Lucky Strike (LUCK)

Entertainment venue operator Lucky Strike (NYSE:LUCK) fell short of the market’s revenue expectations in Q1 CY2025, with sales flat year on year at $339.9 million. Its GAAP profit of $0.07 per share was 69.6% below analysts’ consensus estimates.

Company Overview

Born from the transformation of traditional bowling alleys into modern entertainment destinations, Lucky Strike (NYSE:LUCK) operates bowling alleys and other entertainment venues with upscale amenities, arcade games, and food and beverage services across North America.

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Lucky Strike Entertainment competes with other entertainment venue operators like Dave & Buster's (NASDAQ:PLAY), Main Event Entertainment (owned by Dave & Buster's), Round One Entertainment, and regional family entertainment centers that combine dining, games, and activities.

Examining a company’s long-term performance can provide clues about its quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Lucky Strike’s sales grew at an incredible 47.9% compounded annual growth rate over the last four years. Its growth beat the average consumer discretionary company and shows its offerings resonate with customers.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Lucky Strike’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.4% over the last two years was well below its four-year trend. Note that COVID hurt Lucky Strike’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can better understand the company’s revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Lucky Strike’s same-store sales were flat. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company’s top-line performance.

This quarter, Lucky Strike’s $339.9 million of revenue was flat year on year, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 8.9% over the next 12 months. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below the sector average.

Lucky Strike’s operating margin has shrunk over the last 12 months, but it still averaged 10.2% over the last two years, decent for a consumer discretionary business. This shows it generally does a decent job managing its expenses, and its elite historical revenue growth also suggests its margin dropped because it ramped up investments to capture market share. We’ll keep a close eye to see if this strategy pays off.

This quarter, Lucky Strike generated an operating profit margin of 18.3%, down 2.7 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Although Lucky Strike’s full-year earnings are still negative, it reduced its losses and improved its EPS by 71% annually over the last four years. The next few quarters will be critical for assessing its long-term profitability.

In Q1, Lucky Strike reported EPS at $0.07, down from $0.13 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street is optimistic. Analysts forecast Lucky Strike’s full-year EPS of negative $0.12 will reach break even.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Over the last two years, Lucky Strike’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.7%, meaning it lit $4.69 of cash on fire for every $100 in revenue.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Lucky Strike historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 8.7%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Lucky Strike’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Lucky Strike’s $2.59 billion of debt exceeds the $79.09 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $362.4 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Lucky Strike could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Lucky Strike can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

We struggled to find many positives in these results. Its revenue missed significantly and its EPS fell short of Wall Street’s estimates. Overall, this quarter could have been better. The stock traded down 10.8% to $8.49 immediately following the results.

Updated: May 16, 2025 at 10:04 PM EDT

Before deciding whether to buy Lucky Strike or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

Lucky Strike doesn’t pass our quality test. Although its revenue growth was exceptional over the last four years, it’s expected to deteriorate over the next 12 months and its same-store sales performance has disappointed. And while the company’s projected EPS for the next year implies the company’s fundamentals will improve, the downside is its declining EPS over the last three years makes it a less attractive asset to the public markets.

Lucky Strike’s P/E ratio based on the next 12 months is 30.5x. While this valuation is reasonable, we don’t see a big opportunity at the moment. There are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $13.45 on the company (compared to the current share price of $9.18).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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