Tag Archives: PLAY

DAVE & BUSTER’S (PLAY) – ACTIVISTS PLAY WITH (PLAY) – NEW WRITEUP

 

THE COMPANY

We have written quite a bit about PLAY over the last several years and we encourage interested readers to use the SEARCH function on our Home Page. For the record, we are neither long nor short PLAY stock.

Dave & Buster’s is familiar to most of our readers. In summary, the Company was founded in 1982 in Dallas, TX. There are now 139 locations in 40 states. As of the end of calendar 2020, the average size was 41,000 sq.ft., smaller than in years past because some smaller sized (20k-30k sq.ft.) locations have been opened. The average sales volume in the FY ending 1/31/20 was $10.5M, with 58% of revenues coming from Amusements and 42% from Food & Beverage. The store level EBITDA margin was an impressive 27.2% and the corporate EBITDA margin was also admirable at 20.7%. These above average EBITDA results are a result of the fact that the Amusement component is so high, having grown from 44% to 58% between 2006 and 2019. It is fair to say, therefore, that the Dave & Buster’s facility is more of an indoor kids’ amusement park than a restaurant. A big operating advantage is that the Cost of Goods is only 18%, rather than the more typical 30% (give or take) for most restaurant chains.

SOME FUNDAMENTAL LONG TERM QUESTIONS

The company emphasizes in their presentations the high ROI and “free” cash flow, especially for new units, but it also a fact that initial volumes are not sustained. It is worth noting that depreciation (of games, in particular) is a lot higher for PLAY at over 9% of sales than for restaurant chains that typically run 4-5%, and the Amusement facilities at PLAY are guaranteed to need that depreciation re-invested in the near term. Most restaurants, on the other hand can often defer that process in the short term and “classic” décor and good original kitchen equipment may not have to be replaced, even longer term, to the extent that the depreciation expense implies. The result is that EBITDA for PLAY is not nearly as indicative of free cash flow generation as it might be for restaurant chains.

Dave & Buster’s came public for a second time, in 2014, after spending several hundred million dollars to refresh, perhaps even “reinvent” the system, and produced impressive same store sales, profits and cash flow for a number of years. By 2018, however, for a combination of reasons, the same store sales after stagnating, turned down. Operating income flattened from calendar 2016 through 2019 though the system grew by over 50%, from 81 locations at 1/31/16 to 139 units at 1/31/20. In addition to opening 58 stores, at a cost approximately almost $300M, hundreds of millions of dollars were borrowed to buy back stock. With the shrunken share base EPS did better than operating income, but flattened and finally turned down slightly in the year ending 1/31/20.

We have discussed at length in the past the question as to whether the depreciation charge at over 9% is adequate to refresh the 58% of revenues that is generated from Amusements. It seems at least possible that this issue has been an important factor within the demonstrated performance cycle over the years. The Company originally came public in 1995, went private after “stagnation” in 2005, then spent ten years in private equity hands during which hundreds of millions were spent on capital improvements. PLAY came public again in 2014, performed well for several years and the question today is to what extent the operating history from 2016 through 2019 is a prelude to greater problems. The activists that have recently taken positions are doing their best, we are sure, to address this issue.

RECENT DEVELOPMENTS, AS DESCRIBED AT ICR CONFERENCE

Dave & Buster’s management gave a one hour video presentation, accessible on their website. There was little new incremental information and a lot of discussion about the economics of their stores and the changes that the company made to operations and food and beverage offerings as a result of Covid 19.  The presentation does a good job of explaining the bull case on the company. The two most important takeaways from the presentation can be seen in the following two tables. The main points are as follows:

  • Q4 revenue, about to end is projected to be around $100M, in line with Wall Street analyst projections. Last year sales were $347M. The lack of group events significantly impacted results.
  • Only 60-70% of the stores that are open today are EBITDA positive.
  • Q4 to date revenue is down -75% !
  • Management projects enterprise EBITDA positive at 50-55% of last year’s sales. Note this is EBITDA positive and the company still has $10M in quarterly interest and any cap ex to cover.
  • 61 of the 76 (80%) of comp stores that were open in October were EBITDA positive

