DAVE & BUSTER’S – (PLAY) – UP 38% IN ONE MONTH – WHAT’S GOING ON???

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Dave & Buster’s, which we have written described extensively, most recently on May 3rd, calling it a “battleground” between the bulls and bears.

https://www.liptonfinancialservices.com/2018/05/dave-busters-entertainment/

PLAY ran up in price from $39 to about $47 in the two weeks prior to the earnings report on June 11th. This was based not on the widely expected soft first quarter, but expectations for better results after their new “VIrtual Reality” ride/game is introduced by mid-June. This ride/game is based on the new Jurassic Park movie coming out on June 22nd..

The uninspiring earnings, the comps, the traffic, the margins, the guidance based on the reported first quarter were basically in line with expectations. However, with 16% of the outstanding stock sold short, the absence of even worse results, and the possibility that the new virtual reality presentation will reinvigorate results propelled the stock from $47 to $55. This kind of volatility has become routine as stocks often respond in a dramatic fashion to the supply/demand relationship in the marketplace more than a reasoned response to the actual results. The price action depends more on which multi billion dollar hedge funds are long or short, than the company’s reported results and future guidance.

While the overall business continues to be highly profitable with lots of room for further growth, t is clear that both segments of the business (Amusements and F&B) need to be refreshed, especially in light of increased competition. Food and Beverage has been declining as a percentage of total sales, and Amusements have recently had negative comps as well. Turning around the “culture” on the F&B side of the business will clearly take time. The current question becomes: to what extent can the new Virtual Reality platform help the  Amusement segment?

The Jurassic Park offering is a “Game/Ride”. While I haven’t experienced it, I have seen the installation. It is a moveable platform with four seats. The ride takes about ten minutes, costing $5 .00 per person, so $20.00 for each ten minute session is generated. If we assume five minutes of downtime between sessions, to unload and load new customers, there would be four sessions per hour, generating $80.00 per hour of revenues. There will be one installation per store, the possibility of two in the high volume locations. If we assume an average of five hours per day, that would be $400.00 per day, $2,800 per week, or $145,600 or revenues per year. Obviously, two installations could provide double that. Setting aside the cost of developing this platform, or the expense of “manning” the ride/game, the potential revenues of $145,600 per year per installation, is not a “game changer” in and of itself. It can generate roughly around 1.5% of sales in a $10M facility, which is a modest positive contribution to the Amusement segment which has recently turned down by mid single digits. Assuming the platform is embraced by customers, the key question then revolves around (1) the “staying power”, the frequency, the length of time before customers lose interest (2) the need, and cost, of refreshment of the software, assuming the basic platform can be reconfigured (3) the auxiliary benefits: will new customers come in, will existing customers come more frequently, will all customers stay longer (waiting for their turn) and spend more money, etc.etc.

We indicated in our report of May 3rd that one of the potential positives here is the introduction of attractive new Amusements, including the pending Jurassic Park platform. We do not pretend to know how Jurassic Park, or follow on Virtual  Reality offerings will evolve. We suspect Jurassic Park will be popular at first, possibly very popular. How long it lasts, and management’s ability to build on its potential success is impossible to know. PLAY could well prove to be a dynamic short term investment, even after this recent 38% price appreciation, but I wouldn’t “put it away and forget it”. Stay tuned.

Roger Lipton