Bowlero Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 17, 2023

There are 10 speakers on the call.

Operator

Welcome to the Valero Corp. 3rd Quarter 2023 Conference Call. It is now my pleasure to hand over the call to Ashley DeSimone of ICR.

Speaker 1

Good afternoon, and welcome to the Valero Corp. To the Q3 Fiscal 2023 Earnings Conference Call. All participants will be in a listen only mode. Over during this call, the company may make certain statements that constitute forward looking statements under the Private Securities Litigation Reform Act. Such statements reflect the company's views with respect to future events as of today and are based on management's current expectations, estimates, over to forecasts, projections, assumptions, beliefs and information.

Speaker 1

These statements are subject to a number of risks and uncertainties that can cause to our financial results to differ materially from those described in the forward looking statements. For further details concerning these risks and uncertainties, over Please see our annual report on Form 10 ks filed with the SEC on September 15, 2022, to you as well as other filings that the company will make or has made with the SEC, such as quarterly reports on Form 10 Q and current reports on Form 8 ks. 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 law. Over. In addition, during today's call, the company will discuss non GAAP financial measures, which we believe could be useful in evaluating performance.

Speaker 1

Over to the operator. As a reminder, this conference is being recorded. I would now like to turn the call over to Thomas Shannon of Bolero Corp. Please go ahead.

Speaker 2

Good afternoon, and welcome to the Bolero Corp. Earnings Discussion for Q3 of fiscal 2023. Thank you for participating in today's conference call. I am Thomas Shannon, Founder, Chairman and CEO of Valero Corp. I'm joined by Brett Parker, Vice Chairman and President and Bobby Lavin, who recently joined as Chief Financial Officer Designate.

Speaker 2

Over to Bobby, who will be the company's CFO as of tomorrow, brings extensive experience as a public company CFO over and is a natural fit with our team and culture. We're thrilled to welcome him to the Bolero family. Over. During today's prepared remarks, we'll cover several topics as we have many exciting updates to share, starting with our financial performance in the quarter and several important balance sheet optimization transactions we have completed as we continue to focus on ways to create and deliver shareholder value. Over.

Speaker 2

Beginning with the financial highlights, I am happy to report that we had by far the largest quarter in our nearly 3 decade history, With revenues reaching $316,000,000 and adjusted EBITDA reaching $128,000,000 over to our 20.4 percent margin for the quarter. Year over year revenue growth was 22% and relative to pre pandemic, over to the operator. Revenue was higher by 54%. This revenue growth was driven by a healthy combination of same store sales growth and contributions from acquired and newly opened to our shareholders with same store sales increasing 17% year over year and 30% versus pre pandemic. In addition to continued strong demand across our various business lines, which are walk in retail, leagues and events, This new high watermark remains a testament to our operating ethos.

Speaker 2

We prioritize consistent execution across all levels of the organization. Over. These results reflect the output of our team's efforts, our proprietary technology and the fundamental strength of our business model. Over. Overall, Bolero's trajectory is shaped by our ability to generate consistent same store sales growth.

Speaker 2

Our ABC Growth strategy, which includes acquisitions, new builds and conversions, our proprietary technology and world class team and our dedication to continued innovations and excellence in execution. We pioneered upscale experiential bowling, introduced technology and disciplined operational execution to a highly fragmented industry and continue to focus on the next frontier of the customer experience as exemplified through strategic innovation such as Money Bowl, over, which has now been activated in 64 centers or about 20% of our portfolio. Total downloads are over 60,000. Over. Moreover, the free to play version is expected to launch in our current fiscal quarter, which will further our reach across the nation and increase access to this differentiated gamified bowling experience.

Speaker 2

We appreciate your continued trust in our team and support of our proven strategy. And we're excited to take Bolero to new heights. With that, I would like to hand it off to Brett Parker to lead the balance of the discussion.

Speaker 3

Thank you, and good evening, everyone. As Thomas mentioned, we are happy to report a number of extremely positive developments. Over. We had our strongest performing quarter ever. In the Q3 of fiscal year 2023, historically our seasonally most significant quarter, Valero generated revenues of $316,000,000 and record adjusted EBITDA of $128,000,000 with a 40.4 percent adjusted EBITDA margin.

Speaker 3

This translated into $118,000,000 of adjusted cash from operating activities. Over. Compared to the prior year's Q3, revenue grew $58,000,000 or 22% and adjusted EBITDA expanded by $19,000,000 or 18%. Over. Compared to pre pandemic, revenue was higher by $111,000,000 or 54% and adjusted EBITDA expanded by $60,000,000 or 89%.

Speaker 3

Net loss for the quarter was $32,000,000 over to the operator. However, adjusted for a non cash expense related to the valuation of earn out shares, adjusted net income was $55,000,000 We had a highly cash flow generative quarter and we redeployed much of the operating cash flow across our multi pronged reinvestment strategy to continue to fuel future growth. On a trailing 12 month basis, revenue grew to $1,100,000,000 and adjusted EBITDA reached $372,000,000 at a 30 $4,000,000 or 35% compared to the prior year TTM period. From a center fleet perspective, We have remained active with respect to acquisitions, new builds and conversions. We added 1 new center in the Q3 and 2 additional centers subsequent to the end of the Q3, bringing our current center count to 329.

