Interactive Investor

Shares for the future: a steadily growing, well-oiled machine

This company was among those hit hard by the pandemic, but it’s made a fantastic recovery and is expanding overseas. Columnist Richard Beddard analyses performance and gives the shares a score out of 10.

8th March 2024 15:01

Richard Beddard from interactive investor

Tenpin bowling centre operator Hollywood Bowl Group (LSE:BOWL) is demonstrating that seemingly unremarkable industries can spawn decent businesses.

Scoring Hollywood Bowl: a well-oiled machine

Following a strong bounce-back from the pandemic in the year to September 2022, Hollywood Bowl earned even more revenue and profit in 2023.

It was helped by a full year’s contribution from acquisitions in May 2022 and bad weather in summer 2023, but it was hindered by the resumption of VAT payments in full (they were reduced during the pandemic).

The Past (dependable) [2]

  • Profitable growth: Double-digit growth [1]
  • Strong finances: Debt to capital is greater than 50% [0.5]
  • Through thick and thin: Lowest ROC: 5% during pandemic. Short record as listed firm [0.5]

In the seven years since Hollywood Bowl floated in 2016, the company has achieved double-digit compound annual growth in revenue and profit, an average return on capital of 14%, and average cash conversion of 94%.

These numbers are especially impressive because they include two pandemic years when the company only earned 5% return on capital.

The Present (distinctive) [3]

  • Discernible business: Efficient bowling centre operator [1]
  • With experienced people: Seasoned executives [1]
  • That creates value for customers: Good experience, modest cost [1]

At the end of the financial year Hollywood Bowl operated 65 bowling centres and 5 Puttstars crazy golf centres in the UK. In Canada, it operated nine Splittsville bowling centres, having acquired five in 2022, opened one and acquired three more. After the year end, it acquired two more bowling centres.

Its Canadian centres are supported by Striker, acquired at the same time as Splitsville. It is a supplier and installer of bowling equipment.

The UK centres are mostly in out-of-town retail and leisure parks co-located with cinemas and restaurants, where Hollywood Bowl can benefit from high footfall.

Landlords are looking for high quality tenants that they are confident will be able to pay the rent. Reliable earners like Hollywood Bowl are, therefore, favoured.

Rivals rarely set up near each other, so once in a good location Hollywood Bowl should get most of the bowlers.

Scale brings advantages because it spreads the cost of developing the format and systems over more centres. Systems include dynamic lane pricing, menus that nudge people to buy snacks at busy times and meals at quiet times, and integrated scoring and marketing.

Frowned upon by some competitive tenpin bowling players, the pins on strings system Hollywood Bowl uses to re-spot bowling pins goes unnoticed by the customers Hollywood Bowl courts - families and groups of friends.

Because pins on strings resets pins more reliably than old-style free fall pin-setting, it means less downtime and manual intervention so Hollywood Bowl gets people through games quickly, efficiently, and cheaply.

Efficiency enables Hollywood Bowl to be highly profitable by offering customers the lowest price per game of the UK branded bowling centre operators, and a cheaper day or night out than most other leisure activities.

The same trio has developed this finely tuned format, since before the company floated. All three assumed their current roles in 2014.

They are chairperson Peter Boddy (highest bowling score 220), Stephen Burns (highest bowling score 189) who was promoted from managing director, and chief financial officer Laurence Keen (highest bowling score (191).

The Future (directed) [2.5]

  • Addressing challenges: Limits to growth in UK [1]
  • With coherent actions: Early-stage Canadian expansion [0.5]
  • That reward all stakeholders fairly: Customer, staff centric [1]

Over the next 12 years, Hollywood Bowl plans to add 28 bowling centres in the UK and 22 centres in Canada to the year-end totals.

Puttstars, the new crazy golf format Hollywood Bowl introduced in 2020, has not delivered comparable returns to bowling. It looks like the company’s fifth centre, opened in Peterborough last year, may be its last new crazy golf centre. It is putting Puttstars into bowling centres with space to spare, though.

To maintain the growth rate as it gets bigger, Hollywood Bowl needs to open more centres per year, which is where Canada comes in. It is allowing Hollywood Bowl to almost double the rate at which it opens new centres.

The company says Canada is a good opportunity because it is a fragmented and underinvested market, resembling the UK a decade and more ago. But the overseas expansion may involve trade-offs because Hollywood Bowl intends to export its family friendly model, whereas Splitsville has catered to enthusiasts playing in bowling leagues.

The only blot in the numbers is the high level of financial obligations. Hollywood Bowl rents centres from retail park owners. There is not much it can do about this, but leases are a financial obligation akin to debt, and the company pays a lot of rent.

The pandemic showed landlords will share the pain when things get really tough, and Hollywood Bowl had no conventional bank debt at the end of 2023. Hopefully, it will maintain this stance.

We do not have a long track record to evaluate, but maybe Hollywood Bowl will be resilient during hard times. A family of four can bowl for as little as £25 during peak times, and although its rental cost is fixed, its average operating profit margin of 17% suggests revenue would have to fall a long way before profit turned to loss.

The company is guided by customer satisfaction statistics (92% are satisfied or highly satisfied, 60% are highly satisfied), and it has an impressive net promoter score (NPS) of 64%. The NPS means customers are likely to recommend Hollywood bowl to friends.

Customer satisfaction is delivered by staff, who are incentivised by bonuses linked to the customer satisfaction score (as well as financial and environmental metrics). Centre managers received 65% of their base salaries in bonuses, considerably less than in 2022, which was a real banner year. Assistant managers received 14% of their salaries as bonuses, and 52% of hourly paid workers received bonuses.

