Bowlero Corp. (NYSE:BOWL) Q4 2023 Earnings Call Transcript

Bowlero Corp. (NYSE:BOWL) Q4 2023 Earnings Call Transcript September 11, 2023

Bowlero Corp. beats earnings expectations. Reported EPS is $0.15, expectations were $0.01.

Operator: Greetings and welcome to the Bowlero Corp’s Fourth Quarter and Full Year 2023 Conference Call. It is now my pleasure to hand the call over to Bobby Lavan of Bowlero. Please go ahead.

Bobby Lavan: Good morning to everyone on this call. This is Bobby Lavan, Bowlero’s Chief Financial Officer. Welcome to our conference call to discuss our fourth quarter 2023 earnings. This morning we issued a press release announcing our financial results for the period ending July 2, 2023. A copy of the press release is available in the investor relations section of our website at ir.bowlerocorp.com. Joining me on the call today are Tom Shannon, our Founder, Chief Executive, and President, and Jeff Gliner, Bowlero’s, Chief Operating Officer. I would 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 filing with the SEC. 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 are the most directly comparable to each non-GAAP financial measure discussed in the reconciliation of the differences between each non-GAAP financial measure and the 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 and thank you for joining us today. I’m Thomas Shannon, Founder, CEO and president of Bowlero Corp. Bowlero started with one bowling center in New York City in 1997. This past year we crossed $1 billion of revenue for the first time, a milestone for the company. With the acquisition of Lucky Strike in September, we will have approximately 350 bowling centers and add an iconic brand to our portfolio. With the Lucky Strike acquisition, we will add a center in Hawaii to our portfolio, which will be the 36 states in which we operate. Our path to growth has never been clearer. We continue to redefine family and location-based entertainment across the country. Bowlero’s combination of open bowling events and league play make us not only the premier global bowling company, but also a leader in the entertainment industry.

We continue to identify attractive locations for new builds and we have seven leases currently signed, and four of those already under construction in Marquee Markets for new Bowlero locations. Our newest center in the Westfield Valley Fair Mall in San Jose, California open this past weekend. And at the end of August, we acquired the co-located Mavrix and Octane Properties in the — in a premier location in Scottsdale, Arizona for $33.5 million. We have three more acquisitions expected to close in the next month, including Lucky’s Strike, totaling more than $130 million of purchase price and adding approximately $100 million of annualized revenues. Two of the acquisitions come with real estate augmenting our asset portfolio and potential sale leaseback funding sources.

Our fiscal year same-store sales comp was plus 12.7% year-over-year, plus 12.7%. As mentioned in the Q&A portion of the last earnings call, we saw a slowdown in the fourth quarter of fiscal year ‘23 with same-store sales for that quarter negative 2.7%. Nevertheless, total revenue for the quarter increased 2.4% year-over-year. We view ourselves as perpetual optimizers of the business and we reacted swiftly to early signs of a softening retail consumer to innovate on our offerings. The high incremental margins in our business make it a priority for us to encourage guests to bowl, for example, a third game or stay longer in our centers buying food or playing in our arcade. The past few years of high post-COVID demand made most of our center associates order takers and service providers with no requirement to sell.

To address this, in June, we launched a bundled offering called the Special, which allows guests to prepay the third game at a discounted price and receive a complimentary $5 arcade card to encourage ancillary spending. We are seeing a 60% plus take rate with this offering over hundreds of thousands of transactions and continue to AB test new combinations. Over the past three weeks, we rolled out a pizza and pitcher special that is nearing a million dollars in sales in a very short period of time. These programs are providing consumers extra value while improving ticket size. Early results show average number of games bold is up 5%. We added these specials and pulled back on deeply discounted promotional nights. However, over the past few months, we have realized we pulled back too hard on midweek and late-night promotions.

