, the summer utilities go up. So, really the cost flex is going to be on center payroll and any sort of cost reductions we do. And that’s how you should think about sort of the system is that SG&A sequentially down, corporate sequentially down, and payroll meaningfully steps down. And that’s why in a world where we have a good mid-single digit comp, there’s just a lot of operating leverage going into the fourth quarter.

Jeremy Hamblin: Great. Helpful color. And then just as a follow-up, with the nice update here on EEOC, is there any — do you have kind of a specific call out in terms of whether or not that’s had additional costs from a litigation or legal perspective, that — with that kind of in the rearview mirror on an annualized basis, what you think the benefit might be to the company?

Bobby Lavan: Yeah. I would say there’s been a few million dollars that flows through the income statement, but more importantly, it’s been a distraction. And so, we’re happy to focus 100% now on our business and get this behind us.

Jeremy Hamblin: Great. Last one for me. In terms of your repurchase plan, I believe that you guys still have over $180 million remaining on that. You removed the expiration date. In prior quarters, with the stock below $11, you’ve been pretty aggressive on buying back. The stock, of course, has generally been above that level in recent months. But wanted to get a sense if that still kind of a range where you guys see tremendous value? And how — when your window opens up on potentially doing something there?