Bowlero: Bullish On The Long-Term Outlook

Summary

This post is to provide my thoughts on Bowlero Corp (NYSE:BOWL) business and stock. BOWL operates a chain of entertainment centers that offer a diverse range of activities, including bowling, arcade games, food, and beverage services. With its modern and trendy atmosphere, BOWL aims to provide a unique and engaging experience for its customers, targeting a wide demographic ranging from families to corporate groups. I am recommending a buy rating for BOWL as I expect the business to continue growing for a very long time due to the large and fragmented industry that is ripe for consolidation. BOWL is the largest player and it should be able to outcompete subscale players easily via its economies of scale and balance sheet.

Strong position to capture the expanding total addressable markets

The total addressable market (TAM) for bowling centers in the US is estimated to be $3.4 billion in 2022. This is expected to grow to $4.2 billion by 2030, at a CAGR of 5.9%. The growth of the market is being driven by a number of factors. The increasing popularity of bowling as a leisure activity, especially among millennials and Gen Z. The growing number of bowling centers offering a variety of amenities, such as food and beverage service, arcade games, and laser tag. The increasing popularity of bowling leagues and tournaments. The total number of bowlers in the US is estimated to be 70 million. This number is expected to remain relatively stable over the next few years.

With an annual guest count surpassing 28 million and the largest bowling operator in US, BOWL has become the household brand when it comes to bowling activities. With their strong brand name, image and presence in the bowling segment, BOWL is strategically positioned within the highly promising North American markets, poised to capitalize on the substantial opportunities presented by the expansive markets for bowling and out-of-home entertainment. This advantageous market positioning empowers BOWL to effectively leverage its competitive advantages, driving its business growth. A pivotal growth strategy involves the differentiation of bowling, dining, and amusement video game entertainment offerings across diverse customer segments, including retail, leagues, and group events.

Their ability to gain market share is proven in their strong revenue growth. For instance, between Fy20 to LTM, revenue doubled from $500+ million to $1 billion over the LTM, this is significantly higher than the industry growth rate.

Leveraging on their economics of scale to expand margins and returns

BOWL holds the title of being the largest operator of bowling centers in the United States. The growth strategy embraced by the company goes beyond organic expansion, with a significant emphasis placed on acquisitions. Ongoing assessment of potential acquisitions that align strategically with the Company’s overarching growth trajectory remains a key component of this strategy. Furthermore, the company has outlined a well-defined blueprint for in-market acquisitions, which includes options like direct purchases or leasing arrangements to facilitate market entry.

This strategic objective was pursued through the cultivation of organic growth, showing in the form of center conversions and enhancements to elevate the entertainment concepts on offer, leading to a broader spectrum of offerings. The simultaneous establishment of new centers further bolstered this approach.

In addition, a comprehensive suite of initiatives was set in motion. This suite included the implementation of self-service kiosks, the integration of robotic process automation, and the establishment of streamlined digital platforms for both booking and automated payment processes. These initiatives, working synergistically, succeeded in optimizing the allocation of resources. This efficiency-driven approach facilitated operations under a more streamlined staffing model, resulting in enhanced margins and augmented operating cash flows.

Successful execution of these strategy can be seen clearly from the improvement in revenue per center and EBITDA per center.

Looking at the recent quarter (3Q23), the company witnessed a remarkable surge in gross profit-an increase of ~$25 million, growing by 25%, driving gross profit to an all-time-quarter-high of $126 million. The driving forces behind this commendable growth were the $58 million surge in revenues and an impressive increase of 70 basis points in the gross profit margin. The latter was underpinned by various factors, including the implementation of effective cost containment measures, and an effective upward adjustment of selling prices. I would highlight that BOWL ability to raise prices is really commendable as it shows that BOWL still has plenty of ways to drive effective pricing up, especially with the current consumer spending environment – direct price hikes would certain hurt traffic.

“I think that we’re in pause mode on taking price, but there are other ways of addressing price or value that we’re going to start to explore. One thing that we haven’t done historically is things like bundling, it’s all been a la carte on a retail basis, and some of our competitors bundle. The most famous bundlers, of course, are places like McDonald’s, where I think probably the majority of their customers buy a combo or a happy meal or value meal, which is a bundle. There are things that we can do, that would provide greater value to our guests to guests and still increase revenue, guest spend per visit, and profit, but also increase value to the guest.” 3Q23 earnings results call

Fragmented TAM provides opportunity for M&A growth.

Currently, BOWL’s market share in the US bowling market is only at the high-single to low-teens range (estimated based on management comment that market share is 8% in FY21). With such a small market share, they are already have the largest market share of any bowling center operator in the US. To put things into perspective, the next four largest bowling center operators in the US have a combined market share of much lesser than what BOWL has, and importantly, the remaining 90% of the US bowling market is largely operated by independent operators. As mentioned, BOWL’s current size allows them to leverage on the economics of scale, expanding profit margins by driving cost down. This gives BOWL financial advantage over small scale independent operators by competing in terms of pricing and location. Once the independent operators are unable to compete, it will resort to either closure or sales. This effectively allows BOWL to take advantage of this fragmented TAM to gain market share, making them even bigger, leverage even more on EOS and the cycle continues.

Valuation

I believe the fair value for X based on my model is $15. My model assumptions are that FY23 will see similar performance as the first 9M23 (I annualized the 9M23 into FY23E), and growth to slow down in the next 2 years as the business gets larger in terms of revenue size. Consensus are expecting growth rates in the low-teens, which I think might be too low given the strong momentum so far, and also the large TAM available. I assumed BOWL to trade at 2.8x forward revenue, no change to where it is today, which is a premium to other entertainment facilities peers such as Live Nation Entertainment, Cinemark Holdings, AMC Entertainment, etc. as it is expected to grow much faster.

Risk

Change in consumer preferences and purchasing behaviors due to high inflationary environment

Bowling is classified as discretionary spending by consumers. Consequently, BOWL’s business is susceptible to economic downturns and recessions. Particularly, they rely on the discretionary spending of consumers residing within the communities where our centers are situated. Should there be a substantial decline in the economic strength of these localities or any of the regions housing such centers, consumers might curtail their discretionary expenditures. This, in turn, could lead to a reduction in sales, consequently exerting an adverse influence on both business and operational performance. BOWL’s centers are strategically positioned in proximity to densely populated retail zones like regional malls, lifestyle centers, large-scale retail centers, and entertainment hubs. The viability of such centers relies on attracting a significant volume of visitors to these locations. However, as demographic and economic dynamics evolve, the present centers might or might not remain appealing or profitable.

Growing home-based entertainment markets

In recent years, home base entertainment is becoming much more popular and affordable. The home base entertainment market exploded right after the COVID-19 pandemic outbreak. Therefore, BOWL faces stiff competition from progressively advanced in-home entertainment options, encompassing activities like online and video gaming, as well as home-based streaming and movie delivery services. Failure to compete with this segment might lead to shrinking TAM.

Conclusion

In summary, BOWL stands as a dominant player in the industry. As the largest operator of bowling centers in the US, BOWL’s potential for growth is evident through its strong revenue expansion and efficient operational strategies. Leveraging its economies of scale, BOWL has a competitive edge that allows it to tap into the expanding total addressable markets and outperform smaller competitors. The company’s adeptness in adapting to market trends, evident in their pricing strategies and technological advancements, showcases its resilience and potential for continued growth. However, challenges such as shifting consumer preferences and increasing home-based entertainment options warrant attention.