S&P downgrades Lucky Strike Entertainment's outlook to negative due to high leverage.

2026-02-13 23:58:12

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Investing.com – S&P Global Ratings has revised the outlook for Lucky Strike Entertainment Corp. to negative while affirming its “B” rating, citing concerns over the company’s high leverage.

The rating agency’s outlook change reflects downside risks to its baseline scenario, indicating that Lucky Strike may struggle to increase comparable sales while implementing cost-cutting measures. Aggressive cost reductions could limit comparable growth and harm overall profitability.

S&P also highlighted the risk of continued weak foot traffic. While its baseline scenario assumes foot traffic will stabilize over time due to brand revitalization efforts, marketing investments, and transactions from higher-priced entertainment options, consumer discretionary spending remains under pressure.

The agency expects S&P Global Ratings’ adjusted EBITDA margin for fiscal 2026 to decline by 200 basis points year-over-year. In the first half of the fiscal year, the adjusted EBITDA margin has already fallen by 360 basis points, with the second quarter accounting for the majority of the decline.

S&P’s baseline scenario forecasts a leverage ratio of 8.1x for fiscal 2026, decreasing to below 8.0x in fiscal 2027. They expect free operating cash flow (FOCF) to remain positive in fiscal 2026 and increase to approximately $40 million in 2027.

Capital expenditures for fiscal 2026 are projected at $110 million, mostly allocated to completing the remaining conversion of Bowlero locations to the Lucky Strike brand. The brand revitalization has shown early positive results, with comparable sales in the second quarter up 30 basis points year-over-year, an improvement from a 40 basis point decline in the first quarter.

S&P expects Lucky Strike to continue paying annual dividends of $30-35 million, with share repurchases mainly offsetting dilution from equity-based compensation.

The rating agency stated that if Lucky Strike’s adjusted leverage remains above 8.0x and adjusted FOCF falls below approximately 2.5% of debt, its rating could be downgraded. Conversely, if leverage stays below 8.0x and adjusted FOCF exceeds about 2.5% of debt, the outlook could be restored to stable.

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