LIQUIDITY AND CAPITAL ALLOCATION

Liquidity is adequate, but at a substantial cost and the cash burn continues. The number of stores that are open continues to fluctuate. In October, PLAY had 104 out of 139 stores open, but that dropped to 89 stores in December. The number of stores that are open now is around 100. With 27 high volume stores currently closed located in CA and NY, we do not expect the total number of store openings to improve for another month or two. Getting the stores in CA and NY open would help the company’s liquidity situation. Since Q1’21 (April ’20), Cash from Operations has declined from a positive $17M to a negative $32M at the end of Q3 (Oct.’20). This compares to a positive $217M through Q3 last year. The company has a $44M income tax receivable and should get $11M of that over the next few quarters. Due to store closures since the end of Q3, the cash burn rate has increased from $2.4M/wk to $3.4M, or $13M per month. While this is a considerable improvement from the initial $6.4M/wk PLAY was burning at the start of the pandemic, the company is still far from cash flow breakeven.

The company has been able to maintain liquidity, but at a very high cost to shareholders. There is currently $12M in cash on the balance sheet. This compares to Q1 cash of $156M, Q2 cash of $224M and Q3 cash of $8M. There is $277M available on the revolver vs. $314M end of Q3. PLAY therefore has almost two years worth of liquidity. However, the cost of that liquidity to shareholders has been substantial. In addition to the 17M shares the company issued earlier this year at around $10.70 per share, in October the company issued $550M worth of five year senior secured bonds with a coupon of 7.625%, upsized from $500M . The annual interest cost of $41M effectively doubles the $20M in interest expense the company incurred in 2019. While the company emphasizes the two year extension and modified debt covenants through 2022 on the maturity of its credit facility, the interest rate doubled from 2% to 4%. The company also has $17M in deferred vendor payments and $48M in deferred rent it will eventually have to pay.

In past reports we have discussed the relatively poor capital allocation of over $1B in capital expenditures since 2015. The timing of the company’s share repurchases have also turned out poorly. Prior to 2020, PLAY purchased approximately 13M shares for $598M or an average cost of around $46-$47 per share. Earlier this year the company was forced to issue 17M shares for $182M or an average of around $10.70 per share. The share buyback program has therefore destroyed over $400M of value for shareholders.

Putting it another way: There are 56% more shares outstanding due to the two secondary offerings. Compared to a year ago, the stock price is 25% lower ($33 vs. $44)  but the Enterprise Value ($3.5B vs. 3.2B, with the extra shares and debt) is 10% higher. The real world value of this company with 56% more shares outstanding and more debt is obviously not worth 10% more today than it was a year ago. With activists involved, as discussed below, and the stock seemingly fully priced at $33, it will take a very substantial “reach” to get shareholder back to the $44  of a year ago.

We can’t help but reflect upon the $70/share  high in 2017 before those hundreds of millions of dollars, largely financed with debt, were spent to buy back stock. It turns out that “returning cash to shareholders”, as most companies  like to describe it, by way of stock buybacks is not necessarily so well stated.

ACTIVISTS ARE INVOLVED

The current valuation is about twice the historical range, relative to earnings and cash flow and we have to believe that this is due to the presence of several well-known activists. When there are hundreds of billions, at least, that are searching for a yield, there are bound to be a couple of buyers that will bet on quick normalization of consumer activities after the pandemic. Over 35% of the shares outstanding are held by just four investment firms, two of them noteworthy activists. Since PLAY was taken private once before and the company might be able to generate cash flow of over $150M if same store sales can recover, the marketplace is apparently hoping for a transaction sometime soon. Perhaps the activists will be able to persuade management to slow growth until the base business improves, utilize the free cash flow to reduce the high coupon debt the company recently issued, at some point refinancing the debt at a lower rate.

Activist investors have bought over 5.4M shares in the last few months, in some cases lowering their $40+ per share initial cost basis with large purchases in the $16-18 per share range. KKR just reported that it has increased ownership to 10.7%, up from only 2.65% early in September. KKR had a member of their firm added to the Board of Directors last year and just recently, a representative of Hill Path (with 9.3%) joined the Board.  Both firms have described their intentions as “cooperative agreements”.