Speaker 3

We also have definitive purchase agreements to acquire 2 additional centers in the 4th quarter. Over to our 2 new builds are currently under construction and are expected to open this calendar year. Since the start of fiscal 2022, over. We have added 44 new centers to our portfolio, the majority of which came with owned real estate, which provides long term optionality for us to raise capital over through sale leaseback transactions or traditional mortgages. There are currently more than 35 conversion projects underway.

Speaker 3

Over. Overall, our pipeline remains robust with ample opportunity to further grow inorganically as well as organically with our same store sales growth algorithm serving as the central ingredient in our success. Reflecting upon our robust financial performance in 3Q, over to the prior two quarters, the level of demand we saw in the business were sustained in the 1st month of the subsequent quarter. And looking ahead to our fiscal Q4, this dynamic remains intact, particularly relative to pre pandemic levels. Over since the beginning of calendar year 2022, we have been sharing the growth over a pre pandemic chart to provide a snapshot into how the business was performing in light of the COVID-nineteen pandemic.

Speaker 3

After this quarter, we will no longer provide a forward looking view of operating performance relative to pre pandemic periods over to you as its relevance decreased given the time that has elapsed. Nevertheless, despite macro headwinds such as continued inflation and rising interest rates, Center level revenue continues to perform 50% or higher versus pre pandemic levels and same store sales growth has been strong. Over. While the results are preliminary, the revenue in the most recent 13 week period ending May 7 grew an impressive 53% compared to pre pandemic. As we have stated previously, we expect that the year over year comparable performance will naturally become less pronounced as we begin comping over the surge in demand to you in the latter half of the third fiscal quarter and all of the Q4 of last year as the COVID-nineteen omicron wave subsided.

Speaker 3

On that note, I would like to briefly talk about our fiscal 4th quarter and items that will affect year over year comparability. Over. As a reminder, revenue in the Q4 last fiscal year benefited from 2 factors. 1, there was a 53rd week in our fiscal 2023 calendar the call over to the

Speaker 4

operator for the call.

Speaker 2

That added an

Speaker 3

estimated $15,000,000 in revenue and 2, a change in the accounting methodology for service fee revenue, duty charged on all F and B related revenue, all of which is paid to our servers and bartenders. Adjusting last year's Q4 revenue figure for the 53rd week and the service fee revenue recognition impact in the Q4, the comparable baseline revenue for Q4 of fiscal 2022 is $244,000,000 over. Turning to our center level economics, the heart of our operation and our overall financial profile. We continue to see robust year over year growth and performance well above pre pandemic levels and prior year. Total bowling center level revenue increased $57,000,000 or 23% over the comparable prior year period with walk in retail growing $31,000,000 or 17% and group events up $20,000,000 or 49%.

Speaker 3

Over This strong top line growth translated into a significant increase in adjusted center EBITDA, which jumped 20% year over year and an impressive 73% over the pre pandemic period reaching $149,000,000 over our 48% adjusted center EBITDA margin decreased 103 basis points versus prior year. However, it increased 444 basis points compared to the comparable pre pandemic period. Adjusted EBITDA over the prior year benefited from a $7,500,000 rent concession related to COVID-nineteen and staffing shortages, which coincided with a surge in demand in the latter half of over to our shareholders. Normalized for the prior year rent credit, adjusted EBITDA expanded by 25% year over year and adjusted center EBITDA margin expanded 100 and 3 basis points. On a consolidated basis, adjusted EBITDA margin was 40.4%, which surged almost 7.56 basis points above comparable pre pandemic metrics despite well documented input cost inflation.

Speaker 3

Relative to prior year, adjusted EBITDA margin expanded 128 basis the financials and financials and financials. This margin level exemplifies the benefits of operating leverage inherent in the business to our shareholders at both the individual center and overall portfolio levels. This leverage is largely a function of portfolio wide 50% variable contribution margins across our revenue streams. From a cash flow perspective, in the Q3 of fiscal 2023, we generated $118,000,000 in adjusted cash from operations versus $103,000,000 in the comparable prior year period. Consistent with our history, we redeployed much of this cash flow across our portfolio to self fund center acquisitions, new builds and existing center upgrades and renovations.

Speaker 3

The company finished the quarter with robust liquidity over underpinned by over $150,000,000 in cash on the balance sheet and roughly $190,000,000 have undrawn capacity on our revolving credit facility. Over. Now let's discuss several noteworthy capital markets updates. As you may recall, in February, we amended and extended our Term Loan B through February of 20 the call over to the operator for the Q and A session. We have now hedged $800,000,000 of the loan or nearly 90% of the total by locking in our floating rate 1 month term sulfur exposure into a defined band of approximately 94 basis points to 5 50 basis points over to March 31, 2026.

Speaker 3

It cost us $0 in upfront premium to achieve this protection over. As of April 2, 2023, the effective interest rate on the Term Loan B was 8.3%. We are very pleased with this outcome, particularly given that we have capped our annual interest rate expense on the Term 1B at 9%, which compares to the the 30 plus percent returns we generate across our multi pronged reinvestment strategy I referenced moments ago. Over Further and also salient to the capital structure discussion, we have completed the buyback of 32% of our convertible preferred shares for $81,000,000 in 2 separate transactions, dollars 74,000,000 of which occurred subsequent to quarter end. We funded these buybacks with cash on hand.

