Revamping Entertainment Hubs Fuels Revenue Surge And Operational Efficiency Gains

Key Takeaways

• Bowlero's upgrading and rebranding of acquired centers enhances attraction and retention, indicating positive future revenue growth and high EBITDA margins.
  
• Strategic expansion and diversification, including acquisitions like Raging Waves water park, suggest potential for significant revenue growth and profitability improvement.
  
• Bowlero's strategies and expansion into non-bowling amenities, while avoiding price hikes, could impact net margins and profitability amid operational risks.

Catalysts

Operates location-based entertainment business under the AMF, Bowlero, and Lucky Strike brand names.

• Bowlero's deliberate investment in upgrading and rebranding acquired centers has positioned these locations as best-in-class entertainment hubs in their communities, expected to enhance customer attraction and retention, thereby positively impacting future revenue growth and maintaining high EBITDA margins.
  
• The company's focus on opening new centers in high-potential locations suggests a strategic expansion plan aimed at generating strong double-digit returns on invested capital, indicating a potential for significant revenue growth and profitability improvement.
  
• Bowlero's acquisition of Raging Waves water park and the underwritten synergies from implementing its operating philosophies highlight diversification into other areas of location-based entertainment, suggesting additional revenue streams and operational efficiencies that could positively impact earnings.
  
• The launch of successful initiatives such as season passes, new retail and F&B menus, and technology improvements like server tablets, showcases a strong focus on enhancing customer experience and operational efficiency, likely to increase customer spend per visit and drive same-store sales growth.
  
• Management's guidance for fiscal year 2025, including a mid-single-digit to 10% total growth forecast and a low to mid-single-digit same-store sales comp, alongside expected EBITDA margins of 32% to 34%, showcases confidence in continued operational improvements and efficiency gains, suggesting an undervaluation if these targets are met or exceeded.

Assumptions

• Analysts are assuming Bowlero's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -8.0% today to 7.5% in 3 years time.
• Analysts expect earnings to reach $106.4 million (and earnings per share of $0.67) by about October 2027, up from $-92.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $138.9 million in earnings, and the most bearish expecting $86.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.6x on those 2027 earnings, up from -18.1x today. This future PE is greater than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 8.85% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• Bowlero's strategy to not plan price increases could hinder their ability to offset inflationary pressures on wages and input costs, impacting their net margins.
  
• The dependence on the performance of new and seasonal offerings like the fall season pass to drive traffic during slower months poses a risk if these initiatives do not meet projected success, potentially affecting revenues.
  
• Significant investments in rebranding and launching new menus to upscale their food and beverage offerings could result in higher operating costs without guaranteeing proportional increases in customer spending, potentially squeezing margins.
  
• Bowlero's continued focus on mergers and acquisitions for growth introduces potential risk associated with integrating new acquisitions efficiently and achieving the anticipated returns on these investments, which could impact EBITDA.
  
• The aggressive expansion into non-bowling amenities and location-based entertainment outside of their core business, such as the Raging Waves water park acquisition, may divert focus and resources, introducing operational risks and affecting overall profitability if these new ventures do not perform as expected.

Valuation

• The analysts have a consensus price target of $18.06 for Bowlero based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $15.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.4 billion, earnings will come to $106.4 million, and it would be trading on a PE ratio of 25.6x, assuming you use a discount rate of 10.7%.
• Given the current share price of $11.3, the analyst's price target of $18.06 is 37.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.