Bowlero Corp.
Q1 2023 Earnings Call Transcript

Published: 16 Nov 2022

[Operator:]

Greetings, and welcome to the Bowlero Corp., First Quarter 2023 Earnings Conference Call. It is now my pleasure to introduce your host, Ashley De Simone of ICR. Thank you, Ashley. You may begin.

[Ashley DeSimone:]

Good afternoon. And welcome to the Bowlero Corp., first quarter and fiscal year 2023 earnings conference call. All participants will be in a listen-only mode. During this call, the company may make certain statements that constitute forward-looking statements. Such statements reflect the company's views with respect to future events as of today, and are based on management's current expectations, estimates, forecasts, projections, assumptions, beliefs and information. These statements are subject to a number of risks and uncertainties that can cause actual events and results to differ materially from those described in the forward-looking statements. For further details concerning these risks and uncertainties, please see our annual report on Form 10-K filed with the SEC on September 15, 2022. The company expressly disclaims any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by applicable law. In addition, during today's call, the company will discuss non-GAAP financial measures, which we believe could be useful in evaluating our performance. Reconciliation of adjusted EBITDA to net income calculated under GAAP, can be found in our earnings press release and will be included in our Form 10-Q for the first quarter and fiscal year 2023. Throughout today's conversation, you will hear the company refer to EBITDA and adjusted EBITDA. At all times, the company is referring to adjusted EBITDA, as described therein and reconciled to net income in the associated disclosures. As a reminder, this conference is being recorded today. I would now like to turn the call over to Brett Parker, President and Chief Financial Officer of Bowlero. Please go ahead.

[Brett Parker:]

Good evening. And welcome to the Bowlero Corporation discussion for Q1 of fiscal year 2023. I am Brett Parker, Vice Chairman, President and CFO of Bowlero Corp. Thank you for joining us today. As always, we value our shareholders and strive to create value for them. To that end, we are looking forward to discussing the strong financial results from the first quarter of our 2023 fiscal year. We are pleased to report that we have continued to positive momentum from fiscal year 2022. 2022 was a transformative year for Bowlero and 2023 will take this company to new heights. We believe this trajectory is particularly important as we head into the second and third quarter of FY 2023 which historically represent 55% to 60% of our annual revenue. Beginning with the highlights. In the first quarter of fiscal year 2023, Bowlero generated record q1 revenues of $230 million and record Q1 adjusted EBITDA of $65 million compared to the prior year's Q1 revenue grew $49 million or 27% and adjusted EBITDA expanded by $6 million, or 11%. Compared to pre-pandemic performance revenue was higher by $82 million, or 55% and adjusted EBIT da expanded by $40 million, or 162%. This incredible performance serves as a testament to three key differentiators

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Kevin Heenan with JPMorgan. Please proceed with your question.

[Kevin Heenan:]

Hey, guys. Thanks for taking my question. Just a quick one on the remarks. Brett. I think you said your annual view on the margins remains unchanged. Can you just remind us, do you see the FY'22's 35% EBITDA margin as a base to build on this year? Thanks.

[Brett Parker:]

Sure. Yeah, I mean, look, we would expect that typically, as revenue rises, we would see higher margins, as I said from a combination of the impacts of QMS and then through the operating leverage in the business. So that's sort of the baseline.

[Kevin Heenan:]

Got it. And on the 2Q to-date, top-line figures you cited. Can you just remind us what the same center sales revenue was trending in the second quarter to-date relative to 1Q? Thanks.

[Brett Parker:]

Yeah. So the Q1, same store sales were higher by 55% versus pre-pandemic, or 37.6% versus pre-pandemic are 19.9% year over year. And the Q2 year-to-date through the first 18 weeks, we're seeing same store sales higher by 36% versus pre-pandemic and 21% to FY'22 in the early part of Q2. So it's essentially Q4, the revenue was higher by 52% in total and 32% on a same store basis.

[Kevin Heenan:]

Great, thanks very much.

[Brett Parker:]

Thank you.

[Operator:]

Thank you. Our next question is from Ian Zaffino with Oppenheimer. Please proceed with your question.

[Ian Zaffino:]

Hi, great. Thanks for taking my question. On the pricing that you mentioned, that you mentioned that you recently adjusted to pricing to reflect the cost environment. When have you implemented that? And what areas have you implemented that in or maybe the magnitude or any type of color to give us rounding that would be great. Thanks.