Speaker 3

Pro form a for these transactions approximately $136,000,000 over the $200,000,000 notional principal remains outstanding. Importantly, these two transactions reduced the potential impact to fully diluted share count by 5,200,000 shares as measured on an as converted basis. We have also been active in returning capital to to common shareholders via share buybacks. This calendar year through May 15, we have repurchased 2,400,000 Class A common shares $34,000,000 or an average price of $14.19 per share. Since the inception of the program, we have bought back $82,000,000 of stock equating to roughly 7,000,000 shares for an average of $11.85 per share.

Speaker 3

In continued support of this reinvestment strategy, On May 16, 2023, the company's Board of Directors authorized an increase to our share buyback to $200,000,000 Lastly, it is worth noting that the first tranche of earn out shares were earned on March 2nd. Over. As a result, there is only one remaining tranche of earn out shares that vest at 17.50. The combination of these various share related transactions to our shareholders and shareholders. Our full year 2019 guidance for the quarter was $1,000,000 and $1,000,000 and $1,000,000 compared to $1,000,000 in the prior year.

Speaker 3

The to Slide the 4,300,000 common shares issued as part of the warrant redemption, which was completed in May 2022. As you can see in the chart and the table, we have consistently reduced the fully diluted share count since coming public in December of 2021. In closing, to recap a quarter with many substantial positive highlights. The call over to the operator to review the financial results of $128,000,000 and adjusted EBITDA margin of 40.4%. We continue to simplify our capital structure by retiring nearly 1 third of the convertible preferred for $81,000,000 and reducing our fully diluted share count by approximately 8,700,000 shares or 4%.

Speaker 3

Over We successfully executed a hedge on roughly 90% of the notional principal of our $900,000,000 Term Loan B over and it cost us $0 in upfront premium to ensure this risk. And finally, we augmented our management team with the addition of Bobby Lavin as our CFO. Needless to say, it was a very exciting quarter on multiple fronts and we remain active in finding ways to deliver value to our shareholders. Over. As Thomas highlighted, we remain enthusiastic about our growth trajectory despite some of the near term macro dynamics that we discussed.

Speaker 3

Thank you for your time, and we all look forward to presenting next quarter. We'll now begin a brief Q and A led by our Chairman, Founder and CEO, Thomas Shannon. Over Operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Over

Speaker 4

over

Operator

Thank you. Our first question comes from Matthew Boss with JPMorgan. Please proceed with your question.

Speaker 2

Over to

Speaker 4

you, and congrats on the nice quarter.

Speaker 2

Thanks, Matt. Thanks, Matt.

Speaker 4

So Tom, maybe could you speak to over to the overall demand trends or the progression of traffic that you saw in the Q3, maybe more recently over. And have you seen any notable changes in demand between group events relative to walk in retail?

Speaker 2

Well, there has been a slowing. There's no doubt. So as the quarter progressed, the comps over. We saw that in April, but it seems to be flattening now. So, we were coming off of maybe the biggest sugar high in history a year ago with all the money flowing through the system.

Speaker 2

And I think probably more importantly, for our business, a lot of people not back at work, kids not back at to school. And so you had this unparalleled combination of a huge amount of idle time and a lot of money. I think we'll resume growth, but I think we there needed to be a pause because it's It's been 2.5 years of double digit growth and obviously that's not really sustainable for any business. Over So I'm not concerned about it. I think it's probably it was inevitable at some point.

Speaker 2

We did see it. Over We see the slowdown more pronounced in California, which was also the market that came back the most Strong. So again, just sort of a return to normalization. And yes, over probably more so on the event side than on the retail side. But The trends I'm seeing now are sort of more of a return to over stability or positive growth, but we did notice it for the first time since over 2020 in the last 2 or 3 months.

Speaker 4

Great. And then maybe just a follow-up as we think about over moving into next year, FY 2024, how best to think about some of the underlying drivers of same store sales growth, your pricing power, some of your upgraded offerings as we think about the sustainable underlying drivers of comps.

Speaker 2

To the bars, kitchens that they didn't have. So we've done a lot of acquisitions over time, but It takes a while for those facilities to become renovated and then they contribute more. So that's one tailwind we have. Over the second is, we continue to optimize things like pricing and packages and other things that I think will the call over to our operator and we continue to give us the ability to increase the revenue that we're able to get per guest visit. Over to the operator.

Speaker 2

And then lastly, we have a very robust acquisition pipeline. So I think between the renovations, acquisitions to come, the new builds, just sort of the flow of the underlying business, I think all the trends will be very positive over for the next 12 months.

Speaker 4

Great. Best of luck.

Speaker 2

Thank you.

Operator

Thank you. Our next question comes from Jeremy Hablin with Craig Hallum Capital Group. Please proceed with your question.

Speaker 5

Thanks and congrats on the strong results. I want to just ask a follow-up question in terms of the to the pre pandemic levels. How does that translate on a quarter to date, same store sales basis?

Speaker 3

So it's Brett Parker speaking. We haven't released to that level of detail. We've been fairly cautious on the numbers over outside of the quarter itself. So we've been putting out this chart consistently and done so for the purposes of giving incremental visibility. And I think if you look at kind of this year, over to April, and back into March February and then kind of look at the prior year, You can see that's when the big uptick was happening.

