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Source: Hollywood Bowl Website
Introduction
After looking at a few large caps, we shifted our focus to the small caps, in search of brilliant yet simple businesses with significant white room available. Value Investors nowadays often go searching for complicated businesses while overlooking those with a strong financial track record which offer the kind of predictability we all crave. One popular name among UK investors that fits this profile is Hollywood Bowl which seems to be unknown the counterparts in North America who are only aware of Bowlero when it comes to bowling stocks. The Company is the UK’s largest ten pin bowling operator and offers standard 10 pin bowling, food & beverages, amusem*nts, and mini golf courses through its centres in UK and Canada. It is listed as BOWL on the London Stock Exchange where it went public in 2016.
Bowling is an old pastime of the human civilisation. We can authentically trace its history back over 7000 years to Ancient Egypt where the grave of a child showed implements for playing a game similar to modern tenpins. According to some authorities, its place of origin in Europe is Northern Italy where the Helvetti people of the Alpine region were believed to have played a game similar to the present-day Italian game called Boccie. The modern-day form of Bowling was originally played by the Dutch as well as the Germans and the Swiss who used a single board about 12-18 inches wide and about 20-30 yards in length all on a board platform from 36-48 inches square. After further developments, the first indoor bowling lane opened in London around 1455 AD.
The origins of Tenpin are thought to have come into being between 1820 and 1830. Legislators who banned 9 pin bowling as it was synonymous with gamblers in 1841 allowed Tenpin to grow. Bowling lanes existed on almost every block in Broadway, New York and it was around the 1860s, finger holes were cut in the 9” balls and tournaments and clubs gave rise to competitive bowling. The sports long history shows that leading operators are likely to grow and remain competitive as it has been a popular leisure activity throughout history. It is this sort of timelessness which attracts us to the sector.
The company has 6 sources of revenues which are split geographically between UK and Canada. Its main and largest source of revenue is bowling from its Hollywood Bowl (UK) and Splitsville (Canada) centres. Food and Beverage (F&B) revenues come sales generated from restaurants and bars located in the bowling centres. Amusem*nts sales come from the centre’s arcade and game machines. Hollywood Bowl also started to run Mini-golf operations under the Puttstars brand in the UK back in 2020 and runs a small service in Canada. The only revenue source exclusive to Canada is Striker Solutions which is a B2B supplier for bowling equipment.
Background of Hollywood Bowl
The Hollywood Bowl Group was formed in 2010 following the merger of certain bowling centres in the AMF portfolio with the Hollywood Bowl portfolio that was part of Mitchell and Butlers Group. CBPE Capital provided the equity funding to facilitate The Original Bowling Company’s purchase of Hollywood Bowl and units of AMF Bowling. A reorganisation was carried out with a roll up strategy being devised where existing centres would be refurbished under Hollywood Bowl and new centres would be purchased to undergo redevelopment. At this point, the combined entity had 41 centres. Additional capital was provided to add 3 new locations by CBPE Capital. The rebrand and refurbishment was based on customer feedback which resulted in the management team preferring smaller, more ‘boutique’ formats for their centres which can be seen today as it provided the best customer experience. With this strategy in mind, the new group under new private ownership began operating.
Fast forward to 2014, the group went through a friendly management buyout that was backed by Private Equity firm Electra Partners. At the time of the exit, the then Original Bowling Company was the largest 10 pin bowling operator in the UK with 44 sites. EBITDA had increased by over 60% with the technology investment and improved customer perception delivering improvements in both top and bottom line. In terms of the ROI, CBPE Capital achieved a 2.4x return on invested capital with an IRR of 24%.
An investment of £51 million was made by Electra with a combination of equity and debt being utilised. CEO Steve Burns also invested with his colleagues in the deal with the management team being a key part of the new ownership structure. Electra’s holding period saw a continuation of CBPE’s strategy of acquiring and opening new centres with refurbishment then taking place. In December 2015, the group purchased Bowlplex with 11 centres being added to the estate portfolio. The first 4 years of the group’s operation showed how PE can potentially profit from a purchase of Hollywood Bowl and, how it benefits operationally from being owned by 2 PE firms till date.
Hollywood Bowl went public on the 21st of September 2016 with a market capitalisation of GB 240 million. On the day of the admission, Electra was expected to receive cash proceeds of GBP 153 million from the sale of its equity investment as well as a repayment of GBP 22 million of debt instruments. The total equity return for Electra was 3.1x in cash plus a further 0.8x in shares, totalling a Money on Multiple of 3.9x and an IRR of over 90%. Its ownership stake decreased from 85% to 18% after the IPO with a lockup period being instated of 6 months. Electra then exited completely in April of the following year.