[Thomas Shannon:]

Sure, it's Tom Shannon. Thanks for the question. We've taken about 9% on average across all the products, so food, beverage, and bowling. And that took place about six weeks ago, Brett, correct me if I'm wrong on that date, but it seems like around six weeks ago, is when we took the price increase?

[Brett Parker:]

Yeah, it's been on a rolling basis. But most of it has been in that window you described.

[Ian Zaffino:]

Okay. So basically most of it was not reflected in this past quarter. Okay. And when you talk about staffing, where were we staffing up? Is this in anticipation of, additional events? Is it just mainline bowling? Where's the staffing? And again, any type of color on that would be helpful, thanks.

[Brett Parker:]

Well, it's across the board. So if you look back a year, in the first fiscal quarter of last year, we were just coming out of COVID. It was very hard to hire. A lot of people didn't come back to work, we were dramatically short staffed everywhere. So the margin was unsustainably high. And I mean unsustainably, because you might have centers where you have two managers and the end, the par is three or four. And so you can sustain that for a while, but eventually you just burn out your managers. So it's really across the board. And I would say that by being short staffed a year ago, we weren't able to maximize the opportunity in the second and third fiscal quarters, which are by far the highest revenue quarters, we have and the most important revenue quarters for that reason. I would say, excuse me, we are we are very well staffed now. And in most markets, I would say we are optimally staffed. So we're prepared to capture as much revenue as possible in the quarter in the next busy quarter that comes in after the start of the year. I think you're already seeing that in the incredibly robust same store sales that we've generated already so far in this quarter. And again, we're comping with very high numbers against numbers last year that were really good on a revenue basis. I mean, this was just a blowout quarter, $230 million of revenue in the quarter are traditionally slowest quarter is a huge number. So, again you went from very low labor last year, unsustainably low to a more normalized labor environment, which I think positions us extremely well to maximize revenue over the next few quarters.

[Ian Zaffino:]

Okay, great. Thank you very much. This is great color.

[Brett Parker:]

Sure, Ian.

[Operator:]

Thank you. Our next question is from Stefanos Crist with CJS Securities. Please proceed with your question.

[Stefanos Crist:]

Hey, thanks for taking my questions. You mentioned Money Ball, can we talk about some of the economics here? I imagine there's some incremental costs, maybe utilization that you think would be breakeven. And then what you see the potential of Money Ball today?

[Brett Parker:]

Well, we're spending in the neighborhood of $3 million to $4 million a year to develop and maintain this product. We developed it entirely in house so we own it, we own all the data like think that's key. The main point of Money Ball from our perspective is to increase the number of games bowled per visit, so increased length of stay, and also increased frequency. And the product will really have two basic iterations. One is a full money version where we're going to give you a series of challenges, and you can put up money against those and when actual money. The other is a free version where you have no money at risk. And you can win things like free game coupons, free food, discounts on food, et cetera. The point of both of those versions is identical to increase the number of games both per visit and to increase frequency of visitation. Now, if you think about it, the average bowler comes in and boasts about 2.2 games per visit. And let's just say that the average game we charged the average game rate is about $8. If you can increase that number of games bowled by one game per visit, right, which is the whole system is geared towards incentivizing you to do that will generate another $8 of bowling revenue per guest visit which drops at 100% margin. So the potential revenue increase from this product is enormous. And it's basically all margin less the $3 million to $4 million of ongoing maintenance and improvement costs that we're spending. The goal is not for the -- in the money version, the goal is not for the house to make money. Although it could by offering odds, the house could be the counterparty, we could actually make money and adjust the odds up or down to have a hold so to speak. That's not the goal, the goal is to return basically all of the money to the player and in some cases, more than all the money they've put at risk. And the reason is because we have so much opportunity in increased revenue per visit, at high margin that we could give back up to the $8 that we're getting for the incremental game bowled per visit and still be ahead economically. And so, it gives us a tremendous tool to sort of dial up or down what the incentive is to spur that increased pay per visit, and then to induce people to come back and bowl more.

[Stefanos Crist:]

That's great color. Thank you so much. If I can just squeeze in one more, you purchased, I think 400,000 or 500,000 shares during the quarter. Can you just talk about the decision that goes into that versus acquiring more centers or ramping up convergence?