CONCLUSION

Management has done what was necessary to maintain liquidity, but the cost has been very dilutive to shareholders. As we pointed out earlier, comps had been negative for three years before Covid. In our view, the two new Board members representing KKR and Hill Path is a positive, but they are not magicians. It is possible that the post pandemic operating results, namely the AUVs, the store level and corporate operating margins will fall short of investor expectations. The pre-Covid issues of competitive intrusion and the need for Amusement as well as F&B innovation continue to be in place. The possibility exists, that both Amusements and F&B need to be, in essence, re-invented. In addition customers that have increased their at home gaming activity may not feel the need to visit D&B as often. Higher capex spending by PLAY on video game equipment is already a factor (up 17% YTD) and there could be a slow recovery in corporate events that have generated about 10% of revenues. While 27 high volume locations in CA and NY are still closed, the opening schedule and ongoing restrictions are still an uncertainty.  Lastly, while full service restaurant chains SSS weakened by 5-10 points in Q4 (QSR hardly at all) as in store dining was shuttered again around the country, PLAY’s “temporary” Q4 setback saw SSS in the open units fall twenty five points, from -34% to -59% from September to December. The PLAY system is therefore extremely sensitive to Covid related concerns so the timing and extent of a recovery becomes that much more questionable.

Overall, there seem to be many more questions than answers. In spite of the above described uncertainty, the stock marketplace, with PLAY acting well, is likely assuming a transaction at a premium to the current price. Almost anything is possible in this low interest rate environment and there is a fortune of capital looking for a home but, with the valuation band more than adequately stretched, we wouldn’t count on much of a premium. Private equity investors have a great deal more patience than public shareholders, and, if they take on this situation, we suggest they will need it.

Roger Lipton

DAVE & BUSTER’S (PLAY) – UPDATED WRITEUP – DOWN 75% FROM HIGH – A BUYING OPPORTUNITY?

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.

Roger Lipton

 

RESTAURANT INDUSTRY TURMOIL – NEW SKILLS REQUIRED, STARTING WITH BOARD

RESTAURANT INDUSTRY TURMOIL – NEW SKILLS ARE NECESSARY, STARTING WITH THE BOARD OF DIRECTORS, AND I’M AVAILABLE !!

The questions are numerous. The problems are obvious. The solutions are not so easily manufactured. We don’t know what sales will be, what labor will be required to service customers that have new requirements. Cost of goods is not the biggest problem, but distortions in the supply chain could create price volatility as well as product shortages. We will have lots of new “other” expenses, necessary to deal with health concerns of employees and customers. There has to be negotiation with landlords, convincing them that you are here to stay, but need their help. You must economize at the executive level, but the needs are broader and deeper than ever before. You have to maintain a strong balance sheet somehow, but financing is more difficult, and more expensive than ever with the fundamental uncertainty. With all of this, management is working for reduced pay and Board compensation has been reduced or eliminated.

It’s no wonder, then, that something like a dozen publicly held companies, have had changes at the Board level, sometimes suggested (or imposed) by activist investor groups. Roark has invested $200M in Cheesecake Factory (CAKE) and KKR now owns over 8% of  Dave & Buster’s (PLAY). Vintage Capital owns over 10% of Red Robin (RRGB) and is represented on the Board. Among smaller companies, Kanen Capital Management has taken major positions and is represented on the Boards of both BBQ Holdings (BBQ) and The One Group Hospitality (STKS). Shake Shack (SHAK), Bloomin’ Brands (BLMN), Cheesecake Factory, Dave & Buster’s and others have raised money publicly at what most would consider to be distress prices.  It’s clear, therefore, that management and the Board must be capable of evaluating strategic financial alternatives. We wonder, for example, how and why Bloomin’ Brands was able to raise capital at much better terms than Cheesecake  Factory.

Investment bankers are beating the bushes to “write tickets”, but their possibilities must be evaluated from a realistic standpoint. We heard of a highly regarded investment banking firm suggesting (this past weekend) to a privately held chain that they could still get a multiple of historical EBITDA close to what was considered reasonable before the pandemic. This chain, by the way, is a big box casual dining company. Their sales are currently down 50% YTY, and the chain is, predictably, cash flow negative. That particular Board won’t likely go down that fruitless road, because they have at least one  very smart Board member (my friend), but other companies might not know better and could be forced to do a very unattractive deal at the last minute with a gun at their head.

