DAVE & BUSTER’S (PLAY) REPORTS Q3 – STOCK DOWN 6% TODAY – WHAT TO DO ??
While PLAY may seem statistically cheap at 13x this year’s earnings estimate and 7.5x trailing EBITDA, there seems to be very limited visibility regarding stabilization and then improvement in sales and cost trends. Especially with a company such as Dave & Buster’s, EBITDA is far less of a measure of free cash flow than at most restaurants and retailers. Depreciation should be banked and reinvested in the concept at some point, and that is increasingly clear in this situation. Hundreds of millions of dollars were spent a decade ago to refresh the brand before it came public again, that effort paid off in positive comps for a number of years, but that effect has apparently run its course, and a great deal of maintenance capex is likely in the cards if the concept is to regain its competitive position. Ongoing unit growth has not increased absolute total earnings power over the last several years, and we doubt that this will change any time soon. Even a shrinking stock base has not been sufficient to increase earnings per share, return on invested capital is declining and we are not convinced of the appeal of PLAY at the current time.
Dave and Buster’s Entertainment (PLAY) reported Q3, stock traded up 4-5% in aftermarket as management confirmed guidance, has given the gain back and is now trading down 5-6% from yesterday’s close.
PLAY stock came public, after being taken private several years earlier, in late 2014, moved from the teens to a high of $70/share by mid 2017, fell back to about $40 by mid 2018 as comps moderated, rallied back to $65 with a major stock buyback implemented and the promise of their new Virtual Reality platform. The stock trading now at about $38. is at a multi-year low, statistically intriguing but many fundamental trends are heading in the wrong direction. We have written, at length, many times about this situation over the last two years, and those articles can be accessed through our SEARCH function.
RECENT DEVELOPOMENTS – PER Q3 REPORT AND CONFERENCE CALL
In a nutshell, while still generating a great deal of cash flow, almost every aspect of this brand has to be reinvented: the food, the games, the physical facilities, the consumer facing technology (the mobile app and loyalty platform). This once debt free company is now levered up by $640M, today considered a “modest” 2.3x trailing EBITDA, and we can expect further borrowings to finance stock buybacks, new stores and renovation capex. Earnings per share have gone from $2.84 in calendar 2017 (ending 2/4/18) to an estimated $2.85 in the FY 1/31/20 but the fully diluted share count was 42.6M two years ago and is now 26% lower. Relative to the stock buyback, $97M was purchased in Q3 and $187M remains to be bought. We can’t resist suggesting that, knowing that sales and profits were not turning around, or even maintaining, we would have held off buying stock in the mid $40 range, with a high likelihood of paying less than $40. Oh, well, it was only 2.4M shares bought back, and perhaps (the possibility of) saving $10M or so is hardly worth the bother 😊.
Third quarter overall comp sales were down 4.1%. Within that, Amusements was down 3.9%, F&B was down 4.4%. Special Events was up 0.7%. Amusements, as a percentage of total revenues, continued to grow, to 58.4% of total revenues, so PLAY continues to be more of an indoor amusement park than a restaurant. Expense lines included Cost of F&B up 60 bp to 26.8%, Cost of Amusement flat at 10.8%, Operating Payroll with Benefits up 10 bp to 25.4%, Other Store Operating Expense up 300 bp to 37.1%. This large increase was attributed to higher rent expense with lease renewals and higher marketing expenses associated with TV and digital marketing to drive traffic and promote the new mobile app (discussed below). Store level EBITDA was down 320 bp to 20.1%. Below the store level, G&A was up 10 bp to 5.4%, D&A was up 30 bp to 11.1%, pre-opening was down 30 bp to 1.4%. Operating Income was down 330 bp to 2.2%. Interest Expense was up 90 bp to 2.1%. Income after minimal taxes was 0.2%, down from 4.2%, $0.02 per share vs. $0.30 per share a year earlier.
The conference call provided the most candid description of the state of the business that we can recall from this management team. An increasing amount of competition was again cited as a headwind, along with cannibalization. Food & Beverage improvement is still an opportunity but previous attempts have not gained traction. A new 43-foot Wow Wall LED TV installation has been installed in a total of 48 stores by now (35 at 10/31), and the Company, optimistic about the long term effect, declined to describe specifics about the sales lift so far. New games are being developed that encourage social interaction, and the Virtual Reality platform is being expanded. Management referenced the fact that this year’s Amusement comps are going up against the supposedly difficult comparison of the Virtual Reality introductions a year ago, but Amusements was only up 1.5% in Q3’18.
Other than the Wow Wall, perhaps the brightest specific development was the development of a new Mobile App, which signed up over 600,000 new guests in the two months ending November, purchasing $14M worth of digital power cards. For context, since there were previously less than 800,000 active guests using the mobile app, there seems to be clear opportunity in this area.
CONCLUSION: Provided above