DAVE & BUSTER’S (PLAY) – UPDATED WRITEUP – DOWN 75% FROM HIGH – A BUYING OPPORTUNITY?
We have written about Dave & Buster’s many times over the last few years, mostly concerned about the lack of productivity of the hundreds of millions of capex dollars that were spent with minimal “marginal return on investment”. Readers can access those discussions by way of the SEARCH function on our HOME page. (plug in “PLAY”). We believe this sort of analysis applies to many restaurant and retail companies, that (before we ever heard of Covid-19) leveraged their balance sheet (with low interest rates) to buy back stock, while pretax operating earnings and/or EBITDA were not making much progress. PLAY, by nature of the fashion driven nature of their Amusement segment, as well as the declining portion of normally more stable food sales, just happens to be a good object lesson.
The table below summarizes the last six years since PLAY came public (again) in 2014.
Several financial trends are apparent. The first two years after coming public were very productive, as EBITDA grew from $165M to $262M. Subsequent to that, however, though hundreds of millions of dollars were spent on capex between 2015 and 2020, EBITDA, EBITDA grew only from $262M in the Y/E 1/17 to what was estimated (before the pandemic) to be about $335M in the current year. Notice also that the shares outstanding were reduced from buybacks from 42.2M at 1/17 to 30.6M at 1/20 while net debt went from $264M to $608M.
We compared each year end Enterprise Value with the Adjusted EBITDA in the following year and found that the multiplier was consistently in the 7-8x Expected EBITDA range, as shown in the far right hand column. That multiplier contracted most recently, at 1/20 to 5.8x, when the flat results in recent years discouraged investors from valuing PLAY quite so highly. So, in the “best of times”, PLAY was valued at 7-8x expected EBITDA. Followers of PLAY know well that overall comps flattened and finally turned down in the last year or so, as Amusement revenues stagnated and Food & Beverage never got traction.
Which brings us to the current broad based economic disaster. As almost all chains have done, PLAY has drawn down their lines of credit, cut back overhead, temporarily closed down the entire system. Per last week’s conference call, they were burning $6.5M operationally plus $750k of debt interest per week through the complete closure. They indicated that the 26 stores that had been opened for four weeks as of 5/26/20 contributed about $1.3M of cash to reduce that burn rate. The most recently opened stores are gaining volume more quickly than the first, which makes sense in that the public is presumably becoming more relaxed about the situation. Overall, management seemed to state that stores should be breaking even, in terms of EBITDA, at about 50% of old volumes, the corporation at 60%, but it would be higher in the current ramp up year. Reference was made to “rent deferrals and abatements on 80% of the stores, payments to begin in Jan’21” but it is unclear what manner of adjustment is typical, and how that is built into the break even points referenced above.
Interested readers should access the full call and monitor the anticipated reopening program. Suffice to say, however, that it is a long way back and “re-invention” applies to all aspects of the operations. Openings are being put on hold, food offerings are being revamped, Amusements are being re-evaluated in view of new cleanliness and social distancing requirements. You don’t need us to tell you that the Dave & Buster’s concept is more challenged than most to cope with all the new operating requirements.
Which brings us to the current Enterprise Value. After the recent equity offerings and increase of debt, as the table above shows: the current Enterprise Value is north of $1.2B. The EV/EBITDA multiple in the best of times was 7-8x. We can only wonder how long it will be until PLAY generates an EBITDA north of $150-200M to justify the current situation, let alone a higher valuation.