2024-01-04 14:27:38 ET
Summary
- Bowlero's sale-leaseback transaction with VICI Properties raised significant funds to pay down debt, boost cash reserves, and buy back shares.
- The funds will also be used to pursue an aggressive roll-up strategy, including building new bowling centers, with the company targeting 1,000 centers in the next few years.
- BOWL's average unit volume is currently at $3.2 million and is growing at a high single-digit compound annual growth rate.
Bowlero's (BOWL) sale-leaseback transaction with VICI Properties (VICI) for 38 centers was transformative for its balance sheet. The deal raised $439 million of funds that BOWL is set to use to pay down debt and boost a cash and equivalents position that stood at $40.1 million at the end of its last reported fiscal 2024 first quarter, which ended October 1, 2023. Further, the deal is being structured as a tax-deferred capital contribution, which means more immediate liquidity for building new bowling centers with BOWL taking on an initial annual rent liability of $31.6 million. BOWL has been rallying since the news of the sale-leaseback, up roughly 34% since October, with the commons now looking to make new highs.
As of November, the company had 350 operating centers across three brands in the US, Mexico, and Canada. The VICI funds will be used to pursue an aggressive expansion strategy, with BOWL targeting 1,000 centers via new builds and its ongoing rollup strategy. The Bowlero brand is by far the most extensive of BOWL's three core brands, offering modern and upscale bowling lanes within centers that also sometimes house arcade games, laser tag, and full-service restaurants.
Roll-Ups And Share Buybacks
The company's growth has been driven by its roll-up of traditional bowling centers which are then modernized, upscaled, and rebranded. Bowling remains a popular target sport, with BOWL's roll-up approach set to somewhat derisk its ramp. This is fundamentally a stable demand experiential activity with long-term durability and low cyclicality. The cash influx from VICI is set to accelerate BOWL's roll-up strategy and could possibly be paired with a share buyback program to return some funds back to shareholders. BOWL has an ongoing share buyback program, which repurchased 12.1 million shares of its Class A common stock during the first quarter. The company has reduced its fully diluted share count by 28% since going public in 2021.
In such a scenario, the common shares could eclipse its previous all-time highs, especially if the broader macro perspective was buffeted by interest rate cuts. BOWL leverages its centers to maximize revenue, with food and beverages offered alongside arcade games to drive incremental gains in average unit volume. This was $3.2 million at the end of fiscal 2023, an 8% compound annual growth rate since fiscal 2019. Hence, BOWL's investment pitch is simply just its roll-up of new centers while steadily increasing its average unit volume and maintaining the contribution margins of its products.
Revenue, Cash Flow, And Long-Term Debt Balance
First-quarter revenue growth was somewhat anemic, with BOWL generating $227.4 million in revenue, down 1.2% versus its year-ago quarter comp. This came as the company added 18 centers during the quarter, with 17 of these from acquisitions and a single new build out. Adjusted EBITDA during the quarter was $52.1 million, down from $65.3 million in the prior year, with BOWL generating GAAP net income of $18.2 million. This was a material improvement from a loss of $33.5 million in the year-ago quarter.
BOWL generated $16.1 million in cash from operations during the quarter, but capital expenditure at $50.7 million meant a negative free cash flow of around $34.6 million. The company has funded its buybacks by taking on more debt, with future capital return to shareholders set to be driven by sale-leasebacks. Total long-term debt at the end of the first quarter stood at roughly $1.29 billion was up $138 million sequentially and from $878.2 million in the year-ago quarter. This will be partially paid down with the proceeds of the VICI sale-leaseback.
Whilst an inherently risky buyback strategy, Moody's upgraded its credit rating to " B1 " early last year. BOWL's capital expenditure forms a critical part of its ramp, but dampens free cash flow. This should change as the company achieves more scale and can phase down capital expenditure in lieu of more share buybacks. The company is currently trading at a $2.21 billion market cap versus revenue guidance of $1.14 billion to $1.19 billion for its full year 2024. This would mean a forward price-to-sales multiple of 1.93x using the low end of guidance. However, its debt balance means its price-to-enterprise value is markedly higher at 4.25x. BOWL plans to allocate $160 million to acquisition, $40 million to new builds, and $75 million to conversions in its fiscal 2024 with its bull case now built on its pace of roll-ups and subsequent share buybacks. The common shares are a buy against the ongoing roll-up strategy, with the new year likely set to bring further gains as BOWL executes on its growth ramp.
For further details see:
Bowlero: Is The Rally Just Beginning?