Now comes the commercial: I’M AVAILABLE ! Two of my most recent Board involvements have ended recently, one of them very successfully, the other a privately held company that required refinancing and the new lender didn’t know that he needed me:)

I was on the Board until just recently of publicly held Diversified Restaurant Holdings (SAUC), which we took private on 2/25/20 (how’s that for timing?) at a price over 100% higher than the stock had been trading. SAUC was operating 65 franchised Buffalo Wild Wings locations, clearly a troubled restaurant system even before the pandemic. They had about $100M of debt, which they were servicing as required, but the net cash flow after debt service was non-existent. I was on the Special Committee and, with the great help of Darren Gange of Duff & Phelps, we found the “needle in a haystack” private equity buyer.  Parenthetically, while we were negotiating with the ultimate buyer on virtually a daily basis, an activist investor (and shareholder) was screaming his desire to “help us out”, at what turned out to be about half the price we sold for. It was tedious but we closed the deal for an Enterprise Value of about 7.5x the “run rate” of Adjusted Cash Flow. Intense and lengthy as the negotiations were, it was stimulating and satisfying, especially since it was very successful.

The other recent Board position was a 17 unit big box privately held casual dining company that required new financing.  The chain was, and is, very successful in their home state, but geographically remote locations, opened before my arrival, proved to be their undoing. I’ve always been predisposed to keep operations  “close to home”, suggesting expansion outward from the base so there is always brand awareness and maximum ability to adjust when necessary. I learned from Norman Brinker forty years ago that “running a restaurant chain is like managing a military campaign”. You want your troops “massed”, for strength and speed and flexibility.  It was the old formula that Shoney’s used so successfully decades ago, finally running out of steam when the third or fourth generation of managers that followed founder Ray Danner allowed the operating standards to slip too far.

I’m well aware that compensation for Board members has been suspended in many cases, reduced at the least. I can, fortunately, afford to work for the “going rate” along with other Board members. My major requirement is that the chain has the corporate culture that provides the foundation for long term success. I would naturally like to work with colleagues that enjoy the hospitality industry as much as I and are committed to the task at hand.

Other than reminding all of you that I have a good education,  operated my own chain of fast casual restaurants  many years ago, and have had four decades of  investment banking experience relating to the restaurant/retail industry, more details are provided at the “About Roger” section of this website (from the Home Page)..

So much for the pitch. Publicly held or “Up & Coming” privately held companies can respond, and we’ll talk.  I can be reached at lfsi@aol.com or call 646  270 3127. Please leave a message if I don’t pick up, there is so much spam these days.

Along with you, I will be closely watching developments within the restaurant/retail industries over the critical coming months. There will be lots of closings, but some operators  will emerge stronger than ever. We will remain in touch with all of you, doing our best to contribute to your thought process.

Roger Lipton

 

 

 

 

 

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

SHAKE SHACK (SHAK) RAISES $75M OF EQUITY – BANK COVENANT “CONCERNS”

A lifetime ago, on April 3rd, we wrote an article “MICRO meets MACRO”. Among other things we talked about the new “going concern” language in Dave & Buster’s (PLAY) most recent filing. It wasn’t a particular knock on PLAY, more a commentary that the whole world has taken on going concern considerations. Since then, on April 14th, PLAY raised $75M of equity and amended their bank covenants.  In the case of PLAY, with the current valuation, that amounted to about 20% equity dilution.

Shake Shack (SHAK) today announced a $75M equity offering. The good news is that this only amounts to about 6% equity dilution, since SHAK still has a valuation above $1.5 billion. This additional equity provides SHAK with total liquidity approaching $200M, which should tide them over for a while, considering that the weekly burn rate, as they described it this morning, is $1.3-$1.5M per week.  There is more to the release, which you can read elsewhere, describing the current situation relative to store closures and the decline in sales as the pandemic rolled through their system.

For our purposes this morning, we thought readers would find interesting the following language from their 8-K filing. We present this information not as a particular negative for SHAK, since this kind of filing is likely to become the norm rather than the exception. We want our readers to know what to expect as more companies come public with adjustments to their business plan.