The cult following on all you can bowl night strike $2 Tuesdays was greater than expected. So, we’ve seen results Monday, Tuesday, and late Friday be off double digits in the slow days of summer and are reinstating those programs almost immediately. I’m confident experimentation will result in happier customers who become more loyal customers and who will return more often. Consumer discretionary spend may be dropping, but consumers still want to go out and we provide better value to more expensive alternatives. The brightest star in our business over the past few years has been events. Event sales were up 43% in fiscal year ‘23 over fiscal year ‘22, up 43% year over year, and up 53% in fiscal year ‘23 over fiscal year ‘19. In fiscal year ‘23, we booked $218 million of bowling events, and there is still room to go with a growing team of more than 200 sales associates.

Right now, I’m in Las Vegas with our event sales team gearing up for a robust holiday season. We’re having our national sales conference here. Last year, in the week prior to Christmas, we booked more than $10 million of event sales in a single week. In a world where companies are cutting costs, we provide solutions for businesses to invest in bringing their people together in a very affordable way. Our event business was up 7% year over year in the fourth quarter and has accelerated recently from that level. We believe there are significant upside in this category. Bowlero is getting more analytical and insightful every day. We have established a flywheel in our business that will enable us to compound top-line growth over the long term fueled by self-funded investment.

Our high free cash flow generation offers us a sustainable source of capital that we use to reinvest in our business at highly attractive return levels, including acquisitions, existing center conversions, and building new centers. With a focus on enhancing the customer experience, our centers will continue to grow at the unit level, resulting in additional cash flow and ultimately more momentum in the flywheel. Given this dynamic, we have made the deliberate decision to double down on investment in our business in fiscal year 2024, positioning us for strong growth in fiscal year 2025 and beyond. I would now like to turn the call over to Bobby Lavan to review our financial results for the quarter and year and offer financial guidance for the upcoming fiscal year.

Bobby?

Bobby Lavan: Thank you, Tom. Happy to be here. In the fourth quarter, we generated total revenue of $239.4 million and adjusted EBITDA of $64.5 million, reflecting a 26.9% EBITDA margin. Last year, we reported $267.7 million of revenue and adjusted EBITDA of $82.4 million in the fourth quarter of fiscal 2022. Fourth quarter last year, out of period service revenue in the 53rd week in related calendar shifts totaled 29.7 million. Excluding these impacts, total bowling center revenue was plus 2.4% year over year. Service revenue, a pass-through to employees that we were required to book as revenue was $21.0 million in FY ’23. You should expect that to be low few millions in FY ‘24. Additionally, in the quarter we took $2 million of revenue charges that flowed to the bottom line for out of period adjustment.

On a fiscal year basis, revenue was $1.06 billion, and adjusted EBITDA reached $354 million at a 33.5% margin. Same-store revenue grew 12.8% reported by record seasonally significant second and third quarters, relative to the prior year total revenue grew $147 million or 16.1%. At the center level, in the most recent quarter, we saw growth in events, and leagues and tournaments offset by a decline in walk-in retail. In the fourth quarter, we also raised center-level wages to invest in our people to raise the bar of talent and retain our associates is proving effective, and better talent means better consumer experiences and enhanced sales culture environment. This cost us $2 million to $3 million of incremental wages in the quarter will be a $10 million headwind at centers and FY ‘24.

We’ll offset these with cost saves at corporate and removing some post-COVID excesses at the centers. In general, we continue to generate industry-leading margins and unmatched free cash flow conversion at 85%. For the fiscal year we generated $196 million of cash flow available for reinvestment and growth as maintenance CapEx is elevated from COVID deferrals. The company finished the quarter with robust liquidity underpinned by over $195 million in cash on the balance sheet and roughly $225 million of undrawn capacity on our revolver. We continued to evaluate lower-cost funding sources, including looking at our unencumbered real estate, our unique model of cash flow, and a 7% to 8% cost of capital versus a long runway of 20% plus returns underpins the quality of our story and long-term trajectory of the business.