The management team did not sell their shares as the IPO was structured to allow Electra Partners to exit from its investment. The IPO raised £181 million with the majority of the amount going to investors. No new shares were issued by Hollywood Bowl which meant no new capital was raised making it a secondary offering where existing shareholders sold their shares to new investors. Management keeping their shares showed their long-term faith in the company which is evident till date as the same management runs the business.
Source: Marketbeat
At the time of the IPO, the group still held the title of being the UK’s leading bowling operator with 54 10 pin bowling centres. The centres were split between Hollywood Bowl, AMF and Bowlplex brands. Revenue as of 2015 was £86 million and Adjusted EBITDA was £20.6 million. Total average spend per game was £8.81 which was growing at a CAGR of 7.3% at the time. UK inflation at the time was averaging 2%, meaning average spend per game grew by over 5% in real terms. The group’s earnings power was clear to see for us is why it has managed to be an industry leader.
In the following years, the refurbishment and rebrand continued with 7-10 centres undergoing the changes every year until 2018. The programme consisted of changing Bowlplex and AMF bowling centres to Hollywood Bowl. Stores went through a redesign to the smaller ‘boutique’s style the company preferred. Harry’s Diner and Hollywood Diner were added to improve the F&B offering at centres. New scoring systems and VIP lanes were introduced that helped upsell to customers who paid an extra £1 to use the lines. The final Bowlplex and AMF Centres were rebranded in 2018 and 2019. Rebranding all centres to Hollywood Bowl has built a strong unified brand image over the years that customers are aware of.
In 2019, a new minigolf offering branded ‘Puttstars’ started with 3 trial locations in Leeds, York, and Rochdale. The stores opened in FY2020 with a 9-hole course, bar, diner, and amusem*nt area for customers. COVID slowed growth with 3 new centres being opened from 2020 to 2024 compared to 5 for Hollywood Bowl in the UK. Apart from Puttstars, the next major move by the management team was to enter Canada in May 2022. A consideration of £10.6 million was paid to Teaquinn which comprised of Splitsville and Striker Bowling Solutions. Splitsville operates 10 pin bowling centres while Striker Bowling Solutions is a B2B supplier and installer of bowling equipment. At the time, Splitsville consisted of 5 locations with had a diner, bar, and amusem*nt section. The purchase represents the start of a new era for Hollywood Bowl, whose future stock performance will be largely determined by whether it is able to translate its UK strategy to Canada.
Hollywood Bowl’s story is built on success and prudent management practices. Its successful performance despite changing ownership twice before its IPO shows how the business can be run successfully with the current crop of senior personnel. Strategic acquisitions provide a suitable opportunity for growth, both in the UK and Canada. The company has found a way of making money from a common human pastime which gives us the sort of earnings predictability we crave.
Company Analysis
Segmental Analysis
The main source of revenue comes from bowling. Sales essentially consist of booking prices customers pay less VAT either through the group’s contact centre or in person at the bowling centre. All bowling centres use the 10-pin format and have at least 16 lanes which customers can use. A game typically costs £6.5 but varies depending on the offer customers avail. Offers and prices vary per centre as dynamic pricing is used which sets prices based on demand during a certain time. It is clear to see from the table, that the group engages in price discrimination based off geography and footfall, helping it remain competitive.
The London O2 centre seems to be the only centre with a different style of pricing that is based on time rather than the number of games. A bowling game takes around 10 minutes per person, so a game of 5 people may take upto 50 minutes. A 1-hour slot for a game of 5 would earn the centre £50 which is higher than £11.5 higher than the amount 5 adults would pay for 1 game at the London Surrey Quays Centre. The London O2 Greenwich Centre experiences higher footfall than other centres with google trends reporting that it receives 23% more searches every day than the Surrey centre. As a result, it can afford to a more expensive pricing model. We believe, stores with high footfall that have or are undergoing refurbishment like the O2 might shift to this model as it offers higher per unit revenues.
Canada’s Splitsville centres have a different pricing strategy. Centres charge on a per lane basis for upto 6 guests. Dynamic pricing is not used in Canada and the prices are fixed. This is likely because many centres are still operating under the old model and are yet to undergo refurbishment. Canada pricing is also cheaper on a per person basis than the UK if 3-6 guests purchase any package. If less than 3 guests play, then it is more expensive than UK. On a unit margin basis, this implies that Canadian centres benefit from less players per game whereas UK centres except for London O2 benefit from more players taking part in a game. The different pricing strategies result in differing unit economics between the 2 geographies which is important to understand when projecting future store revenues and margins.
The 1st driver behind bowling revenues is game volumes. Game volumes are dependent on the weather and number of lanes at a centre. If centres increase the number of lanes, they can accommodate more games and if the weather does not favour outdoor activities, a centre can expect to see more footfall which drives volumes. LFL sales growth is largely dependent on the weather, price increases and refurbishments which we will explore later in this writeup. These factors help explain how volumes have increased at a CAGR of 2.95% between 2018 and 2023.