Quoting this morning’s 8-K filing: (Bold Italics are ours.)

“As previously disclosed, on August 2, 2019, we entered into a credit facility with Wells Fargo Bank, National Association (“Wells Fargo”), providing for a $50.0 million senior secured revolving credit facility with the ability to increase available borrowings under the credit facility by up to an additional $100.0 million through incremental term and/or revolving credit commitments, subject to the satisfaction of certain conditions set forth in the facility. In March 2020, we drew down the full $50.0 million available to us under the credit facility…. as a result of the COVID-19 outbreak. We are required to comply with maximum net lease adjusted leverage and minimum fixed charge coverage ratios, in addition to other customary affirmative and negative covenants, including those which (subject to certain exceptions and dollar thresholds) limit our ability to incur debt; incur liens; make investments; engage in mergers, consolidations, liquidations or acquisitions; dispose of assets; make distributions on or repurchase equity securities; engage in transactions with affiliates; and prohibits us, with certain exceptions, from engaging in any line of business not related to our current line of business. As of December 25, 2019, we were in compliance with all covenants. However, as a result of the COVID-19 outbreak, our total revenues have decreased significantly and we have implemented certain operational changes in order to address the evolving challenges presented by the global pandemic on our domestic and licensed operations. While we expect to be in compliance with the financial covenants for the first quarter, due to the impacts of COVID-19, our financial performance in the first quarter was, and in future fiscal quarters will be, negatively impacted. As a result, it is likely that we will be unable to continue to comply with certain covenants contained in the credit facility, potentially as early as the second quarter compliance date. We are in discussions with Wells Fargo regarding potential modifications to our covenants, and/or temporary waivers, but there is no guarantee that we will be able to reach any such agreement. A failure to comply with the financial covenants under our credit facility would give rise to an event of default under the term of the credit facility, allowing the lenders to refuse to lend additional available amounts to us and giving them the right to terminate the facility and accelerate repayment of any outstanding debt under the credit facility. As a result, we may need to access other capital to address our liquidity needs rather than relying on our credit facility. As of April 16, 2020, we had approximately $112.0 million in cash and marketable securities on hand, excluding foreign currency and certain reconciling items such as deposits in transit. Our cash resources and liquidity would be substantially impaired by an acceleration of the debt under our credit facility.”

We expect that the banks will have been made comfortable by the $75M of new stock sold by SHAK, and, just as with Dave & Buster’s, covenants will be waived and adjusted. The commercial banks don’t want to run the stores. The good news for SHAK is that much less equity dilution is involved than was the case at PLAY. However, it’s a new world. All of this is becoming commonplace. Almost everyone, in and out of the restaurant industry, will be spending a great deal more time negotiating with bankers.

Roger Lipton

DAVE & BUSTER’S (PLAY) REPORTS Q3 – STOCK DOWN 6% TODAY – WHAT TO LEARN? – WHAT TO DO ??

DAVE & BUSTER’S (PLAY) REPORTS Q3 – STOCK DOWN 6% TODAY – WHAT TO DO ??

CONCLUSION

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.

BRIEF BACKGROUND

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

DAVE & BUSTER’S (PLAY) TAKEN OUT AND SHOT (AGAIN) – WHAT’S GOING ON ??

DAVE & BUSTER’S (PLAY) TAKEN OUT AND SHOT (AGAIN) – WHAT’S GOING ON ??

This situation, as it is playing out, is no surprise to our readers. The Q2’19 release met the earnings expectations but missed on the comps, and the company lowered guidance by 5-10% for the current full year, implying a relatively weak second half. You can read all the details elsewhere, including the conference call transcript, but a summary of Q2 includes:

Operating Income was up 0.6%, Net Income  was down 4.1% but EPS was up 7.1% on fewer shares outstanding. Corporate EBITDA was up 5.3% but down 60 basis points as a percentage of sales (still an impressive 22.9%, down from 33.5%). Store Operating Income (EBITDA) was up 4.8%, but down 90 bp as a percentage of sales (still an impressive 28.9%, down from 29.8%). Food & Beverage comps were down 3.2%. Amusements & Other were down 0.8%. Amusements and Other now represents 60% of total sales, up 80 bp from ’18. It continues to be the case that Dave & Buster’s is more of an indoor amusement park than a restaurant. It  is worth noting the lackluster comps were attributed largely to the difficult comparisons with the rollout a year ago of the Virtual Reality platform.  While we can’t know how much of the Amusement comp in ’18 came from the heavily promoted Virtual Reality, the Amusement comp in Q 2’18 was down 1.2%, the Food and Beverage comp was down 4.1%.