In this performance culture the benefits mostly go to senior managers. Median pay including bonuses in 2023 was £20,000, only £1,000 more than the 25th percentile and £5,000 less than the 75th percentile. The chief executive achieved 69 times the median, nearly £1.4 million in total pay.

Such a large discrepancy makes me uncomfortable, but it is also a feature of the retail and leisure sector. At Card Factory, a greetings card retailer that, like Hollywood Bowl, is one of the UK’s 25 Best Big Companies to Work For, pay is very similar to Hollywood Bowl’s at the 25th and 50th percentiles. It is considerably lower than Hollywood Bowl's at the 75th percentile.

This shows the bonus culture extends at least some way down the organisation.

The company also helps people climb the ranks by promoting from within. 46% of management vacancies are filled internally, and the company has started a graduate training programme to complement existing management training programmes. It aims to develop graduates into centre managers within three years.

Hollywood Bowl does not disclose staff turnover, but says it performs better than leisure and hospitality peers.

The price (discounted?) [-1.1]

  • No. A share price of £3.33 values the enterprise at £717 million, 23 times normalised profit.

Barring the extent of pay discrepancies, I like Hollywood Bowl’s staff and customer focus. It appears to be a well-oiled machine, and if it continues to make a success out of Canada, one that is growing steadily too.

A score of 6.4 out of 10 indicates the shares are probably fairly priced.

It is ranked 30 out of 40 shares in my Decision Engine.

24 Shares for the future

Here is the ranked list of Decision Engine shares. I review the scores once a year, soon after each company has published its annual report. The scores change daily due to price changes.

Generally, I consider shares that score 7 or more out of 10 to be good value. Shares that score 5 or 6 out of 10 are probably fairly priced.

Quartix has published its annual report and is due to be re-scored.

If a share is likely to be downgraded next time I score it, there is a “?” before its name in the table. This is usually because events have revealed something about the company that I had not previously considered adequately.

We will not know for sure until I have scored these companies again, but extra caution may be necessary.

0

Company

Description

Score

1

? Quartix

Supplies vehicle tracking systems to small fleets and insurers

9.9

2

Churchill China

Manufactures tableware for restaurants and eateries

9.6

3

Focusrite

Designs recording equipment, loudspeakers, and instruments for musicians

9.0

4

Howden Joinery

Supplies kitchens to small builders

8.7

5

? Oxford Instruments

Manufacturer of scientific equipment for industry and academia

8.6

6

Macfarlane

Distributor of protective packaging

8.5

7

Dewhurst

Manufactures pushbuttons and other components for lifts and ATMs

8.5

8

RWS

Translates documents and localises software and content for businesses

8.5

9

Games Workshop

Manufactures/retails Warhammer models, licences stories/characters

8.0

10

Porvair

Manufactures filters and filtration systems for fluids and molten metals

7.9

11

Anpario

Manufactures natural animal feed additives

7.8

12

? XP Power

Manufactures power adapters for industrial and healthcare equipment

7.8

13

James Latham

Imports and distributes timber and timber products

7.8

14

FW Thorpe

Makes light fittings for commercial and public buildings, roads, and tunnels

7.7

15

Advanced Medical Solutions

Manufactures surgical adhesives, sutures, fixation devices and dressings

7.7

16

? PZ Cussons

Develops and manufactures hygiene, baby, and beauty brands

7.5

17

Victrex

Manufactures PEEK, a tough, light and easy to manipulate polymer

7.4

18

Treatt

Sources, processes and develops flavours esp. for soft drinks

7.4

19

Cohort

Manufactures military technology, does research and consultancy

7.4

20

Softcat

Sells hardware and software to businesses and the public sector

7.4

21

Marks Electrical

Online retailer of domestic appliances and TVs

7.3

22

Bunzl

Distributes essential everyday items consumed by organisations

7.3

23

Celebrus

Makes marketing and fraud prevention software, sells it as a service

7.1

24

Renishaw

Whiz bang manufacturer of automated machine tools and robots

7.1

25

Goodwin

Casts and machines steel. Processes minerals for casting jewellery, tyres

6.9

26

Auto Trader

Online marketplace for motor vehicles

6.7

27

James Halstead

Manufactures vinyl flooring for commercial and public spaces

6.7

28

James Cropper

Manufactures specialist paper, packaging and high-tech materials

6.5

29

Solid State

Manufactures rugged computers, battery packs, radios. Distributes electronics

6.4

30

Hollywood Bowl

Operates tenpin bowling and indoor crazy golf centres

6.4

31

Jet2

Flies holidaymakers to Europe, sells package holidays

6.2

32

4Imprint

Sells promotional materials like branded mugs and tee shirts direct

6.1

33

Bloomsbury Publishing

Publishes books, and digital collections for academics and professionals

5.9

34

YouGov

Surveys and distributes public opinion online

5.8

35

Garmin

Manufactures sports watches and instrumentation

5.5

36

Tristel

Manufactures disinfectants for simple medical instruments and surfaces

5.4

37

Tracsis

Supplies software and services to the transport industry

5.2

38

Next

Retails clothes and homewares

5.0

39

Judges Scientific

Acquires and operates small scientific instrument manufacturers

4.8

40

Keystone Law

Runs a network of self-employed lawyers

4.6

Scores and stats: Richard Beddard. Data: SharePad and annual reports
Shares marked with a question mark are more speculative
Click on a share's name to see a breakdown of the score (scores may have changed due to movements in share price)

Richard Beddard is a freelance contributor and not a direct employee of interactive investor.

Richard owns many of the shares in the Decision Engine. He weights his portfolio so it owns bigger holdings in the higher-scoring shares.

See our guide to the Decision Engine and the Share Sleuth Portfolio for more information.

Contact Richard Beddard by email: richard@beddard.net or on Twitter: @RichardBeddard

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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Disclosure

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