The 2nd driver is Average Spend per Game. Average Spend per Game in the UK is dependent on the package customer’s avail and their profile. If customers pay individually, the average spend increases as group offerings are cheaper on a per game basis. On the other hand, if customers are students, the price is discounted or if children are part of a deal, average spend decreases. Large groups and students provide growth in terms of volume, making it preferable to offer a wide variety of packages as opposed to only focusing on an individual customer group. These factors influence sales growth for the bowling segment, making it important to understand.
Hollywood Bowl’s financial year ends on the 30th of September. H1 comprises of the period from October to March. During this period, both Canada and the UK experience colder weather which is favourable for the company. Customers tend to prefer indoor activities like bowling during the winter period, driving sales for the bowling segment during the H1 period. According to earnings performance notes, colder than expected winters act as a tailwind as there tends to be higher demand for indoor activities. Harsher winters in both Canada and UK can be expected from time to time, boosting future revenues. A top-down analysis from this information suggests climate change will help increase game volumes on a LFL basis.
The 2nd segment of the group is Food and Beverage (F&B). Each centre has a bar and a restaurant. Menus used to vary depending on the centre, but after the series of refurbishments post IPO, centres use the same American style menu. The concept is called Hollywood Diner that is centred around US food items and décor. Food items on the menu include nachos, margherita pizzas, hot dogs, fries, beef burgers, shakes, slushys, and alcohol. The items go hand in hand with the game environment as we observe that customers prefer American food in any activity based environment, whether it is a football match or a bowling game.
F&B is a key growth segment for the business. It provides additional revenues on top of the sales from bowling. Over the years, the group has focused on improving the F&B offering in terms of customer service and value for money. The snacks and sharers part which comprises of appetisers was introduced in 2019 and enhanced in H1-2024. On the customer service side, new lane technology gives customers the option to order food from the bowling lane. New menu items and innovation in the order service system help improve the customer experience while also providing opportunities for centres to upsell and increase average customer spend during games. The F&B segment’s track record of innovation has and will help the group increase average customer spend in low growth markets like the UK.
All centres in Canada also offer F&B. Although named differently, the menu is largely the same as the UK. Canadian delights like Poutine are also offered and more pizza items are available on the menu. The kid’s menu is slightly different with Pepperoni Pizza and Cheese pizza being served in Canada. Conversely with other segments where Splitsville can benefit from Hollywood Bowl’s expertise, we believe Hollywood Bowl can take Canadian menu items to improve their own menu. By regularly enhancing the menu, customers should return to centres for the complete experience of bowling, eating and drinking. By operating internationally, synergies can be optimised to increase customer spending in centres.
The ability of the management team to increase revenues for the Food and Drink Segment can be seen in the chart above. UK average store revenues for the segment grew at a CAGR of 6.9%. It must be noted that this segment is inflationary which might suggest LFL growth was driven by higher F&B prices as opposed to volumes. However, the management reported in its H1-2024 statement that menu favourites, unclear which ones, were kept at 2019 prices. This means, depending on the proportion of F&B sales consisting of those items, a large part of LFL growth was volume driven. The ability to keep prices competitive against other F&B operators, gives the group an additional competitive advantage.
Canadian Food and Drink revenues can be expected to follow a similar trajectory to the UK. As more centres are added, overall revenues will increase and as centres are refurbished in a way like the UK, customer spending on F&B will rise. The graph above shows how annual same store food and drink revenues which measures LFL sales growth for stores open for at least a year between 2019 and 2023 grew at a CAGR of 8.82%. UK inflation averaged 4.4% during the period, implying that at least half of the growth came from volume rather than price. Store adjustments like lane ordering and smart promotions should help Canadian centres generate higher sales from Food and Beverages providing additional whiteroom for the group.
The Amusem*nt segment is the 3rd largest segment in terms of sales. Centres differ in the games which are available to play but typically have a pool table, arcade games, and a few machines that have prizes for customers to win. Games can cost as low as 2 pence, and some charge up to £2 to £3 per game. Canadian centres also have amusem*nt sections with the Burlington centre also offering laser tag. Like Food and Drink, amusem*nts provide an additional revenue source complimenting the main bowling offering. For instance, parents can leave their kids in the amusem*nt section while playing a game of bowling themselves, that way both segments benefit. Having the amusem*nt section adds to the entertainment experience the group offers and is a strong driver of additional customer spend.