Management adjusted guidance for all of ’19. Comp Sales will be down 2.0-3.5% (vs. -1.5 to +0.5). Net income will be $91-$100M (vs. $103-113M). The tax rate will be (unchanged from prior guidance) at 22.0-22.5%. The shares outstanding will be about 34.0M instead of 36.5M, as a result of share repurchases. EBITDA will be $272-282M ($274-284M excluding $2M in one time charges), (vs. 283-$295M previously) . Capex will be $200-210M (vs $190-200M). In summary, comps will be a point or two less than previously expected, Net Income will be about 10% less, EBITDA will be about 4% less. EPS expectations will approximately unchanged, up about 10%, protected mostly by the large stock buyback.

CONCLUSION

We have written extensively about Dave & Buster’s over the last two years, and we provide below the most recent articles. The sum and substance of this situation is that the Company is spending hundreds of millions of dollars but is barely increasing corporate EBITDA.  The chart below shows how the incremental return on the dollars spent continues to deteriorate. Management continues to do their best to get a better return from the square footage dedicated to Food & Beverage, as well as re-invigorate the Amusement offerings. The “culture” within a restaurant chain is a challenge to improve and Amusements is basically a “hit driven” business with a high level of unpredictability. Considering the above, and the information provided in our previous discussions, though PLAY is down 8% today and down about 40% from its high of 2017 and 2018, we don’t view PLAY as a bargain at $40/share.

Roger Lipton

JUNE 12, 2019

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DAVE & BUSTER’S (PLAY) – TAKEN OUT AND SHOT, IS IT REALLY THIS BAD?

Dave & Buster’s reported first quarter, ending 4/30, results last evening and their stock is trading down 22% this morning. The results were only modestly disappointing, and guidance was lowered just slightly, so the stock market reaction could be considered severely overdone. However, as our readers have been informed for almost two years now, the underlying business has been deteriorating for quite some time and that is now becoming clear to almost all observers. First, the Q1 results, not so bad:

EPS was $1.13 vs $1.04 last year. EBITDA was up 3.2%, adjusted EBITDA up 2.4%. Total revenues were up 9.5%. Same store sales were up 0.3%, a point or so less than expected, which management attributed to weather and disappointment related to sales over the Easter holiday. Seven new stores were opened, and “new store performance remained strong”. Previous trends relating to increased sales at Amusements (comps up 1.8%) and decreased sales at Food & Beverage (comps down 3.3%) continued. The details were less comforting, to be sure. Operating Income was down 1.5%, down 170bp to 15.9%. Net Income $42.4M vs. $42.2M, so EPS was higher due to a lower share count. Though EBITDA was up 3.2%, it was down 150bp to a still impressive 24.4% of revenues. Adjusted EBITDA was down 290bp to 27.0%. Store Operating Income was up 3.6%, but down 180 bp to a still impressive 31.0%.

Guidance was lowered just slightly for all of fiscal 2019, ending 2/2/20: Revenues will be $1.365-1.39B, vs. $1.37-1.4B previously. Comps will be -1.5 to +0.5 instead of Flat to +1.5%. Net Income will be $103-113M instead of $105-117M. EBITDA will be $283-295M instead of $285-300M.

So: on the surface, results were affected by weather and a calendar shift, and the full year is adjusted mostly to reflect the first quarter shortfall.

However: there is no tangible reason to think that trends will improve. As discussed on the conference call: The second quarter has started off “choppy”. Virtual Reality has not provided much of a lift, extra labor is involved, volatility is to be expected in this “hit driven” area, and pricing of this attraction is still a question mark of sorts. Food & Beverage initiatives, including a Fast Casual test, haven’t paid off yet even if customer surveys are promising. Competition was called out, once again, as a negative factor, and is not expected to abate.

