What happened
Bowling center operator Bowlero (BOWL 2.71%) trailed a rising market this week. The stock was down 10% through Thursday trading compared to a 1.8% boost in the S&P 500. This decline put shares down 13% so far in 2023, according to data provided by S&P Global Market Intelligence, compared to the wider market's 9% increase.
This recent drop was sparked by the company's fiscal third-quarter earnings report covering the selling period through early April.
So what
Bowlero announced on Wednesday that sales trends remained strong in the quarter as bowling fans increased their pace of visits. Revenue was up 22% in Q3 compared to the prior-year period and rose 54% compared to the pre-pandemic level. Fiscal Q3 is the company's strongest season, but demand trends did not disappoint through early April.
Sales benefited from a 17% increase in sales at existing locations, plus a rising pool of bowling centers.
On the downside, Bowlero reported expanding losses, mainly powered by charges related to its going public via a special purpose acquisition company (SPAC) merger. While operating profit rose, net losses roughly doubled to $32 million. And the company continues to hold significant debt of nearly $1 billion, with a portion of that debt exposed to rising interest rates.
Now what
Management is directing cash toward reducing that debt and toward lowering the outstanding share count in what it calls efforts to "de-risk the balance sheet." These efforts are aided by Bowlero's strong sales growth, but it will take several more quarters of progress before investors can be confident in the company's financial strength. Any financial improvements would be delayed by a recession, too, should one develop in late 2023.
Ultimately, investors this week chose to view Bowlero's business as a riskier investment. But that bearish reading could change as the company starts showing progress toward sustainable profitability.