[Brett Parker:]

Well, we're not capital constrained. So we sort of do all of it. We buyback opportunistically and we acquire every center or sign every lease that meets our hurdle rate. Hurdle rate being about 25% compounded over five years, with the terminal value factored in. So we started out the fiscal year with a significant cash balance. As you know, we generate prodigious amounts of cash flow and at the same time, we're renovating centers. So we're not capital constrained and we sort of are in a very virtuous position where all of these are very high IRR opportunities. And thus far, we haven't had to pick and choose, we've just done all of them.

[Stefanos Crist:]

Right, thanks so much.

[Brett Parker:]

Sure thanks.

[Operator:]

Thank you. Our next question is from Eric Handler with MKM Partners. Please proceed with your question.

[Eric Handler:]

Good afternoon, and thanks for the question. Tom, I wonder if we could sort of revisit the group events segment from last year second quarter. Obviously, Omicron caused a lot of cancellations in those corporate events in the quarter. Can you go back and I vaguely remember you saying what the impact was last year on this. But let's say whatever that number is, if we take that number and add it to the $40 million from group events that -- that was your actual number from last year's 2Q. Is that a good starting point to think about for group events in this year's 2Q?

[Thomas Shannon:]

It seems reasonable. I mean, we're trending higher than that now. So I think you can use that as a baseline. But in Brett, we didn't publish this number, but can we talk about what we did in Q4 on a cost basis and events?

[Brett Parker:]

Through Q3.

[Thomas Shannon:]

Okay, I don't have that number handy.

[Brett Parker:]

So through Q3, Eric our net revenue, or through Q1, sorry, was up 90% versus prior year, and 69% to pre-pandemic. So the momentum is really strong, it goes far beyond sort of getting back hold, which I think is the starting point that you were describing, where the trends are meaningfully more positive than that. For a number of reasons. But they're -- I think that's probably a good place to start your equation is looking at the trends in the year-to-date, because there's really nothing better to point to. And it's the most up to date that, the momentum in that part of the business in particular is extremely strong. But we're not seeing I think, what's equally important, and this is directly in response to your question. But we're not -- it's not as if we're seeing some replacement. So in the quarter, we saw events 69% versus pre-pandemic, as I said. We're also seeing retail up 69% and league up 19%. So we're doing better across all lines of business. It's not just that and there isn't any replacement that's happening.

[Eric Handler:]

Right, okay. That is helpful. And then with regards to your leagues and tournaments. Obviously, you just said you got like 19% growth, pre-pandemic. Just looking at the trendline sequentially in the fourth quarter, it was $21 million, which I think is a shoulder period for leagues. But last year, in the second and third quarter, you were like at $26 million $28 million. Like, how do I think about the seasonality of leagues? And in terms of, let's say, signups, how is that tracking on a year-over-year basis?

[Thomas Shannon:]

Well, the business is evolving. It's evolving from longer leagues to shorter leagues, et cetera. It's also evolving, in that. There were times of the week where the league business maximize the revenue opportunity, and now it doesn't. And so we've selectively taken leagues out to replace with retail. So the fact that we're up in league is pretty astonishing. I think the industry as a whole is down. But leagues are not your primetime business. They are really the off-primetime business, you have a lot of day leagues, you have leagues during the week, et cetera. And so, the league business for us is up. There's an evolution going from the 32-week, leagues to the shorter social leagues that can be half of that, or even shorter, but they spend more on food and beverage, which doesn't directly show up in the league number. So moving around, all in a positive direction, and certainly positive for the business. But it's not something that I would particularly focus on, sort of in the whole revenue mix.

[Eric Handler:]

Got it. Okay. And then one last question, if you don't mind for Brett. I believe all of your debt now is variable. How are you thinking about the debt that you have outstanding? Would it make sense maybe to pay down some of the debt with excess cash? How do we think about where the interest rates are trending to?

[Brett Parker:]

Well, I mean, at this point, though it's not low in the sense that everybody got sort of loaded into. The cost of capital is still pretty low, particularly when you compare it to the returns that we get by reinvesting in the business. So Tom mentioned the 25% hurdle rate, nearly all of our investment strategies were well ahead of that, in actuality. And we're seeing -- those returns continues so that the spread is just huge. So we continue to monitor it and we have considered putting on some caps. But typically trying to outsmart the interest rate environment, in marketplace has not been a winning strategy for most. So I think at this point, we're more inclined to see how things shake up -- shake out because it's still dramatically cheaper than what our rate return is by reinvesting that money in the business.