There is a lot more detail we could provide, but, in the interest of getting this summary out as promptly as possible, you get the picture.

Conclusion:

PLAY may now seem like an attractive turnaround speculation since it now trades near its lowest price in several years, and the valuation does not seem expensive at about 13.5x ’19 earnings and 6.5x trailing EBITDA. New store returns continue to be attractive and the Company as a whole throws off a great deal of apparent free cash flow which can be used  for new stores, dividends and stock buybacks. However, as we have described several times over the last two years, the underlying long term trends are challenging and expected to remain so. Earnings and EBITDA have been essentially flat for several years now, the Company has spent over half a billion dollars to keep it that way, and there is no predictable reason to expect improvement. Deteriorating returns on investment do not make for a premium valuation so we considered PLAY adequately valued at the current time.

 

REPRINTED BELOW FROM 4/15/19 – DAVE & BUSTER’S (PLAY) – REPORTS Q4 AND ’18 YEAR – IMPORTANT OVERVIEW !!

We take a long term view. This management team, led by previous CEO, Stephen King, who stepped up to Chairman in August, did a fine job of refurbishing the brand prior to bringing D&B public again in late 2014. It is important to note that hundreds of millions of dollars were spent in that effort, and it would have been disappointing indeed if operating results had not improved dramatically for at least a few years.

We have pointed out in our previous commentary that the return on the incremental investment is shrinking, just as it did when D&B was publicly held the last time. We update that discussion with the following table, which starkly shows this trend.

 

 

You can see that capex was $162M in calendar 2015, and the operating results were still ramping up, to the new “plateau” of $143M in pretax income in calendar 2016.

After that improvement demonstrated by calendar 2016 results as a result of previous spending: ($181M was spent in 2016(but we assume couldn’t have affected  the $143M of Pretax Income by much), on top of $181M in 2016, an additional 219M was spent in 2017, $216M in 2018 (a total of $616M), and pretax income is projected to be the same in 2019 ($135-150M) as 2016 ($143M).

In essence: after the ramping of results through calendar 2016, presumably as a result of the last re-invention , ($181M in 2016, 219M in 2017, and $216M, a total of $616M) will have been spent, Pretax Income will have been essentially flat, and EBITDA will be up about 30M. That’s zero current return on a pretax income basis, only about 5% on an EBITDA basis, and (we have to say again) depreciation is not free cash flow.

Management could counter that three years is not the end of the story, and there is no doubt a “tail” in terms of return on upfront investment. On the other hand, it is pretty clear that continual refurbishment of this concept is a requirement. It’s also a major feature of this story that new locations have a huge first year return. That is no doubt true, but that would mean that new stores are providing a very large part of the total results, and older stores are falling off sharply. If there is a first year return of over 50% on new stores, that would be something like $100M on the last 15-16 stores, $200M on the other 110.

In any case, if earnings at PLAY are going to continue to grow, at say 10-20% annually, more new stores have to open, materially more than the 10-12% budgeted (some of them with a smaller footprint), to offset the declining contribution from the growing base of mature stores where contribution is declining.

While most analysts may not want to talk about this strategic reality, it’s possible that PLAY’s price performance, essentially flat for the last two years, is reflecting the above discussion. At only 18x projected earnings and about 8.5x last twelve months EBITDA, the stock might seem attractive when the first year cash on cash returns for new stores  are over 50%. However, the longer term view indicates that it will be increasingly difficult to build upon the current results, especially in a retail environment that is generally unforgiving.

REPRINTED BELOW FROM 9/17/18 – DAVE & BUSTER’S (PLAY) REPORTS Q2 – STOCK UP 7% – HOW IS BIG BET ON VIRTUAL REALITY DOING?

Dave & Buster’s Entertainment reported their Q2, ending 8/5/18, last Thursday, and the stock responded positively, up 7-8% on the slight sales “beat”, the more material EPS beat, and positive company commentary regarding results of the new Virtual Reality platform.

