Dave & Buster's: Own This Cash Cow

| About: Dave & (PLAY)


I briefly review the concept of the businesses.

I discuss the financials of the just reported Q1.

The company crushed estimates, raised guidance and has initiated a buyback.

Back in December, I detailed my experience at Dave & Buster's (NASDAQ:PLAY). Briefly, I will remind you that I was immediately impressed by the sheer size of the establishment. Further, it quickly became clear to me that Dave & Buster's was a cash cow, and this was without looking into the financials of the company. The first thing I noticed was the cost of the games. Each game costs "credits" which you buy and they are loaded onto a card, unlike the old-fashioned token system I was used to at competitors.

What do I mean? Well I will reiterate that Dave & Buster's in genius fashion charges more credits for 'better' games. I quickly realized just how fast these credits could go. Watching my sons swipe their card and being charged 6.8 credits, 8.8 credits or 15.4 credits in some cases for the larger games, it became evident that they could quickly be wiped out of credits, and ask for more. We also decided to eat there and do a so-called 'eat and play combo'. This allowed us to have food and get the kids more gaming action.

The food was surprisingly high quality compared to what I had expected and was very reasonably priced. I can't imagine the margins are high on food, but it's the games where the money is made, as is the complete bar. That was likely what impressed me the most in addition to a full bar complete with over a dozen big screen TVs to offer sporting events and other entertainment. Now in the original piece I recommended a buy here in 2016. But to know whether Dave & Buster's can still be invested in here, we have to turn to the numbers.

Well, as I suspected in my coverage initiation, the company is indeed a revenue machine. In the company's just reported Q1 2016, total revenues increased a strong 17.7% to $262 million from $222.7 million in Q1 2015. Across all stores, food and beverage revenues increased 13.1% from Q1 2015 to $117.1 million. This represented 44.7% of all sales. How about the games? Well so-called 'amusements and other' revenues increased 21.6% to $144.9 million year over year and represented 53.5% of total revenues in Q1 2016.

I found those numbers to be interesting, but what I liked to see was strong growth in comps. Comparable store sales increased 3.6% in Q1 2016. This follows a strong 9.9% increase in the same period last year. Much of the same-store sales growth was driven by a 4% increase in walk-in sales, but here was a 0.7% decrease in special events sales, such as birthdays and corporate outings. Further, non-comparable store revenues increased by $31.1 million or 181.6% in Q1 2016 to $48.2 million.

What about costs to do business? We need to keep an eye on this as well. Total operating costs were $210.8 million on the quarter. Taking into account revenues, operating income increased to $51.1 million in Q1 2016 from $35.7 million in Q1 2015. The key here is that as a percentage of total revenues, operating income increased approximately 340 basis points to 19.5%. Turning to net income, we see this metric increased to $31.2 million, or $0.72 per share, in Q1 2016 compared to a net income of $19.5 million, or $0.46 per share, last year. This was a beat of $0.13 per share. This type of growth is the direction I look for when I make a buy call.

Looking ahead, for the year, the company will have opened a total of eight new stores. That is slow and manageable growth. Looking ahead to 2016, the company intends to open a total of nine to ten new stores. On top of that, the company sees higher revenues and continued strong comp growth, and has upped its guidance.

It now sees total revenues of $983 million to $995 million, compared to prior estimates of $967 million to $987 million. You have to love that. They see comparable store sales increasing 3.25% to 4.25%, a nice hike compared to 2% to 4% previously. Adjusted net income should now be $80 million to $85 million, up from $74 million to $80 million. Finally, the company has also approved a $100 million share repurchase program through the end of fiscal 2018.

I love this up and coming concept restaurant and entertainment company that is turning the corner to sustained profits. It is demonstrating substantial, but sustainable growth in both revenues and comparable store sales growth. The company's development plans remain manageable and continue to reflect a commitment to the brand, rather than growth for the sake of growth. I still think this is a top pick in 2016.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in PLAY over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.