[Eric Handler:]

Thank you very much. Appreciate it.

[Brett Parker:]

Thank you.

[Operator:]

Thank you. Our next question is from Michael Kupinski with Noble Capital Markets. Please proceed with your question.

[Michael Kupinski:]

Thank you, and thanks for taking my questions. Some of them have already been dressed, but I was just wondering, in terms of the color on Q2, and you indicated that you did increase pricing. Can you talk a little bit about the margins, particularly in the event revenue, given the fact that that seems to be rebounding very strongly, versus like, let's say league play and others. And so if you could just kind of give us your thoughts on the composition of the revenue mix, and how margins kind of play into that, given your price increases and so forth?

[Thomas Shannon:]

Sure, Michael. It's Tom Shannon. The bowling part of the business has the highest margin, there's no cost of goods sold. So it's basically all profit on a variable basis. And we're seeing very, very robust retail demand and event demand. So the retail bowling is the highest margin, the highest volume, the most important part of the business. We're seeing the most robust demand we've ever seen in the company's history. We're also seeing extremely strong event sales which are accelerating. And that business is very high margin, also just slightly less high margin because you have a food and beverage component. So instead of it being basically 100% margin, let's call that business 80% margin. So I think what's important to keep in mind is that the quarter we just got out of is our lowest grossing quarter, even though it was very, very good quarter $230 million in revenue in the quarter that it's not surprising that if you're going to have margin compression in any quarter, it would be this one on a year-over-year basis, because you're going from a quarter where you had abnormally low input costs to one where they're more normalized, and it's not a huge revenue quarter. And so, the increase in costs sort of is magnified on a margin basis, versus what it would look like, say in this quarter or the next quarter. And so there's a -- we made a conscious decision to staff up to be fully capable of maximizing revenue and profit for the rest of the year. And we had to staff up in our lowest grossing quarter. So, the business across the board is extremely strong. Revenue generation continues to defy our expectations, Street's expectations, our annual operating plan, really everything. And now we're able to run the business in a sustainable way, and most importantly, deliver a high-quality guest experience.

[Michael Kupinski:]

Well, your business is performing extremely with some pretty strong economic headwinds, not all of your peers are doing as well. I was just wondering if you have noticed that there might be more interest in acquisitions and that sort of thing, given that you're doing so well, and others aren't. And I'm just wondering if the pipeline of acquisition targets look like they've improved from where they were just maybe six months ago.

[Thomas Shannon:]

I don't think there's been any change in that. But I will say that the acquisitions we've done year-to-date have been extremely good acquisitions. So Strikes at Rocklin in California, a center doing $6 million as an independent, which is an extremely high number for an independent. We just closed on the Mark in Omaha yesterday. You might have see in the press release or on Monday, I guess. Again, another center and independent doing $6 million. We think those centers have potential under our ownership to get to $8 million or $9 million. And when you're at those levels, they're extremely profitable. We also acquired Mel's Lone Star Lanes in Georgetown, outside of Austin, Texas, the Alley in Wichita. So not just a lot of deal activity, but a lot of really high quality deal activity, which is great. And then the rest of the centers are all very good, quite good. But this last couple of months was unusual in that we did so many deals of really, really high quality centers. I would say that the outlook going forward is about the same. And we have a very robust pipeline. We have five leases signed for new builds construction will start in after the first of the year, and these centers will probably average, I would guess, $7 million to $8 million so far, far higher than our fleet average. So it's a combination of deal volume, but also deal quality and the deal quality keeps going up. But just to answer your question the most simple form, we haven't really seen any change in the volume, the volume remains really good. I think the volume is driven more by the demographics of the sellers. You have an elderly independent proprietor base. And thus far, we're really the only acquirers of any scale.

[Michael Kupinski:]

Right. Thanks for all the color. Appreciate that.

[Thomas Shannon:]

Sure. My pleasure.

[Operator:]

Thank you. There are no further questions at this time, I'd like to turn the floor back over to management for any closing comments.

[Brett Parker:]

I think this is Brett Parker. I would just thank everybody for joining and giving us the opportunity to share our thoughts on what was a really robust performance in this quarter. And we look forward to talking again in a few months.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.