Over the past six months, Lucky Strike’s shares (currently trading at $8.92) have posted a disappointing 14.3% loss, well below the S&P 500’s 8.2% gain. This may have investors wondering how to approach the situation.
Is now the time to buy Lucky Strike, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Lucky Strike Will Underperform?
Despite the more favorable entry price, we're swiping left on Lucky Strike for now. Here are three reasons there are better opportunities than LUCK and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
Investors interested in Leisure Facilities companies should track same-store sales in addition to reported revenue. This metric measures the change in sales at brick-and-mortar locations that have existed for at least a year, giving visibility into Lucky Strike’s underlying demand characteristics.
Over the last two years, Lucky Strike’s same-store sales averaged 2.3% year-on-year growth. This performance was underwhelming and suggests it might have to change its strategy or pricing, which can disrupt operations. 
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
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 unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Lucky Strike’s $2.69 billion of debt exceeds the $31.03 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $377.4 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.
Final Judgment
Lucky Strike doesn’t pass our quality test. After the recent drawdown, the stock trades at 53.1× forward P/E (or $8.92 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. We’d suggest looking at the most dominant software business in the world.
Stocks We Would Buy Instead of Lucky Strike
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