Dave & Buster's: Playing With A Falling Knife

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About: Dave & Buster's Entertainment, Inc. (PLAY)
by: Stone Fox Capital
Summary

Dave & Buster's cut full year guidance.

The stock hit new 52-week lows as margins continue to collapse on weak comp sales.

The stock isn't necessarily expensive, but the negative trends need to be reversed before Dave & Buster's is a buy.

As predicted at the end of last year, Dave & Buster's (PLAY) had a busted plan. The company saw margins peak and the CEO exit stage right as the gaming portion of the business becomes increasingly difficult to grow when consumers have so many other entertainment options that offer better value. Even the stock hitting new yearly lows doesn't change the bearish story here.

Source: Dave & Buster's website

Weak Comps

The easy thesis on the Dave & Buster's story over the prior decade was the shift in focus towards entertainment. The company started 2006 with 56% sales from the restaurant side of the business. The company ended Q1 with the business now 59% on the entertainment side.

The bad news for shareholders is that the growth in the amusement business portion is in part due to weak food and beverage comps. For Q1, the restaurant side of the business saw a 3.3% comparable sales decline. Even the decent 1.8% boost from the entertainment business was overshadowed by the weakness in food and beverage.

The issue for shareholders is that Dave & Buster's saw comp sales start decelerating back in 2017. The company went from years with double-digit stacked comp sales to now negative comps in consecutive years.

Source: Dave & Buster's January presentation

The clear issue is that Dave & Buster's can no longer generate outsized growth from the entertainment portion of the business. Consumers would much more prefer to Netflix and chill with delivery food, than venture into an entertainment facility that offers pricey games.

Not All Bad

The investment story isn't all bad. Dave & Buster's did generate nearly $60 million of operating income that amounted to 15.9% of total revenues.

Net income even grew slightly with EPS getting a nice boost from share reductions. The company bought 1.3 million shares for $63.5 million leading in part to the EPS growing from $1.04 last year to $1.13 in Q1. In total, the share count is down ~3.0 million shares YoY.

The updated financial outlook tripped up the stock, but Dave & Buster's remains a highly profitable company with a net income forecast of up to $113 million. The company did guide down by $4 million on the high end.

Source: Dave & Buster's FQ1' 19 earnings release

The company is down to only 37.6 million shares outstanding placing the market valuation at $1.5 billion with the stock down to $40. The stock trades at about 14x the updated net income guidance and 5x the EBITDA guidance of about $289 million.

For investors, the problem is trying to catch a falling knife. EBITDA margins started rolling over in 2017 when comp sales peaked. The company saw EBITDA margins fall further to in the quarter. The 190 basis-point hit was one of the larger YoY declines in the last couple of years.

Source: Dave & Buster's January presentation

The trend remains problematic for the stock as the bottom can't be predicted. The stock breaking to new lows at $40 should make one want to stay clear of Dave & Buster's for now.

Takeaway

The key investor takeaway is that Dave & Buster's is hitting new 52-week lows as the business model rolls over. The entertainment portion of the business is no longer a major growth story and the restaurant business is as weak as the general sector.

The market needs to see the new CEO (old CFO) turnaround the negative trends before jumping back into the stock. Until a turnaround takes place, an investor is just trying to catch a falling knife despite a business generating solid profit levels.

Disclosure: I/we 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.