Lucky Strike’s stock price has taken a beating over the past six months, shedding 36.4% of its value and falling to $5.39 per share. This was partly driven by 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?
Even with the cheaper entry price, we’re cautious about Lucky Strike. Here are three reasons why LUCK doesn’t excite us, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
In addition to reported revenue, same-store sales are a useful data point for analyzing Consumer Discretionary - Leisure Facilities companies. 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 2.1% 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
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Unfortunately, Lucky Strike’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
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 $2.78 billion of debt exceeds the $39.36 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $333.2 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 cheer for all companies serving everyday consumers, but in the case of Lucky Strike, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 10× forward EV-to-EBITDA (or $5.39 per share). This valuation tells us a lot of optimism is priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
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