Speaker 3

So we continued to comp meaningfully higher. And then as Tom was saying, over We saw some deceleration that we knew would happen as we come up against those more difficult comps and then continuing to trend meaningfully higher than pre pandemic. And it's the trends are intact as Tom said.

Speaker 5

Okay. Got it. Just from the comments from Tom, it was hard to interpret whether or not comp trends were over Q to date, positive or not. Any do you want to clarify that at all?

Speaker 3

Well, we're not going to give the comp numbers on the quarter Until we get into it, I think what Tom was articulating was that the front part of the quarter had the most difficult comps and would be Easiest to keep higher on a total revenue basis and most difficult to keep high on a comp basis. Over. Got

Speaker 5

it. Okay. I wanted to ask about Moneybult and it looks like you've rolled that out as you said over almost 20% of your centers now. It looks like you saw a pretty meaningful uptick over in app downloads. Wanted to see if you could comment or provide any color over to the ability for this to drive the 2 intended goals, trip frequency and games played, over anything notable that you would be willing to share at this point in time.

Speaker 5

And then Also associated with that is with the pending launch of FreePlay. What are the expected costs that

Speaker 3

So with respect to the performance in aggregate of the system, we're Very encouraged by what we're seeing, but we're hesitant to give specific data points yet just because the data set isn't that Rich, but the directionality is certainly what we're looking to see. Over. And then excuse me, with respect to free to play and the cost to roll it out, it's de minimis over at the location level, 0 in many instances, where the systems already exist. So it's really just the over overall development costs where and we didn't add heads to support that effort. It's just an allocation of the team dedicated to Moneybills.

Speaker 3

So in terms of incremental expense, if there were meaningful capital requirements needed at the centers or over significant advertising plan for it or anything like that. That would be very different from what we're looking at today, which is Just a simple push.

Speaker 5

Okay, got it. And then last one for me before I hop out of the queue. Over Just in terms of there's been quite a bit of noise related to the EEOC review that's been pending here. It seemed to grab quite a bit of media attention in the last week. To share on

Speaker 3

that. Sure. Yes, I mean, you're right in that we're limited. But I would tell you, First of all, the claims made in the cnbc.com article are entirely false, and we deny them in the strongest terms over that there were any of those allegations are accurate. The EEOC investigation is not a new development.

Speaker 3

It's been dragging on for over 7 years, and we've disclosed in regulatory filings all the information we're able to share. As you noted, we have nothing to hide. We have fully cooperated and provided information to document and documents to the EOC throughout this whole process. Over to date, the EOC has not substantiated their determinations with any evidence or any viable methodology that supports their conclusion. Over to our own thorough investigation into the claims also has not substantiated any evidence over to the operator of wrongdoing or any violation of our policies prohibiting any form of employment discrimination.

Speaker 3

Over. Overall as a values based enterprise, Valero does not tolerate discriminatory or demeaning conduct. These are the facts and the reasons why we continue to battle to have these claims thrown out. Whatever the outcome is, it will not materially impact our business or distract us from executing against our strategic priorities. Our latest earnings results that we're talking about now reflect our unwavering focus and commitment to excellence.

Speaker 3

The names the author made in a similar story that she wrote in the New York Post in 2017. At the end of the day, we stand by our positive workplace culture, over to our shareholders.

Speaker 4

We stand

Speaker 3

by our visionary leader and we stand by our track record of cultivating exceptional talent. And beyond that, there's not much we can say.

Speaker 5

Got it. Thanks for

Speaker 2

the color. Best wishes, guys.

Speaker 3

Thank you.

Operator

Over. Thank you. Our next question comes from Randy Konik with Jefferies. Please proceed with your question. Over.

Speaker 6

Hey, guys. Thanks a lot. I really appreciate it. I just want to kind of really think about and focus my questions on some long term opportunities for productivity enhancement. Can we get first, I want to discuss Lane Kiosks And maybe give us some perspective, remind us what percent of the sensors currently have the lane kiosks installed?

Speaker 6

Over And then have you seen kind of a noticeable difference in the amount of F and B per lane per bowling session, if you will, in the lanes or the sensors with the lane kiosks over versus the ones without. Just want to kind of get some perspective there because it seems like a good unlock for driving higher and higher F and B and just revenue per lane going forward.

Speaker 2

Over. Yes, Randy, this is Tom. I think it's a great question and as a funny coincidence, it's something I was spending time talking to some of my senior people about today. The reality is that the kiosks have underperformed our expectations for them and certainly their potential. We have them in 80 of our highest grossing centers.

Speaker 2

And over The technology is very good. We spent a lot of time. I think we're on version 3 or 4 of the product, works very well. Over. I think there were 2 problems that have resulted in it not getting sort of the level of attention in the centers that it should.

Speaker 2

Over. The first is we had a lot of management turnover, which we've addressed by giving to the Chief Operating Officer and Chief Executive Officer and Chief Executive

Speaker 4

Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer

Speaker 2

and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer and Chief Executive Officer. Because we needed to mitigate the turnover, we hadn't raised pay in those positions in quite a while, We made some meaningful increases. What we've seen since that happened is a dramatic stabilization in the work over the managerial workforce. The reason that matters is because you can't train managers and have something stick in terms of a quasi complicated process or let's say over a process with a number of attributes like getting the kiosks optimized if you have rampant turnover. So We need to do to address turnover for a lot of reasons.