Amusem*nt spend per game has grown at an average rate of 8.9% in the UK. This is achieved through different methods such as new machines being added and different payment options being introduced. For instance, new machines have a £1 per play price point which presents strong value for money during a cost-of-living crisis, Additionally, Contactless payment breaks barriers to play as tickets don’t have to be purchased. These measures help increase customer spend as barriers to enjoyment are removed while offerings are constantly improved to attract important groups like kids. The ability to innovate the amusem*nt section, has helped Hollywood Bowl grow sales after gaining substantial market share in the Bowling Sector in the UK, making it a key yet overlooked revenue driver.
Puttstars has had a turbulent period since it started in 2020 but possess positive economics that can benefit the group. Mini-golf courses have a fixed cost base and require minimal staff, which led to Hollywood Bowl using its brand name to open a new segment which would benefit off its brand name. Some Hollywood Bowl centres have mini golf courses as well such as Stockton and Leeds. Currently 2 Splitsville centres have minigolf, Hamilton and Nainamo. It is yet to be seen whether Hollywood Bowl will introduce a separate mini-golf brand, although as the Canadian business is relatively new, this seems unlikely.
The last segment is striker solutions which came as part of the Teaquinn acquisition. For now, it seems, its main purpose is to provide equipment to existing and newly acquired Splitsville centres. The discussion around the business is that as investment into bowling increases, it should also grow and become a full fledged entity on its own and it already works with Brunswick Bowling, QubicaAMF, and US Bowling Corporation. For the next 2-4 years, we expect it to service Splitsville centres.
Centre Economics and Refurbishments
Hollywood Bowl Centres have a strong record of productivity in terms of game activity. Depending on the Centre, centres are typically open for 12-14 hours on weekends and 6-10 hours on weekdays. Centres on average have 24 lanes. Games are usually 50 minutes to 1 hour long. The graph above shows that on average, 1 game per lane is played every hour and 13-14 games are played daily on each lane. This implies that lanes are regularly filled up and revenues are maximised. These statistics show how productivity has improved over time, presenting a favourable outlook for new centres.
Centres are located tactically to attract customers living or near a certain area. Most are in high footfall areas where cinemas or retail centres are nearby. Hollywood Bowl Yeovil is part of a L&G investment scheme where it is trading with a cinema, several restaurants, and a gym. Hollywood Bowl Lakeside is the largest bowling centre to open in the UK and is right next to the Nickelodeon Indoor theme park. Both centres show how the group selects it locations. Location is pivotal for Hollywood Bowl and is a big part of its new centre strategy.
Hollywood Bowl’s refurbishment track record is impeccable. The management typically refurbishes centres every 6-8 years with some being on their 2nd or 3rd refurbishment since they became part of the group. Refurbishments essentially optimise space in a way that encourages greater customer spending by making them play more games or order food and drinks. For example, in 2019 the Leicester centre went through refurbishment which meant combining the bar and diner. This created space for 2 additional lanes, an increased number of amusem*nt machines, and improved customer service. This led to the Leeds centre being on track to deliver payback within 2 years, 1 year lower than the standard 3. The simplicity of the refurbishment strategy gives us a clear insight into how refurbishments grow sales and improve centre margins.
Refurbishment spending spiked in 2021 as the group looked to revamp sites during lockdown. The return on refurbishments has never been reported to be below 30%. In fact, ROI has increased over the years. In 2019, the average return was 46.1% and in 2023, the average return was 50%+ according to management. This is due to ability of the management to learn from previous experiences and create centre formats which improve the customer experience. A higher ROI suggests that with continued refurbishments, Hollywood Bowl can generate higher profitability from its investments as it constantly finds ways to drive customer transaction values upwards.
New stores average an ROI of 35% which is considerably lower than the return refurbishments provide. It takes time for new stores to gain traction in their respective areas which reduces the amount of the immediate payback. The Payback period of new stores is just under 3 years which is in line with retail peers.
Contribution profits and margins have both improved in the last 5 years. Profits have increased at a CAGR of 10.62% and margins on a centre basis have risen 1600 basis points. Corporate costs were between £10.9 to £11.9 million excluding COVID years until 2022 when an out-performance bonus was given to centres. Corporate Costs are unlikely to change greatly in the coming years as head office expenses are fixed and marketing expenditure are a small proportion of total costs. For these reasons, contribution margins should be around 73%-75% level when adjusting for future living wage increases.
Cost Structure
Hollywood Bowl has a simple cost structure. There are 5 main components: cost of goods sold, employee costs, property costs, corporate costs, and statutory depreciation. Administrative expenses consist of employee, property, corporate, and statutory D&A costs. Most costs are to do with the operational elements of the centres as opposed to any non-centre corporate related expenses the company might incur. Costs are different in nature and are a vital part of the investment case for Hollywood Bowl.
