S&P Global Ratings has revised the outlook on Lucky Strike Entertainment Corp. to negative, while keeping the company's long-term issuer credit rating at 'B'. The agency's move centers on concerns over Lucky Strike's high leverage and a deterioration in operating margins observed year to date.
S&P described its action as a response to increased downside risk around its base-case assumptions. The rating agency noted that Lucky Strike could face difficulty simultaneously growing comparable sales and implementing cost reductions. In S&P's view, aggressive cost-cutting efforts carry the risk of depressing comparable sales trends and eroding overall profitability.
Traffic trends represent another focal point for the rating agency. Although S&P's base case assumes that customer traffic will stabilize over time because of the company's rebranding initiatives, marketing spending, and customers trading down from more expensive entertainment options, it stressed that consumer discretionary spending remains pressured - a dynamic that could undermine those assumptions.
On margins, S&P expects Lucky Strike's adjusted year-over-year EBITDA margin to decline 200 basis points in fiscal 2026. The rating agency highlighted that, through the first half of the fiscal year, adjusted EBITDA margin has already fallen 360 basis points compared with the prior year, with the fiscal second quarter accounting for the full decline.
Looking at leverage and cash flow, S&P's base-case forecast anticipates adjusted leverage of 8.1x in fiscal 2026, with leverage dropping below 8.0x in fiscal 2027. The agency expects free operating cash flow (FOCF) to stay positive in fiscal 2026 and to improve to about $40 million in 2027.
Capital expenditure plans are a notable component of S&P's analysis. The agency projects capital spending of $110 million in fiscal 2026, with most of those funds earmarked to complete the conversion of the remaining Bowlero locations to the Lucky Strike brand. S&P observed that the rebrand has produced some early improvements in comparables, with comparable sales rising 30 basis points year over year in the fiscal second quarter following a 40-basis-point decline in the fiscal first quarter.
S&P also expects Lucky Strike to maintain an annual dividend program in the range of $30 million to $35 million. The agency anticipates that share repurchases will be mostly limited to offsetting dilution from share-based compensation rather than representing a broader buyback program.
The rating could be downgraded under two specific conditions spelled out by S&P: if adjusted leverage remains sustained above 8.0x, and if adjusted free operating cash flow drops below about 2.5% of debt. Conversely, the outlook could be returned to stable if leverage stays below 8.0x and adjusted FOCF exceeds about 2.5% of debt.
Summary
S&P affirmed Lucky Strike's 'B' rating but moved the outlook to negative because of elevated leverage, falling adjusted EBITDA margins, and the risk that traffic and comparable-sales trends may not recover as assumed. The agency expects capex to remain significant in fiscal 2026 as the company finishes rebranding efforts and projects gradual improvement in free operating cash flow into 2027.
Key points
- S&P affirmed a 'B' rating and changed the outlook to negative due to elevated leverage and margin deterioration.
- S&P forecasts adjusted leverage of 8.1x in fiscal 2026, improving to below 8.0x in fiscal 2027, and expects FOCF to rise to about $40 million in 2027.
- Capex is projected at $110 million in fiscal 2026, mainly to convert remaining Bowlero locations to the Lucky Strike brand; comparable sales showed a modest improvement in fiscal Q2.
Risks and uncertainties
- Comparable-sales and traffic may remain weak, which would pressure revenue and margins - impacting the consumer discretionary and leisure sectors.
- Sustained adjusted leverage above 8.0x or adjusted FOCF falling below about 2.5% of debt would risk a downgrade, with implications for credit markets and the company's borrowing costs.
- Aggressive cost reductions could backfire by reducing comparable-sales growth and harming profitability, further stressing liquidity and free cash flow.
The outlook change leaves the company's credit profile under watch: improvement in leverage metrics and stronger adjusted FOCF would be required for the outlook to return to stable.