Speaker 2

One of the casualties of high turnover was kiosk utilization because managers over Need to really understand the value it provides to them, whether it's as an adjunct to a server or as a replacement to a server over And the entire customer journey through that experience from educating them at the front end, this is an avenue by which they can order, over making sure that the orders are executed properly by the kitchen and delivery to the lanes, etcetera. So what we found recently was a wide range of how kiosks are being utilized in the centers. Some centers utilize them over quite a lot. Some centers utilize them basically as a digital menu and some centers didn't utilize them at all. So over It's more of a cultural thing and more of a training thing than it is a technology thing.

Speaker 2

The good news is I think that once we solve this And we will. And we need, I think, a very dedicated product champion to really spearhead this effort.

Speaker 5

Over that

Speaker 2

the possibility for this is meaningful. And what does that mean? I would say, There's no reason we shouldn't be looking at a high single digit or even low double digit increase in retail food sales by getting these utilized. But over the call. The problem is unfortunately that this is not a technological solution.

Speaker 2

At the end of the day, it's a people based issue. And over in a rapidly growing company, with high turnover like everyone else in hospitality, It hasn't taken root culturally in the centers like we would have hoped, but this is addressable and it's something that we're very focused on.

Speaker 6

It's interesting. It almost feels like investing in almost a greeter or someone that because when I go to the lanes, if someone does walk me over to the lanes and over it could be just as simple as, hey, just these kiosks can help you out and if you want to order food, blah, blah, blah. We can talk about that offline, but just seems like obviously a huge going forward in the years ahead. My second question is more around the social, I guess, the group events. Over very good growth in the quarter.

Speaker 6

The way I kind of almost thought about this was the last bowling party I went to was when 6, that's 40 years ago, right? So it almost felt like there was a dormancy in bowling as a party, over being in a consideration for a kid party, obviously, that's improved over the last few years with Valero remodels and everything, but It still seems like a massive opportunity ahead as the bowling party comes back into consideration for kid parties. Over How do you think about that in the non bolero versus bolero centers? Like just give us some perspective there.

Speaker 2

Well, I mean, we do an enormously robust event business. I don't know what the over to GPM is, but I would imagine it's in the neighborhood of $200,000,000 of events. Over The bowling birthday party is kind of a bedrock American institution. In some markets, over it may be stronger than others. For example, in Los Angeles, the people I know out there say all they do on weekends is to end up going to birthday parties for their kids or other kids at Boeing at our centers on the West side of LA, same thing in Manhattan.

Speaker 2

Over I think it's that business will continue to grow long term and it's not one business, right? You've got kids birthday party business, you have adult social, you have corporate events, you have holiday events, right? I think all of those will grow either over by population growth or other reasons. I think we're actually helped by over workers not going to the office as much as they did previously because it requires companies to over to get employees together in some way to keep the culture intact, and this is a great way of doing that. So I would say relative to what seems to be a very negative trend for many companies, which is work from home And they're fighting that.

Speaker 2

They want people to come back. We've seen corporate activity stronger over than it was previously as a result of what I think we're benefiting from that where companies need to get creative to get people back in the over together, I should say. We're a great way of doing that. So the event business is extremely robust for us and I think that all of the market segments that go into that are growth segments for us really almost in perpetuity.

Operator

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

Speaker 6

Over. Hi, great. Thank you very much. Just wanted to build on that question. I guess I'm kind of hearing 2 different things over On the event business, I think you mentioned that they were slowing a little bit and that was related to a to Sugar High.

Speaker 6

I guess, was that Sugar High that you're referring to is just really companies trying to get employees back? Over Or did that have to do with something else? Because I guess the way I originally interpreted it is a Sugar High probably over would have juiced retail previously and now retail would have come down, but it seems like retail is strong. Over So maybe my interpretation of the Sugar High is different. And then the other question would be over going into I don't know if we're going into recession, I think people think we are.

Speaker 6

How does the business over. And how do we think of maybe retail, event, etcetera, maybe in slowing macro environment? Over. Thanks.

Speaker 2

So I'm glad you asked, Ian. Let me clarify. The weakness in the event business At the end of the quarter we just reported was in the social events. So that is small groups of people, not corporate, who come in together typically on the weekends. Over.

Speaker 2

That is the business that slowed most dramatically. And that is that was the business where I think that there was the biggest sugar high where people were going out and they were sort of spending indiscriminately on a social basis a year ago. So that came in a little bit. Over Corporate business remained very strong. So that was the weakness and I'm glad you asked the question.

Speaker 2

With regard to session and we've been through a number of them in the company's 26.5 year history. They're all different. We're not really over meaningfully impacted by sort of shallow recessions. For one thing, we're a value over. So we're a cheaper alternative than most other entertainment opportunities, certainly compared to going to a sporting event or over to a theme park or traveling anywhere, right?

Speaker 2

So we're local, we're in the community and that's why when gas prices spiked, over Our business actually improved because we're local, we're easily accessible and we're low cost. So over. Recessions don't bother us. Now the only recessions that are really problematic for us are things like over When we had the great financial crisis and companies just turn off the spigot and don't have corporate events, over that hurts our business meaningfully because that's a very good segment of our business, very profitable segment. But none of these things are in any way catastrophic for us.

