Strike big with Hollywood Bowl

Britons will soon see more Hollywood Bowls dotted around the country. The company is planning to open an average of two new units each year over the medium term, and new locations have already been secured for two openings per year up to 2022. Funding for these expansion plans will come from internal cash flows. Last year, Hollywood Bowl generated free cash flow of £19.6m after £4.3m of expansionary capital investment, which was some £2m better than the forecast from Shore Capital. Those locations that it’s opened recently seem to be doing well, as are the nine refurbishments and rebrandings undertaken last year, which have so far exceeded the targeted 33 per cent return on investment.  

Once lanes are built, chief executive Steven Burns describes bowling as a 100 per cent gross margin business. Gross margins are slightly less eye-popping on food, drink and amusement sales, but overall group gross margins came in at an impressive 86.1 per cent last year, consistent with the year before. Operating margins, meanwhile, rose to 20.8 per cent from 19.5 per cent helped by a 6.1 per cent rise in spend per game, as well as a small drop in average rent and staff cost per centre, despite the rise in the minimum wage. Making a rough adjustment for the company's leases, the attractive margins supports a solid return on average capital employed (ROCE) of 13.9 per cent.

Rising spend per game has been helped by the company's pricing strategy, which aims to keep a trip to the bowling alley a fun and affordable family activity. Hollywood Bowl has begun experimenting with “dynamic pricing”, such as making a booking £1 cheaper if made in advance, and £1 more expensive for same day bookings. It has also revamped its drink and food menu, and introduced lane side ordering and new amusement games. Indeed, average food spend last year rose 5.4 per cent, drink spend was up 7 per cent and amusement spend grew 8.3 per cent.

Management has suggested that it sees an opportunity to start a mini-golf division, although this would not fall under the Hollywood Bowl branding. This would play into the company’s idea of creating a 'leisure hub', where many casual dining and amusement options are available all in one place. Since the company already positions new locations with other amenities such as cinemas and restaurants, one might wonder whether this adds competition to its other nearby competitors, especially for Hollywood Bowl’s diners. But Mr Burns says that the leisure hub idea helps get people into the area, and that the diner is not meant to have the capacity for every bowler.

The company has proven itself to be resilient enough to withstand tough market conditions with a set of full-year results for 2018 that beat analyst expectations. Analysts at Shore Capital said that Hollywood Bowl’s ability to generate revenue growth and margin improvement in the trading environment, especially given the weather and the World Cup during the year, was “an impressive achievement” and “demonstrates the strength of both the offering and the management team”.

The company hasn’t shied away from sharing the fruits of its success by returning money to shareholders. Since its IPO in September 2016, Hollywood Bowl will have returned a total of £29.8m to shareholders, representing 12.4 per cent of the company’s market capitalisation at IPO. This came most recently in the form of a 4.33 special dividend, up from a 3.33p special payout last year. Shore Capital thinks as much as 80p could be returned over the next five years – the table below does not include special dividends.