Lucky Strike currently trades at $8.91 per share and has shown little upside over the past six months, posting a middling return of 2.2%. The stock also fell short of the S&P 500’s 27.3% gain during that period.
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 for active Edge members.
Why Do We Think Lucky Strike Will Underperform?
We don't have much confidence in Lucky Strike. Here are three reasons you should be careful with LUCK and a stock we'd rather own.
1. Same-Store Sales Falling Behind Peers
In addition to reported revenue, same-store sales are a useful data point for analyzing 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 2.2% 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
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).
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. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
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 $2.60 billion of debt exceeds the $59.69 million of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $367.7 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. With its shares lagging the market recently, the stock trades at 85× forward P/E (or $8.91 per share). This multiple tells us a lot of good news is priced in - you can find more timely opportunities elsewhere. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.
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