Although Lucky Strike (currently trading at $6.69 per share) has gained 5.5% over the last six months, it has trailed the S&P 500’s 11.8% return during that period. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Do We Think Lucky Strike Will Underperform?
We’re sitting this one out for now. Here are three reasons we avoid LUCK, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Investors interested in Consumer Discretionary - 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 1.1% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Lucky Strike might have to close some locations or change its strategy and pricing, which can disrupt operations. 
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
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 $2.75 billion of debt exceeds the $58.65 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $347.9 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
We see the value of companies helping consumers, but in the case of Lucky Strike, we’re out. With its shares trailing the market in recent months, the stock trades at 67.4× forward P/E (or $6.69 per share). This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at a dominant aerospace business that has perfected its M&A strategy.
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