Description

Summary

Bowlero (BOWL) is another post-pandemic cyclical vs structural setup within discretionary that appears asymmetric to the downside on increasing awareness that fundamental boost from highly favorable reopening dynamics including 10ppts of margin improvement is unsustainable. This also looks like another SPAC management team running yesterday’s “top line growth at any cost” playbook with deteriorating same-center growth behind more aggressive M&A cadence and taking 9ppts of price despite posting record margins in F23 (Jun) nearly +10ppts above F19. Timing appears favorable despite YTD declines as downward revision cycle has just gotten started with F4Q miss/F1Q below and the reopening surge in OOH entertainment rapidly normalizing across both consumer and corporate end markets. BOWL is especially vulnerable given magnitude of overperformance vs F19 in part on underappreciated heavy use of surge pricing to exploit one-time demand spike/price-inelastic consumer behavior that boosted operating leverage as evidenced by near-50% F22 AEBITDA flowthrough that’s already reverted to 28% in F23. Deteriorating margins should accelerate the current downward revision cycle and usher in hefty giveback uncertainty especially given F23 AEBITDA of $354M is >2x F19’s $161M. On persistent negative comps/falling estimates premium 8x NTM EV/AEBITDA multiple appears at risk with closest peers including theme parks at 6-7x and LBEs i.e. close peer PLAY at 5x and every turn ~$2/share. At 7x F24 AEBITDA -15% below MP of just-issued guide which is still 2x F18-19 levels this stock would trade at $7/share representing -30% additional downside. Not hard to imagine further downside toward the SPAC graveyard sub-$5 if the strategy to provide exit liquidity for mom & pops at the top of an unprecedented demand spike unravels, potentially reckless capital misallocation to keep the stock promote alive persists and/or consumer macro deteriorates materially which would likely make financial leverage increasingly top of mind.

Red Flags

Consistent with its SPAC asset-class heritage there are also multiple red flags here including: 

1/ Management team lacking public company experience and recent leadership reshuffling including longtime CFO relinquishing his role right in front of fiscal year end (apparently for medical reasons) and being replaced by former BALY CFO.  

2/ Business model to aggressively roll up (primarily) mom & pop bowling center operators despite post- deSPAC material weaknesses in internal control over financial reporting (since remediated per company mgmt with auditor not req’d to sign off given EGC status).

3/ Anticipated future acquisitions baked into guide/Street estimates and recent expansion of M&A targets beyond bowling alleys to include broader LBE space such as go-kart and laser-tag venues to accommodate more aggressive acquisition pace.

4/ Cap table contingencies including earnout thresholds of 11.4M shares at $15 (satisfied; 50% to sponsor and 50% to CEO T Shannon) and another 11.4M at $17.50 which combined with $144M of PIK convertible preferred. In true SPAC fashion this had masked true fully diluted shares out which mgmt seemingly attempted to subsequently address by ramping up share repo and buying 30% of the convertible preferred following the initial earnout award.

5/ Capital misallocation seemingly driven by optics including aggressive return of capital despite 3x net leverage. This includes $134M of share repo despite GAAP losses/lack of tax shield/premium valuation and initial aggressive repurchase of convertible preferred immediately after broader increased awareness of contingencies (Atairos sale). Recently announced $90M Lucky Strike buy – its largest acquisition thus far - also appears to be driven by desire to offset expected giveback within existing base.  

6/ Heavy YTD insider selling including nearly 1.5M shares by CEO and 4.9M-share block in Mar by sponsor Atairos immediately following satisfaction of initial contingency threshold. Both CEO (2.3M shares) and former CFO (4.4M shares) implemented new 10b-5s prior to F4Q end.

7/ Aggressive adjustments including 36% of $354M F22 AEBITDA vs CFFO $218M and $75M FCF (including $7M proceeds from sale of PP&E) before $111M of completed acquisitions.

8/ Selective disclosure including change in QTD revenues vs pre-pandemic disclosure from weekly to trailing 13 weeks at F2Q likely to obscure massive comp wall that it hit starting in late Feb on reopening surge a year ago and support insider sales. This disclosure was eliminated as of the just- reported F4Q. 

9/ Ongoing legal overhang from civil suit alleging widespread discriminatory business practices including dozens of age discrimination and retaliation claims that authorities apparently want to settle for $60M according to CNBC.  

Given the typical red flags here the thesis could just as easily be that <10 out of 200-strong class of 2021 deSPACs trade at/above $10/share and BOWL is one of them. 

Catalysts

Potential catalysts include: 

1/ Continued downward revision cycle that just commenced with F4Q 2023 miss/F1Q 2024 below against seemingly aggressive guidance that assumes same-center SSS recover to flat in F2Q-3Q and inflect positively in F4Q, $160M of acquisitions vs $112M in F23 and $73M in F22 and just 50bps of AEBITDA margin decline to 33% at MP +900bps vs F19. 

2/ Increasing evidence of discretionary downturn including return of price elasticity/consumer fatigue in LBEs and further slowing in corporate/events business against extremely tough F23 compares.  

3/ Introduction of competition into narrative as localized LBE expansion accelerated coming out of the pandemic driven by initial post-pandemic surge in group OOH entertainment demand and BOWL benefitted from outsized ancillary growth including two-year +70% F&B and +72% amusements CAGRs.

Risks

1/ Pandemic margin lift proves sustainable and mgmt proves able to execute against F24 guide. 

2/ Despite heavily favorable sellside skew positioning has become increasingly bearish incl mid-teens SI up from HSD% in 1Q. BOWL reported F4Q yesterday and expected weak results including negative inflection in sales/SSS/AEBITDA got defended as simply reflecting tough initial reopening comps. 

Description 

Bowlero is the world’s largest operator of bowling entertainment centers that went public Dec 2021 in a deSPAC transaction with ISOS Acquisition. The company operates 328 centers as of F23 end (Jun) and recently agreed to acquire high-end operator Lucky Strike for $90M (342 centers PF). Even more recently  a two-venue buy expanded its targets to laser tag and go-kart venues because according to CEO T Shannon they "align seamlessly" with bowling alley rollup strategy. 

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Catalyst

Downward revisions 

Roll up blow up