Looking ahead in terms of fiscal year 2024, we expect total revenue to be up 10% to 15%, excluding the $21 million service fee, which equates to $1.14 billion to $1.19 billion of revenue. Same-store revenue growth will be flattish as we come through, plus 32% comp from FY ‘19 and plus 12.8% from FY ‘22. We expect same-store performance to improve over the course of the year with the 1Q, ‘24 comp tracking down 5% and in the quarter total rev — reported revenue flat year over year as we reactivate the non-peak time promotions that Tom mentioned. Note debt promotions are very important to the summer month, so less material to our second quarter, third quarter, but it did impact late July and August more than we expected, and we are addressing it.

We expect adjusted EBITDA margin to be 32% to 34% in FY ‘24. We have a Multi-Pronged reinvestment strategy with a long runway of opportunities to deploy capital, all of which have strong track records of producing 20% plus unlevered returns. In the next year, we anticipate allocating at least $160 million to M&A in addition to $40 million for new builds and more than $75 million for conversions. For those newer to the story conversion is a multi-phase project that transforms a center to an upscale experiential location. We are also evaluating leaning into the Lucky Strike brand more to come. Since our third quarter ‘23 earnings call on May 16th, we have repurchased $127 million of shares retiring approximately 11 million shares. We reduced fully diluted share count by 9% over the past year.

In continued support of this reinvestment strategy on September 6th, 2023, the company’s Board of Directors authorized an increase in our share buyback $200 million. We continue to evaluate driving shareholder returns through capital returns, particularly at these share price levels. In closing, we have several exciting initiatives underway and are continuing to evolve and innovate. Nevertheless, we continue to believe in our fundamental offering and A, B, C, or acquisition, new build, and conversion strategy as part of our operating ethos. As Tom highlighted, we remain enthusiastic about our long-term growth trajectory. Thank you for your time and we look forward to seeing you on the road in coming months. We’ll now open it up to Q&A. Operator.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Matthew Boss with JP Morgan. Please proceed with your question.

Matthew Boss: Great, thanks. So, Tom, maybe could you speak to the progression of demand and traffic trends since April? Maybe elaborate on what you’ve seen across group event segment relative to walk-in retail, and then just as we think about your FY ‘24 comp outlook, what have you baked in for conversions relative to pricing, as well as traffic improvement as the year progresses?

Thomas Shannon: Hey Matt, thanks for the question. Let me turn this over to Bobby, because he’s able to give a more detailed answer.

Bobby Lavan: Hey, Matt. So, from in the one — in 4Q April was weak, but traffic picked back up in June, July started strong and as we kind of got into the doldrums of summer, the pullback on promotional activity actually hit our traffic. Sort of — I would say low mid-single digits. If you think about promotions, the heavy promotion stuff, all you can like that happens during the week is kind of 10% to 15% of our revenue, but it’s higher in the summer month, and we just turn those off. And so those businesses are down significantly. We’ve turned them back on this week. So, we do expect sort of the comp in the first quarter to be about minus 5%, which is down retail up events. But we expect that to flatten out in the second quarter, third quarter, and then be up in the fourth quarter.

From a pricing perspective, I think the special is proving to take price. It’s effectively a silent price increase. It’s a bundle, it delivers the consumer value. So, we are getting some price, but ultimately, the days of mid to high single digit price increases are behind us. So, it’s our focus right now is flattening out traffic and having a strong event quarter in the second and third quarter.

Matthew Boss : Great. And then maybe just as a follow up, Bobby, so you characterize in the release FY ‘24 as an investment year. So, is there a way to elaborate on investments that you think are needed across the P&L? If there’s anything in labor staffing relative to food and beverage costs, and then maybe the other side of it all is obviously the acquisition. So, the $160 million guidance for acquisition. If you could just parse out expectations for new center growth, and your visibility to the unit pipeline over the next 12 months.

Bobby Lavan : Yes, so from an investment year, it’s a capital investment year. We did put $10 million into employees, but we’ll offset that with cost save. So, this is really more on the balance sheet side. In FY ‘23, we $53 million on conversions, we’re going to spend 75 plus in FY ‘24. From an M&A perspective, we have a line of sight of at least $160 million of M&A, we could do more. So that’s sort of the focus for us from an investment perspective. We’re really focused on driving profitability in the incremental margin. So, it’s not expense investment, it’s capital investments.

