Pinstripes Holdings Inc., the "dining and entertainment" company known for its upscale bowling alleys and bocce courts, just had its inaugural earnings call as a public company. The mood was optimistic, with CEO Dale Schwartz touting the "magic of Pinstripes" and highlighting their expansion plans. But buried beneath the celebratory tone lies a subtle, yet alarming trend: Pinstripes appears to be increasingly reliant on its high-margin bowling and bocce revenue to prop up profitability. While not inherently problematic, this shift, coupled with other factors, raises concerns about the long-term sustainability of their business model.

On the surface, Pinstripes' financial performance seems solid. Third-quarter revenue grew a respectable 14.1%, driven by new venue openings and a 6.9% increase in same-store sales. However, a closer look at the underlying drivers of this growth reveals a potential cause for concern. Management attributed a portion of the same-store sales increase to higher volume in bowling and bocce, which carry a near 100% gross margin. This indicates that a growing share of Pinstripes' revenue is coming from its entertainment segment, rather than its food and beverage offerings.

This trend is particularly worrisome given that food and beverage sales still make up a larger percentage of Pinstripes' overall revenue (approximately 75%). Historically, restaurants and similar businesses rely on a healthy balance between food and beverage sales, and additional revenue streams like entertainment. A heavier reliance on the entertainment side, while boosting margins in the short term, could signal weakness in the core competency of the business – its "made-from-scratch" Italian-American cuisine.

Why This is Concerning:

Changing consumer preferences: The post-pandemic world has seen a resurgence in demand for unique dining experiences. If Pinstripes' core food and beverage offering isn't compelling enough to drive traffic on its own, it raises doubts about their ability to compete in the long run. Vulnerability to economic downturns: Entertainment spending is often the first to be cut during economic downturns. An over-reliance on bowling and bocce revenue could leave Pinstripes disproportionately vulnerable during recessions. Limited pricing power: While increasing bowling and bocce prices might seem like a simple solution, it could alienate customers who view those activities as secondary to the dining experience.

Furthermore, consider the fact that Pinstripes is aggressively expanding, aiming to open six to eight new locations annually. This ambitious growth strategy requires significant capital investment, and any stumble in their core food and beverage business could strain their financials. If new locations fail to replicate the current, potentially skewed, revenue mix, achieving the projected 17% venue-level EBITDA margins could prove challenging.

To be fair, Pinstripes does have some things working in its favor. Their private event business, which accounts for almost 50% of sales, provides a steady revenue stream and drives brand awareness. Additionally, their focus on suburban locations aligns well with post-pandemic trends.

However, the potential overdependence on bowling and bocce revenue raises a red flag that warrants further scrutiny. Investors should closely monitor the company's food and beverage sales growth in upcoming quarters. If this segment fails to keep pace with overall revenue growth, it could signal deeper problems lurking beneath the surface of Pinstripes' seemingly successful business model.

Hypothesis:

If Pinstripes is indeed becoming overly reliant on its entertainment segment, we would expect to see the following in future earnings reports: Stagnant or declining food and beverage same-store sales growth, while overall same-store sales growth remains positive. Increasing marketing spend focused on promoting the entertainment offerings, rather than the dining experience. A decline in average food and beverage spend per customer, indicating customers are primarily visiting for the entertainment aspect.

Numbers to Watch:

Food and beverage same-store sales growth as a percentage of total same-store sales growth. Marketing spend allocated to food and beverage promotions versus entertainment promotions. Average check size for food and beverage only.

Revenue Breakdown (Hypothetical)

This chart illustrates a potential scenario where bowling/bocce revenue grows while food/beverage stagnates.

Key Financials from Q3 2023 Earnings Call

Failing to address this potential imbalance could leave Pinstripes in a precarious position – one where the allure of strikes and spares masks a fundamental flaw in their business model. And that's a game no company wants to lose.

"Fun Fact: The term "pinstripes" originally referred to the striped pattern found on traditional business suits, symbolizing professionalism and success. Ironically, Pinstripes Holdings Inc. could find their own success threatened if they don't pay attention to the "stripes" in their revenue streams."