72% of the company’s revenues has no COGS inflation. As of H1-2024, labour costs account for <19% of revenue at a centre level. This is low relative to other hospitality peers. Bowling revenues are not inflationary as the costs are fixed. Property and rental costs are well managed with LFL rent increases being less than 2%. Food and Drink revenues represent 26% of total sales but due to bowling revenues, the group can keep certain popular menu items constant. As a result of this cost base, the company is insulated from inflation and is only impacted by wages and energy inflation. For this reason, it can keep prices at a competitive level.
Financial Analysis
Gross margins decreased in 2023 due to an increase in Centre Staff Costs. Cost of Sales increased due to F&B inflation. F&B margins decreased as prices were kept constant on popular menu items while costs rose. EBIT Margins went down in 2023 due to an increase in payroll costs. The company uses a hedge to protect itself against electricity inflation. A new UK hedge was signed in H1-2024 till the end of FY2027. Additionally, solar installations are taking place with a target of 31 UK centres by the year end. This should help protect against utility costs, providing further stability to margins in the face of living wage increases.
Working Capital (WC) requirements for the company are low. WC % Revenue has been coming down after COVID. We expect this to come down as the business is not reliant on growing working capital to achieve growth. Bowling equipment and Centre fixture and fittings are all long-term assets which drive revenues. As a result, working capital will decrease relative to revenues as it has grown at a 11.1% 5-year CAGR compared to 12.3% for sales. Along with a negative OCC which implies the company does not have to use non-current funding for day-to-day operations, we believe the company has a favourable WC situation.
Hollywood Bowl has a favourable debt situation. It has long term debt in the form of long term lease liabilities. Net Debt/EBITDA is 1.7x and EBIT/Interest Expense is 5.9x. This suggests that it can service its debt quite comfortably. The group has lease contracts for property and amusem*nt machines used in its operations. There are 9 lease contracts that have variable lease payments in the form of revenue-based rent top ups. Liabilities are spread out over the next 10 years, giving the management ample time to pay off the debt. The debt situation gives the company the freedom to invest and remain concentrated on the long run.
Capex excluding acquisitions totalled £22.872 million in FY2023. Expansionary Capex as a % of sales was 220 bps higher than Maintenance capex. Except for 2018 and 2021, the group typically allocates capital mostly towards refurbishments and new centres. On a 2-year cumulative basis, New Centre spending has been 51% higher than refurbishment spending. This shows how management is looking to grow its market share by spending on new stores rather than rely on refurbishments which might only increase LFL sales. By utilising an effective Capex program, the group is able to generate additional whiteroom.
Since the Teaquinn acquisition in 2022, the group has engaged in M&A activity in both Canada and UK. In H1-2024, 2 acquisitions were carried out in Canada with family owned centres being purchased in Guelph, Ontario and Vancouver, British Columbia. A total consideration of £5.125 million was paid. In the UK, Lincoln Bowl was purchased for about £875 thousand. The centre was also family owned and located in a strategic location. If not opening or refurbishing centres, the group looks to acquire assets which assist with market penetration into a region. As both markets have a significant number of family-owned centres, we expect acquisitions as a % of Free Cash Flow to increase from 18.36% in 2023 to 52.45% by 2025.
Canada Opportunity
Splitsville currently has a 5% market share in Canada. The market is fragmented and there is no clear market leader. Hollywood Bowl spotted this opportunity and purchased Teaquinn after successfully leading the UK market for a decade. Average Centre Bowling Sales in Canada are 23% below UK Centres. We expect refurbishments to improve the customer experience by optimising available space, in turn driving customer spending across all segments in a similar fashion to the UK. By owning more Centres through roll ups and rebranding, our base case expects bowling revenues per centre in Canada to increase by more than 100% to £0.7-£0.8 million by 2028 which is 67.5% below current UK figures. Future Canada revenues look favourable making us bullish on the Canadian expansion.
The Teaquinn acquisition opens the opportunity for investors to benefit from a future buyout. With an aggressive rollup strategy featuring 5 new centres every year, Splitsville will become an attractive PE takeover target. Growing revenues and stable cash flows make it an attractive portfolio company for mid-market private investors. Dividend payouts can be used to service debt, making it ideal for an LBO. By assuming an Adjusted EBITDA Margin of 29% in 2028, which is below the current 40% margin for the UK business, and an EV/EBITDA multiple of 10x based off comparable peers in the US, Splitsville will have a conservative valuation of £260 million in 2028. This will increase the Enterprise Value by 50% in the next 5 years even if we assume no growth for Hollywood Bowl in the UK.