Operator: Our next question comes through line of Steve Wieczynski with Stifel. Please proceed with your question.

Steven Wieczynski: Hi, guys. Good morning. So, Tom, in the past, you guys have talked about kind of that low to mid-single digit, same-store sales growth analog seems pretty fair and in a normalized, operating environment, and like you kind of laid that out on slide five in your deck this morning. But as you guys think about reinvesting so aggressively in the business this year and as we kind of move forward how would you think about that same metric, that same-store sales growth metric as we look more out into to ‘25 and beyond?

Thomas Shannon: Well look, as we said, the reinvestment is really investment in growth, right? So, the centers are operating very well and we’ve taken incremental labor spend. That was really the point of that was to get a better candidate work and to retain our best talent. And it’s worked tremendously. We’ve really seen a slow-down in turnover and so mission accomplished there with regard to sort of the forward outlook. Let me turn it over to Bobby to go into greater detail there.

Bobby Lavan : Yeah. If you think about our comp, it’s really two parts. It’s price and then it’s sort of a step up that happens from conversions. So, if we spend $75 million on conversions, we should get $25 plus million that goes to the top line and close heavily to the bottom line and that drives the comp. The special, which we’ve shown works is really focusing on [indiscernible] whatever metric you want to use, which is — we just want to get more money from the consumer, right? And so, the better selling we do, the better kitchens, the more attachment we’re going to get to bowling. So ultimately, long-term we are at a mid-single-digit comp, right? But it’s not necessarily based on volume, it’s really price, attachment, and increasing the consumer experience.

Steven Wieczynski : And then Tom or Bobby or both of you guys, both of you guys in your prepared remarks made some type of comment towards your excess land and how you potentially plan to use that excess land moving forward. So, to us that sounds like you’re probably a good bit, a long way down that road in terms of doing something a little bit more robust with your real estate holding. So, just wondering, what you guys can say, maybe a little bit more around those comments.

Thomas Shannon: Yeah, we have 43 unencumbered properties and we’re actually bringing two more in with recently announced acquisitions. So, we’re always going to look at opportunities to look for lower-cost funding sources. Like right now, we can hit sort of the debt market for 8%, 8.5%, but if we can get something below that, we will.

Operator: Our next question comes from line of Garrett Greenblatt with Jefferies. Please proceed with your question.

Garrett Greenblatt : Thanks for taking my question. I was wondering if you just to follow-up on the acquisition stuff, how are you thinking about the health of the acquisition pipeline in the current environment given interest rates and all that?

Thomas Shannon: Well, I’d say, it’s never been better. This month, we closed Mavrix, and Octane, which is a marquee property, the best property in Phoenix by far. That co-located business was doing almost $20 million of revenue when we bought it. And we’re acquiring Lucky Strike Plan. Closing date is one week from today, another $80 million. And then we’ve announced two in Michigan that should close over the next month or two. And then there’s a dozen in the pipeline, well, let’s say, 15 to 20 more in the pipeline behind that could close this fiscal year. As I mentioned, seven leases signed four of those under construction now, probably another six to seven in various stages of negotiation. So, it’s an extremely healthy and robust pipeline, one of the best we’ve ever seen.

Garrett Greenblatt : Great. And I wonder if you could just give a call on the engagement you’re seeing with Bowlero [indiscernible] MoneyBowl.

Bobby Lavan : Yeah. I mean, MoneyBowl, is in 64 centers, we’re pushing on it still in those centers. We are implementing a customer acquisition tool in MoneyBowl. And so, we want to see can we go effectively spend 15, 20 bucks to bring people in the center. And so, I think that’s sort of the next evolution. You know, at the same time, we are updating our website. So, in early ‘24, we’ll have a new website that integrates in with MoneyBowl, and that’s going to be very exciting to generate incremental demand from the consumer.

Garrett Greenblatt : Good. Thank you.

Operator: Our next question comes from line of Ian Zaffino with Oppenheimer. Please proceed with your question.