Speaker 2

So over the event of a garden variety recession for us, I think might be revenues flat or down a couple of points. Over It's hard to imagine revenue being down much more than negative 5 even in a very meaningful recession because we become the default low cost alternative. And over When you have a slowing of the business like that, it presents opportunities. The first is that the acquisition market becomes that much better. So we over We've been doing a lot of deals.

Speaker 2

One of the things we've been facing in the last few years is that business was good for the industry and everyone had very high expectations over to the future was going to bring. When you have a recession, it resets sellers' expectations lower. So more assets come on the market and perhaps at more favorable pricing. So every time there's been a recession, we've benefited. Financial crisis led to the bankruptcy of AMF.

Speaker 2

Over required AMF very attractively. We turned it around, great deal. The over to COVID, a lot of deals emerged out of COVID, Bowl America and a number of others. So over to our business. It's not like we ever lose money and we make over less money, but we make a lot of money to begin with.

Speaker 2

So if there's a slight reduction in profitability, really not that consequential. But from an M and A Growth standpoint, it has tended to be on balance a better thing than a worse thing for us. Over to Brett, you've spent a lot of time sort of talking about what happened in recessions in years past. Do you want to talk about some of the actual data that we have?

Speaker 3

Sure. Thanks, Tom. So I would just Before I get to even the data, I would just kind of stack on top of what you're saying. The value based offering absolutely matters. You're also talking about a business that has over very high natural margins and low decrementals.

Speaker 3

So we have the ability to be very nimble on our feet. Over the managers out in the field go through effectively boom and bust cycle training every year just riding our seasonality curve throughout the course of the year. And then as Tom mentioned, in terms of over to the senior team. We've been doing this together since before 9eleven. So 9eleven, GFC, COVID, and none of these things Had any lasting impact on us that was anything other than positive as Tom was saying.

Speaker 3

And that's really true over a couple of reasons. Number 1, to pull on some of those stats, looking back at the AMF portfolio during the great financial crisis, Which was the really the only large national diversified portfolio of assets to look at that's indicative of what we have now. And they were only down 4.5 percent peak to trough during the GFC and that was with the business essentially unmanaged At the time and the business that we were running was smaller, had more exposure to the over dense urban markets, etcetera, saw a little bit more pain on the top line, but we actually grew EBITDA 'eight to 'nine because We were out in front of it and we were managing it very actively. Now that remains in terms of a core part of who we are and what we do, is something we call the recession contingency plan or RCP, over, which is essentially 5 different levels of economic dislocation from over to the stagnation to a depression and then it lists all the way down to the belly button, analysis across thousands of rows, over what actions are to be undertaken in response to each stimulus.

Speaker 3

And what that does is it sets out for us a roadmap and a game plan that we can follow. We've been doing this since 2016. We know it works because we started running it in January of 2020, as soon as there was over any wonkiness around COVID. And that plan is updated every handful of months. It sits over to our computers and it can save 30% out of SG and A If needed.

Speaker 3

So our finger sort of hovers above that button at all times. Our entrepreneurial roots, we've never forgotten all over those things that we've come through and it gives us a lot of confidence that whatever comes down the pipe we'll be able to handle it because it's over. Unlikely to be anything that we haven't seen yet.

Speaker 6

Okay. That's actually very helpful. Over to the operator. So I guess the way we think about just the model in general is in good times you have very high incrementals and then I guess to say moderately down times, you have enough levers to pull to keep the decrementals very reasonable. So And how do we think about just you mentioned store growth or location growth.

Speaker 6

How do we think about over location growth, I guess, maybe in today's market, if we look over the next 12 months, how do we think about location growth over today's environment over the next 12 months versus, let's just say, a downturn in the economy? Over. Thanks.

Speaker 2

Well, I think we're going to have a very, very good next 12 months of growth. So if I had to ballpark, I would say in the neighborhood of 25 to 30 new centers, the combination of acquisitions and new builds that are opening. We are under construction in several places right now and we have a number of deals over working the way through the pipeline. In fact, we closed on an acquisition yesterday that hasn't even been announced yet. Over.

Speaker 2

So in Tennessee, which I believe is our first in Tennessee, so we continue to go into new markets, over. Put in a foothold and we'll expand from there. We are we have a infrastructure at the corporate level that is geared for growth, right? So we have a lot of people who process deals. We have a robustness to the organization over That's predicated upon us continuing to grow.

Speaker 2

If we ever needed to streamline that, if we ever said, well, okay, we We think the situation is severe, right? The recession is really deep and we're uncertain about the future. As Brett said, we can very rapidly take massive fixed cost out of overhead. And you can also over to go backwards in terms of management parts in the centers. We are staffed to maximize revenue in good times.

Speaker 2

Over the staffing model is different in bad times. So there is operating leverage on the way up, there's operating leverage on the way down that's different. So over. We've been through 3 pretty severe macro environmental shocks since the company over has existed and we've navigated all of them and the playbook is not new to us. Over.