Another benefit of the expansion is the potential capital return to shareholders. After maintenance capital, refurbishments, new centre spending and acquisitions, the group adopts a capital allocation priority of providing shareholders with a dividend which is 55% of Adjusted Profit after Tax. If there is sufficient capital, it returns more capital as seen in 2023 when it returned 69% of Adjusted Profit after Tax to investors. We are confident Splitsville will help the group generate higher cash which will returned in the form of dividends, with payout ratios exceeding 70%. Moreover, the group engaged in Share Buybacks in H1-2024 for the first time. Any form of share buybacks will present a catalyst for investors which will benefit from reduced share capital increasing implied equity prices in financial models. For these reasons, we believe shareholders benefit from the Teaquinn acquisition through greater future capital returns.
Industry Analysis
We found analysing the US and UK Markets helpful in understanding the wider bowling market. The Canadian market is a mixture of both the UK and the US. Markets differ in customer types and market structures but have similar financial and operational characteristics. This provides a layer to base projections off while also assisting us with assessing the effectiveness of the group’s future strategy in Canada. It is important that the group translates its UK strategy rather than replicate it.
Ten pin bowling is a relatively low frequency activity compared to other leisure activities like the Cinema in the UK. On average, 33% of consumers per 100 participate in bowling, compared to 67% for the cinema. This is largely due to the accessibility of bowling sites. According to a Pragma Research Study, 47% of the UK population live within a 15-minute drive of a bowling centre, much lower than 69% who live within a 15-minute drive from a Cinema. Additionally, customers are mostly leisure seeking as opposed to professionals who compete in tournaments. These factors present an opportunity for the continued rollout of ten pin bowling in the UK.
There are about 4500 commercial bowling centres in the US. The states with the most bowling centres are Illinois (269), Texas (221), New York (218), and Ohio (213). Cities with larger populations have larger centres which have upto 60 lanes while smaller cities have centres with as few as 8 lanes. In the US, most bowling centres are catered to professional customers who typically compete in leagues. Bowling is the most popular sport in America for those who are 18 and older based off participation. It outranks golf, fishing, tennis, pool, cycling, roller and ice skating, jogging, and hunting by wide margins. The activity is moving upscale with competitive and casual bowlers coming from higher socioeconomic households.
Customers can be broken down into the following types:
There have been recent developments in the US market that have carried over to the UK. Many centres now grow revenues from F&B sales by broadening their menu selections and improving quality. This is seen as a pivotal part of attracting and retaining customers. Many centres in the US report that improved food presentations do bring more people back to bowling. New technology is also being used to attract new customers by making the experience more fun and user friendly. This is important as customers are becoming more ‘experiential’. Centres also now offer a wider diversity of entertainment options: Video game arcades, modern lounges with sports bar themes, karaoke, darts, skating rinks, laser tag. These activities are supposed to increase the number of customer visits and revenue per visit.
Moody’s and the Small Business Association published data showing that Bowling is ranked favourably for loan writeoffs. It is in the 36th percentile and has a charge off rate of 0.79%. Property and casualty insurance coverage is available at cheap prices and the lending climate is favourable. This is due to several reasons. Bowling is not sensitive to the economy, during recessions it is seen as a ‘value’ activity. It has high barriers to entry as Bowling centres are expensive to buy and construct. This is a competitive advantage for existing firms.
Other factors that benefit the industry are low working capital needs, lack of obsolescence, lack of a digital threat, and high operating leverage. Low working capital requirements have to do with inventory, receivables, and payables. The only seasonality firms must worry about is customers preferring outdoor activities during the summer, however the impact is not substantial. Centres carry little inventory and usually only hold F&B items which makes up a large part. Cash is paid immediately and Credit cards clear balances in 24-48 hours.
Bowling has existed for a large part of human civilisation, meaning it can’t be killed. Bowling can also not be experienced on the internet and fulfils a unique social need by combining activity and socialisation. Lastly centres have high operating leverage. They are simple to run and fixed costs can be spread over many customers, reducing average costs. The simplicity helps centres achieve scale and offer competitive prices.
Canada has a unique bowling market. It has many different forms of bowling that are popular across the country. Five Pin Bowling is widely played in the country and was developed as a more accessible version of Ten pin bowling, requiring less physical strength and making it popular among a broader audience. Smaller balls are used with no finger holes and only uses 5 pins which are arranged in a V shape. The pins are worth different points which is different to Ten pin where you try to clear everything. Candlepin and Duckpin bowling are popular in the eastern region and is found in very specialised bowling centres. Different forms of bowling is one of the major factors that make Canada different to both the UK and US.
There are a few differences between the UK and Canadian bowling market. Independent bowling centres make up a large part of the Canadian market. The UK was in a similar position a decade ago but now Hollywood Bowl and Tenpin Entertainment have significant market share. UK bowling alleys are geared towards retail customers seeking leisure while Canada tends to focus more on communities and professionals. UK operators have shifted towards an entertainment centric model with a focus on providing a comprehensive entertainment experience beyond just bowling. Canada is spread over a vast geographic area with large distances between major cities, making it challenging for a large operator to run centres across the country. These differences result in varying consumer preferences which the group must adapt to.
