ROUND ONE Corporation (ROUND ONE), established in 1980 in Tokyo, Japan, is predominantly an entertainment company (2,062 employees) that provides service through managed indoor leisure complex facilities focused on Bowling, Amusement, Karaoke and Spo-cha. In view of sustainable long-term growth, the Group has expanded its operations beyond Japan to include the USA and China. The company opened stores in the USA in 2010, and in China in 2021. As of November 2024, ROUND ONE has 100 stores in Japan, 54 stores in the USA, and 4 stores in China. Segment wise Amusement contributed 59.9% of the sales mix in 1HFY25 (half year ended September 2024), followed by Bowling (16.6%), Spo-cha (11.2%), Karaoke & Food (10.3%), and others (2.0%).

Amusement and food business taking wings in the USA

Driven by the philosophy to provide “a place for smile, health and communication” to its customers, and on the backdrop of demand for new and diversified entertainment, ROUND ONE has continuously focused on providing and adding new entertainment setups for its consumers. Amusement contributes the bulk of the revenue in both Japan and the USA and has grown at a CAGR of 6.3% and 33.5% over the period FY20-24 to register sales of JPY49.5bn and JPY44.2bn, respectively. The growth demonstrates the rapid traction in the USA business in recent years. The Group is also considering aggressively expanding its food business in North America with the addition of new stores with food halls. Historically, the average food court sales in the USA have averaged about JPY200mn per outlet with pizzas and hot dogs as the main items. However, the company now plans to replace them with Grade B, and Grade C Japanese gourmet, which is expected to garner increased interest from consumers.

Strong trajectory in financial performance

The Group has demonstrated a CAGR of 11% in net sales over the period FY20-24 to reach JPY159.2bn. Moreover, the company staged a turnaround in bottom-line performance from a loss of JPY18bn in FY21 (peak COVID-19 impacted year) to a net profit of JPY15.7bn in FY24. Overall, net profit CAGR performance over the period FY20-24 period stood at an impressive 34.5%. Tracking positive profit performance, the Group delivered solid free cash flow over the same period, growing it by 3.45x to JPY29.3bn as of FY24 end, from JPY8.5bn as of FY20 end. This gradually helped to scale down debt to JPY22.2bn as of FY24 end, compared to a high of JPY67.2bn as of FY21 end. The number of stores increased steadily from 144 to 153 during the same time. The company further expects to increase its store count to 165 by FY25 end, driving net sales to an anticipated JPY165bn and net profit to JPY17bn.

During the same period (FY20-FY24), the company’s main competitor in North America - Dave & Buster's Entertainment, Inc. (PLAY), registered a CAGR of 13.1% in sales to reach USD2.2bn FY24. The net profit performance, however, grew at a lower CAGR of 6.2% to USD127mn.

Staggering stock returns in the past one year

ROUND ONE’s current P/E level of 19.7x (based on estimated FY25 EPS of JPY67) appears to be reasonably cheap compared to the global peer average of 24.1x. The company is trading in-line with its historical 8-year average P/E of 20.1x. However, the company’s valuation seems to be stretched when compared to Dave & Buster's Entertainment which is trading at a P/E ratio of 15.7x. Valuation through the EV/EBITDA approach also projects Dave & Buster's multiple to be lower at 5.3x, compared to 7.9x for Round One. Moving in sync with the positive financial trajectory of the company, the stock price also made rapid upward strides in the past one year, delivering staggering returns of over 130%. Out of the seven analysts covering the stock, five analysts have given a rating of ‘Buy’ for an average target price of JPY1,352, implying an upside potential of around 9%.

In conclusion, the company should garner investor interest in the long run, driven by its strong fundamentals, strong traction in the Amusement business, and strength in the balance sheet. Additionally, the management’s focus on expanding the food business in North America augurs well for the top-line growth. However, the company’s operations are exposed to risks of an increase in variable costs for crane game machines and prize items in both Japan and the USA. In addition, rising labor costs have compounded the input cost challenges. ROUND ONE’s plan to tackle the input cost pressures through price hikes also appears to be challenging in the face of the current sluggish economic scenario in Japan.