Speaker 2

That said, look, I think that over to the extent that there is a recession and I'm not predicting 1, but recessions are different for every industry. Over I wouldn't want to be a car dealer. I wouldn't want to be necessarily a real estate agent, but over Bowling alley, low cost in your neighborhood, familiar. It's a great place to go if you don't want to spend a lot of money. So to the extent that there's a recession, we just don't have that much volatility.

Operator

Thank you. Please keep your questions to 1 or 2. Our next question comes from Steve Wieczynski with Stifel. Please proceed with your question.

Speaker 7

Over. Hey, guys. Good afternoon and congrats on the quarter. So Tom and Brett, if we could stay on the scalability of costs across your business, if in fact you do start to witness declines in demand. I guess to stay on that point there, Is there any way to help us think about like if we actually threw a number out there, let's say revenues declines, pick a number, let's say it's 5%.

Speaker 2

Is there

Speaker 7

any way for you to help us think about how much of that decline really could be offset by expense reductions?

Speaker 2

Over. Well, let's just Ballpark, haven't done this before, so forgive me if it's inaccurate, but over $10,000,000 of overhead over and then probably $50,000 per center, over maybe more, but just to be conservative here. So $50,000 what would that be about $16,500,000 so $26,500,000 over In fixed cost, right off the bat. And then if you have reductions in revenue, you also have some reduction over in cost of goods sold, right? So to the extent that you have reductions in food and beverage, you have some corresponding reduction in Food and Beverage.

Speaker 2

So if you say, well, that in aggregate is 30,000,000 over $35,000,000 And again, I think these are very conservative numbers. You're talking about a 3 plus percent over total company revenue reduction over That is if you do it, right? If you say, well, we're going to have a if we're going through a shallow recession or you see some sort of shallow, whatever softer results than you've seen historically, right? You don't want to overreact to that. Over Would we change our operating methodology if things started to slow a little bit?

Speaker 2

Probably not, over because we've made great investments that have really bolstered the company and positioned us for the growth that we've had and hopefully accelerated growth to come. Over But if the concern is what happens if you have a real recession, the answer is we can act over Almost immediately. I mean, in COVID, for example, in 2 weeks, we took out enormous cost. Over. And so we can do what we need to do.

Speaker 2

I think though that We also don't overreact to stuff that doesn't turn out to be that consequential.

Speaker 7

Yes, that's great.

Speaker 3

Sorry, I was just going to add. Yes, I mean,

Speaker 8

the key is the for a

Speaker 3

couple of percent type of a thing like that. There's really not even much you have to do from the parent company level because the centers are used to those to Vasiliations and their performance anyway and optimizing performance through over those scenarios. So I mean there's a lot of things that we can do, a lot of levers that we can pull over to maintain or expand profitability depending on the environment.

Speaker 7

Okay. That's great color. And then second question, Tom, probably for you. In your remarks, you talked about you've started to see a so called slowdown. And over Just want to be very clear here, that's going to make a lot of investors kind of panic.

Speaker 7

But you're just talking about at this point your comparisons year over year are Much more difficult. You're not seeing a material change in your normal retail customers' appetite to spend over or their spending power as they enter your stores. Is that am I thinking about that the right way?

Speaker 2

You are. And what I was really alluding to is, over to you. When we've had these consistent very high double digit comps to year after year after year that that has slowed.

Speaker 7

Okay. And then If I can just add one more on real quick. From a price standpoint and taking price, where do you guys over. Do you think you're at the point where you maybe have pushed price too much? Or over.

Speaker 7

Is there still more room for you to take price depending on the geographic location?

Speaker 2

Over I think that we're in pause mode on taking price, but there are other ways of addressing price over that or value that are we're going to start to explore. So 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 Happy Meal or Value Meal, right, which is a bundle.

Speaker 2

And there are things that we can do that would provide greater value to our guests and still increase revenue, over guest spend per visit and profit, but also increase value to the guest. And so those are things that we're going to start to explore in earnest. We've already started to explore them. And I think over That could be an important growth sector for us. I think it's probably a bit of a blind spot.

Speaker 2

I think our pricing over on the event side has been very sophisticated. I think our pricing on the retail side has been the opposite. And so That's a great opportunity for us. But it's not going to be a price increase. I don't think that in this environment price increases are warranted.

Speaker 2

Now typically we take price increases in the fall over and so we'll see what the tea leaves look like going into the busiest season and it may be that We feel like we can take price, but at this point, we're not looking at price increases.

Speaker 7

Okay, great color. Thanks guys. Appreciate it.

Speaker 2

Thank you. Thanks, Steve.

Operator

Thank you. Our next question comes from Jason Tilton with Canaccord Genuity. Please proceed with your question. Over.

Speaker 9

Great. Thanks for taking the question. There was a note in the deck that indicated sort of relative Q4 seasonality within the total annual mix. I just wanted to clarify, on the profitability side, it sort of indicated 50% of total trailing 12 month EBITDA, which would sort of imply a pretty significant year over year margin compression. I'm just curious relative to the commentary earlier about the over year differences in the calendar.

Speaker 9

Can you talk about some of the key puts and takes for Q4 profitability and whether that interpretation on the sort of year over year margin compression is accurate. Thank you.

