Long-Term Investors Should Play With Dave And Buster's IPO

| About: Dave & (PLAY)

Named after its founders David O Corriveau and James W "Buster" Corley, Dave & Buster's (NASDAQ:PLAY) is a restaurant and entertainment company all rolled into one. The company operates a full restaurant and bar on one side of its locations, with the other half showing off a "Midway" of arcade games, simulation games, and games offering tickets redeemable for prizes. The company has combined dining and entertainment since its founding in 1982. The majority of the visitors are in an age range of 21-39. Dave and Buster's motto is "Eat Drink Play."

The company is selling 7.69 million shares this week in its re-entry on the public markets (S-1). Dave & Buster's was taken private in 2005 by private equity group Wellspring Capital. New owner Oak Hill Capital will be taking the company public in an IPO offered with the help of Goldman Sachs, Jefferies and Piper Jaffray. Shares are expected to price at a range of $12-$14 and will trade on the Nasdaq Stock Exchange under the symbol "PLAY."

The company's strengths from the prospectus:

· Strong distinctive brand with broad guest appeal

· Multi-faceted guest experience and value proposition

· Store economic model capable of delivering diversified cash flows and strong cash-on-cash returns

· History of product innovation and marketing initiatives

· Commitment to guest satisfaction

· Experienced management team

Growth plans going forward:

· Pursue disciplined new store growth

· Grow comparable store sales

· Continue to enhance margins

Here is a breakdown of current Dave and Buster locations:

· Arizona (2), California (7), Colorado (2), Florida (4), Georgia (3), Hawaii (1), Illinois (2), Indiana (1), Kansas (1), Massachusetts (1), Maryland (2), Michigan (1), Minnesota (1), Missouri (1), North Carolina (1), Nebraska (1), New York (6), Ohio (4), Oklahoma (2), Pennsylvania (4), Rhode Island (1), Tennessee (1), Texas (7), Virginia (1), Wisconsin (1), Canada (1)

At the end of March, the company had 59 stores in the United States across 25 states, with an additional location in Niagara Falls, Canada. Third party research has listed a possibility of 150 Dave and Buster's locations throughout the United States. The company has plans to open four stores in fiscal 2012. Four to six stores will be opened in the following year. After that period of time, each year will see the company's store base increase by 10% of current stores.

Stores have an average square footage of 47,000. The sizes range from 16,000 to 66,000 square feet. One of the company's key growth initiatives is smaller size stores that will expand the company's presence in regions not able to sustain the previous size model created by the company.

Since being taken over by private equity, Dave and Buster's has seen several new processes to cut costs and improve sales. One of the first moves was a change in management. New Chief Executive Officer Todd King was brought in from Carlson Restaurants, where he worked from 1984 to 2006. Other changes from private equity ownership were: cutting costs, using automated kiosks, and creating the small store concept.

In fiscal 2011, Dave & Buster's had revenue of 541.5 million, an increase from the previous year's $521.5 million. The company saw a net loss of $7.0 million in the most recent year, slightly smaller than the $7.3 million loss the year before. Stores had average annual revenue of $9.8 million in fiscal 2011. All of the stores posted positive EBITDA, with 85% having EBITDA of $1.0 million or greater in the most recent fiscal year.

Fiscal 2011 revenue broke down by:

· 35.1% Food

· 15.2% Beverage

· 48.8% Amusement

· 0.9% Other

The company will have four additional stores when reporting fiscal 2012 revenue. With those stores hitting the average of $9.8 million, the yearly revenue total would climb to $580.7 million. After adding the additional five stores in 2013, the company should cross the $600 million revenue mark ($629.7 million). With the additional sales, and improved costs and margins, Dave and Buster's should report a profit by fiscal 2013. These estimates use the average store sales of $9.8 million, and factor in flat same store sales. The addition of new store locations will add around 10% in revenue growth or more each year.

I have visited two locations of Dave and Buster's (Michigan and Missouri) in my lifetime. I was impressed each time I visited with the food, service, and gaming selections. This is a well managed company with plenty of growth ahead of it. The company will see aggressive expansion beginning in two years, with plans to grow store count by 10%. While third party research shows a possibility of 150 stores, I think that number is low and could be re-evaluated based on the new small store sizes helping the company penetrate smaller cities. This is one IPO definitely worth a look and should be considered for people willing to hold for more than two years.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.