Porter’s 5 Forces Model
We expect the Canadian market to go through a similar evolution to the UK market. We expect bowling as an activity to democratise, bringing in more non-professionals to the activity. Amusem*nt additions to centres and refurbishments will improve the entertainment offering of Bowling which will make the market more in line with the UK. However, we expect community centric approaches to continue as centres hold a lot of social value in Suburbs. This is important as Canada is more suburban than the UK. Additionally, we expect professional customers to continue to be a large part of the customer base but don’t expect growth from the group. The evolution is pivotal for our investment case, and we believe the market in Canada is ripe for Hollywood Bowl to come in and consolidate its market position.
Competitor Analysis
There are not many listed bowling companies around the world. Tenpin Entertainment was bought out by Trive Capital in December 2023 and is no longer publicly listed. Hollywood’s Bowl main peer which is not a direct competitor is Bowlero. Round1 Corporation is a Japan based amusem*nt store chain which offers bowling alleys, arcade games, karaoke, and billiards. The business models are largely similar across the 3 firms and make it a fair basis of comparison.
Before delving into which company is better, we will explore Bowlero as it’s the most obvious replacement if one doesn’t invest in Hollywood Bowl but wishes to gain exposure to the bowling sector. Bowlero doesn’t build its own centres but instead purchases existing ones which then undergo refurbishment. In an article published by Jacobin, customers revealed that the company has failed to improve the customer experience of many acquired centres. One primary anecdote revealed that the centres are not cleaned regularly, meaning the floor is often sticky which ruins the customer experience as customers are uncomfortable when bowling. Pinsetters are breaking down often and there are no mechanics on site. This means some lanes are unavailable which results in lost potential revenue for centres. We believe there is clear evidence of the customer experience not being up to the mark of Hollywood’s Bowl Centres, making it unattractive from a service quality aspect.
Aside from the customer experience, Bowlero is fundamentally weaker to Hollywood Bowl because of its business strategy. From a product/service aspect, the management team does not seem to keen on the future of bowling. In 2011, the CEO made a statement about bowling becoming unpopular and believed it was more worthwhile for centres to shift completely to entertainment. Hollywood Bowl understands bowling must be at its core and all other offerings are supplementary to maintain its competitive advantage. On a more financial note, Bowlero takes on debt and uses incoming revenue to pay dividends and buy back shares. The management team holds shares which means it benefits from the dividends. If growth slows, it must cut its dividend or share buybacks, affecting its share price. The Net Debt/EBITDA figure in the table for Bowlero shows how leveraged the company is, making it a dangerous bet for investors who face the risk of the company going bankrupt. Due to these reasons, Hollywood Bowl has stronger fundamentals.
Hollywood Bowl is more attractive than its direct peers which creates a mispricing investors can take advantage of. It the highest margins and ROIC, showing its operational superiority. It is also cheaper than Bowlero on an EV/EBITDA, LTM PE, Forward PE, and Free Cash Flow Enterprise Value yield basis. This is a mispricing as Hollywood Bowl is trading at a cheaper multiple despite being a superior business to Bowlero. Using the comparable analysis, it is clear to see that Hollywood Bowl should be trading at a much higher multiple as it is fundamentally stronger.
Ten Entertainment Group has pursued a notably more aggressive M&A strategy than Hollywood Bowl Group in several key areas. For starters, Ten Entertainment has made acquisitions at a much higher frequency, consistently adding new sites each year. In 2018 alone, the company acquired four bowling centers, and it has continued this pace in subsequent years, regularly expanding its footprint through additional acquisitions. This is in stark contrast to Hollywood Bowl's more cautious approach, where acquisitions are far more selective and strategically aligned with their brand. For instance, Hollywood Bowl's acquisition of AMF Bowling UK in 2010 added 28 centres to their portfolio, but since then, the company has focused on fewer acquisitions that offer a strong strategic fit rather than pursuing rapid expansion through multiple deals.
The difference in strategies is also clear in how each company approaches market expansion. Ten Entertainment’s goal has been to increase its market presence quickly by acquiring underperforming or independent bowling centres, a strategy that has allowed them to grow to 46 sites by 2020. Hollywood Bowl, on the other hand, has expanded at a more measured pace, focusing heavily on organic growth through refurbishments and new center openings. As of 2023, Hollywood Bowl operates 70 centers, indicating a steadier, more deliberate approach to expansion compared to Ten Entertainment's aggressive acquisition-driven growth.