Speaker 3

Yes. No, there's it's not an indication of year over year margin What you're seeing is sequential margin compression, which is just the natural state of things as we go from our biggest quarter Q3 into one of our smallest quarters Q4. Over So it's you're always going to see margin come in, in Q4 versus Q3. And then a little bit of difference just this year Q4 versus last year Q4 over It's around those most particularly the $15,000,000 of incremental revenue from the 53rd week that won't be repeated this year. So you have some coming in on that, but that's we just wanted to be clear with folks what items from last year were anomalous And what those impacts were so that we could have a reasonable setup going into Q4.

Speaker 9

Over Okay. So just to make sure I follow that. So it's sort of a modest that could have those dynamics could have sort of a modest year over year margin impact, but Not a significant impact is sort of the way to think about

Speaker 3

it. Yes, because it's not even an actual impact on margin.

Speaker 9

Just in the way that they flow through. Exactly.

Speaker 3

Yes. You just if you're going to have a 1 week less, right? Yes. You have substantially less revenue and it doesn't really make a huge difference in terms of cost.

Speaker 9

Okay. That's helpful. And just one other follow-up on some of the earlier questions about the Events business. Over Curious if you can maybe help us understand a little bit the mix within the Events business between corporate kids parties and sort of smaller social gatherings, over to you how each one size wise stacks up either this quarter or sort of a trailing 12 basis would be helpful.

Speaker 2

Over. Brett, do you want to provide that later because I don't have that information?

Speaker 3

Yes, that's fine. I mean, what I would tell you is that the what we view as retail events, which are event over over dollars, and then corporate is the inverse, and it's just because the per person spend is materially different. Over

Speaker 9

Okay, great. That's really helpful. And just to reiterate what Tom said earlier, the corporate side demand has remained really strong there through the end of last quarter. Over to you. And then the weakness that you commented on was more on the sort of smaller social gatherings.

Speaker 3

Yes. I mean, events in aggregate across the quarter were really strong. I mean, the Event revenue in the quarter at $60,000,000 was 49% higher than last year and 84% higher than pre pandemic, and it's 44% higher even on a same store sales basis than last year or 52% higher than over to Pandemic same store. So I mean the business the event business overall was quite robust. And the TTM number, just FYI, Walt, over Because Tom did mention it.

Speaker 3

He was pretty much right on the button. It's $217,000,000

Speaker 9

Great. Very helpful. Thanks a lot.

Speaker 2

Sure. Over.

Operator

Thank you. Our next question comes from Eric Handler with ROTH and Kilometers. Please proceed with your question.

Speaker 8

Good afternoon. Thank you for the questions. Two questions. First, with an economic tightening, is that Helpful or a hindrance for the M and A pipeline in terms of volume of potential deals?

Speaker 2

Over. Well, historically, it's always been good for us. So we're cash buyers. We don't rely on financing to get these deals done. Over.

Speaker 2

And in boom times, sellers have higher price expectations and are more reluctant to sell quality assets over to the question and the inverse is true in downturns. So we don't wish for recessions, but over We've been doing this long enough and through enough cycles to realize that these downturns do have a silver lining and it shows up in M and A.

Speaker 8

Over. Yes. Okay. And then with regards to the new builds, obviously things over slowdown in terms of lease signings during COVID. You said things are a little bit more active now coming out of COVID.

Speaker 8

What does the situation look like as with economic tightening? And as you look at over to more newbuild deals. Are there a lot of opportunities being thrown your way? So like what could that like over what would be a good goal for you 12 months from now to have sort of in the pipeline?

Speaker 2

Over. We have a tremendous amount in the pipeline now. So we're currently under construction, well under construction, I'd say more than 50% done in San Jose in the Westfield Valley Fair Mall, which is one of the best malls in the country, over exceptional location in a fantastic mall. We started construction in Miami, Miami World Center, Which should end up as one of our top 5, certainly top 10 highest grossing locations right in the heart of Miami, 0 competition. We've done some preliminary the question in Moore Park, which is sort of out near like 1,000 Oaks, Calabasas outside of LA.

Speaker 2

Over We have I think there are 6 or 7 signed leases and 6 or 7 over behind that that are likely to get signed. So from a newbuild standpoint, it's actually our pipeline has never been this good. Over and the locations are phenomenal. A lot of California, which our California centers over to you about on average almost twice what the rest of the country does. So we love over Building in California and buying in California, it's our biggest market.

Speaker 2

We have about 50 locations there already. Over And I could see adding 10 more in the next 18 months. Despite all the headwinds that you hear about in California, which over true. The reality is that you just have an enormous population, huge amount of disposable income and a over to the to you. And so we do great in California and we continue to expand there.

Speaker 2

But as part of this pipeline, we've got half a dozen or so new builds in California, couple in Denver, Miami, as I mentioned. And so It's the best it's ever been.

Speaker 5

Great. Thanks, Tom.

Speaker 2

Sure. Thank you.

Operator

Thank you. At this time, we do not have time for any further questions. I will now turn the call to Brett Parker for closing remarks.

Speaker 3

Thank you. And over. Thank you to all of you for joining us on today's call. We greatly appreciate your interest and support in the fundamentally sound business that we're continuing to build. We're extremely proud of the record breaking quarter that our world class team achieved.

Speaker 3

We're also very pleased with the capital structure management initiatives that we executed. We look forward to speaking with you after the conclusion of our fiscal 'twenty three. Thanks again for your time today.

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Earnings Conference Call
Bowlero Q3 2023
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