Financially, Ten Entertainment has shown a greater willingness to invest significant capital into acquisitions and the subsequent refurbishment of newly acquired sites. By investing heavily to standardize and enhance the customer experience across its expanding portfolio, Ten Entertainment quickly scales up its business and benefits from increased market share. This aggressive capital deployment is likely influenced by its history of private equity ownership, which often pushes for rapid expansion and market dominance.
In contrast, Hollywood Bowl has taken a more balanced financial approach. While the company does invest in acquisitions when the right opportunities arise, it also focuses heavily on organic growth initiatives, spending over £12 million annually on refurbishments and new technology enhancements between 2018 and 2020. This strategy highlights Hollywood Bowl’s emphasis on long-term value creation and sustainable growth, differing significantly from Ten Entertainment’s more aggressive, acquisition-focused expansion strategy.
Given the lack of public comparables, we decided to carry out a comparable analysis including Cinema stocks as it is a direct substitute for bowling. Hollywood Bowl has higher operating margins, higher ROICs, and is cheaper on all metrics. Cineplex might have a a higher ROIC but is operating with much more leverage. Furthermore, cinemas are very cyclical and are dependent on content slates and have unfavourable agreements with media houses who have a revenue share in ticket sales. As a result, we believe bowling alleys are preferable given its counter cyclicality and lack of dependence on uncontrollable external factors.
Reverse Thesis
Hollywood Bowl Group, despite being a major player in the UK bowling industry, faces several challenges that could hinder its future growth and success. One significant concern is the overall lack of growth in the bowling market. Bowling as a leisure activity has faced declining participation rates in some markets, and Hollywood Bowl’s heavy reliance on the UK market could limit its ability to achieve meaningful expansion. The saturation of the market in the UK means that opportunities for organic growth are becoming increasingly scarce, forcing the company to seek growth in other, potentially less lucrative, areas.
Another red flag is the insider selling activity within Hollywood Bowl. According to data from MarketBeat, several key insiders have been selling their shares, which might indicate a lack of confidence in the company's prospects. For instance, sales by individuals such as Laurence Keen, the Chief Financial Officer, and Stephen Burns, the Chief Executive Officer, suggest that even top executives may not be entirely optimistic about the company's growth trajectory. Such insider selling could be perceived as a signal that those closest to the company see limited upside potential or are concerned about upcoming challenges.
Moreover, Hollywood Bowl's recent venture into the Canadian market raises further concerns about its ability to replicate its UK success abroad. The Canadian bowling industry is already highly fragmented and lacks the same growth potential seen in Hollywood Bowl's core UK market. Given these market conditions and Hollywood Bowl’s limited experience outside of the UK, there is a significant risk that the company might not achieve the desired success in Canada. If Hollywood Bowl fails to establish a strong presence and generate significant returns in the Canadian market, it could further strain the company's resources and hinder its ability to deliver value to shareholders.
Valuation Analysis
Our DCF provides an implied price of £4.69 which provides an adequate margin of safety from the current share price. 2 Year FCF to EV isn’t as cheap as we would like but is still a fair yield investors will receive for a company with a well-established track record. Lastly, by attaching a 2-year EV/EBITDA multiple of 11x which is where Bowlero trades at, we establish a margin of safety of 38%. We believe these metrics present an attractive entry point for Hollywood Bowl as it is cheap on an implied and comparable basis while also trading at a fair free cash flow yield (EV and Market cap).
Conclusion
What we like about Hollywood Bowl’s investment case is the simplicity of the business model and clear growth strategy which helped us make (hopefully) accurate projections about its long-term future. Its focus on delivering a good customer experience makes us bullish about its prospects in Canada, where it can continue to provide quality bowling experiences to a new population. The company seems to be cheap across many metrics and is trading at a suitable entry point.
We feel there is still a lack of awareness about this company. We have seen media coverage about Bowlero but feel Hollywood Bowl offers a stronger value bet on the future of bowling. Not only does it have a more attractive debt situation, it beats its American counterpart from a service quality standpoint. We believe companies which prioritise customers and lead peers will always provide favourable returns to investors. In the case of Hollywood Bowl, we believe EBIT margin expansion, greater capital returns, and a potential acquisition of the Canadian business are the major catalysts which investors could benefit from. As a result, we are bullish on the company.
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Sources
https://www.gotenpin.co.uk/about/history-of-bowling
https://www.cbpe.com/portfolio/original-bowling-co
https://thehansellgroup.com/wp-content/uploads/sites/269/2022/02/Industry-Overview.pdf
https://jacobin.com/2024/05/private-equity-bowlero-ruining-bowling
https://www.marketbeat.com/stocks/LON/BOWL/insider-trades/
https://www.hollywoodbowlgroup.com/investors/
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