Conclusion: The upward move in PLAY stock was mostly a function of “beating” expectations for comps and EPS, which have been coming down in the last six months, and a short position among traders who are inclined to panic. Forward guidance was raised by the Company, but the amounts were modest, and were reductions in certain negative expectations, rather than inspiring confidence that traffic and margin trends will turn positive any time soon.  On the positive side, initiation of a dividend, providing a yield of about  1%, and continued stock buybacks are positive factors. However, management has distinguished itself by its unwillingness to hold shares outright, promptly selling shares acquired by way of options. On balance, we view PLAY stock as “fairly priced”, with a still strong operating model generating impressive levels of store level EBITDA. This apparent attractiveness, however,  is offset by the risk element of the “fashion driven” Amusement segment that is the main driver of profitability and cash flow.

REPRINTED BELOW FROM 12/11/2017 – DAVE & BUSTER’S (PLAY) – THE BATTLE OF THE BULLS AND BEARS !

The Positives:

  • (1) Cash on cash returns are still among the very highest in the restaurant and retail universe.
  • (2) There is a very long runway for future growth, which  has been extended by virtue of the smaller format.
  • (3) The balance sheet continues to be strong, relatively unleveraged, with substantial cash flow for unit expansion, stock repurchase, and dividends possible as well.
  • (4) There is potential improvement in the food element, separately and/or in conjunction with the new smaller format, including a Fast Casual approach to food & beverage.
  • (5) A lower corporate tax rate would improve future after tax EPS, though it obviously would not affect EBITDA.

The Negatives:

  • (1) Comps have been coming down, narrowing overall, with a continuation movement toward Amusements, now 56.9% of revenues. With less than 30% of sales from food, D&B is more of an amusement park than a restaurant.
  • (2) Average Unit Volumes are coming down, at least partially due to the increasing mix of smaller stores.
  • 3) Margins at the store level have been coming down modestly, and may not recover due to higher marketing, higher rents, higher commodity prices, and sluggish traffic trends, especially within the food & beverage segment
  • 4) Competition, and cannibalization is playing an increasing role in suppressing sales and margins.
  • (5) Depreciation, that is the useful life of Amusements,  continues to be an underlying issue. EBITDA is a valid measure of “cash on cash” return at the store level, but it seems to require increasing amounts of original (undepreciated) capital as the years go on.  Noone can be sure of the useful life of Amusements. The Company declares that it is “between five and twenty years”. We discuss this issue at more length in the full Corporate Writeup on our  website (9/14/17) at : https://www.liptonfinancialservices.com/2017/09/dave-busters-entertainment/.  We have not seen this issued addressed in either company documents or analyst discussions. If our concerns are misguided,  we welcome further discussion of this issue by the company or the money management community.

 

DAVE & BUSTER’S (PLAY) – TAKEN OUT AND SHOT (- 22%), IS IT REALLY THIS BAD?

DAVE & BUSTER’S (PLAY) – TAKEN OUT AND SHOT, IS IT REALLY THIS BAD?

Dave & Buster’s reported first quarter, ending 4/30, results last evening and their stock is trading down 22% this morning. The results were only modestly disappointing, and guidance was lowered just slightly, so the stock market reaction could be considered severely overdone. However, as our readers have been informed for almost two years now, the underlying business has been deteriorating for quite some time and that is now becoming clear to almost all observers. First, the Q1 results, not so bad:

EPS was $1.13 vs $1.04 last year. EBITDA was up 3.2%, adjusted EBITDA up 2.4%. Total revenues were up 9.5%. Same store sales were up 0.3%, a point or so less than expected, which management attributed to weather and disappointment related to sales over the Easter holiday. Seven new stores were opened, and “new store performance remained strong”. Previous trends relating to increased sales at Amusements (comps up 1.8%) and decreased sales at Food & Beverage (comps down 3.3%) continued. The details were less comforting, to be sure. Operating Income was down 1.5%, down 170bp to 15.9%. Net Income $42.4M vs. $42.2M, so EPS was higher due to a lower share count. Though EBITDA was up 3.2%, it was down 150bp to a still impressive 24.4% of revenues. Adjusted EBITDA was down 290bp to 27.0%. Store Operating Income was up 3.6%, but down 180 bp to a still impressive 31.0%.

Guidance was lowered just slightly for all of fiscal 2019, ending 2/2/20: Revenues will be $1.365-1.39B, vs. $1.37-1.4B previously. Comps will be -1.5 to +0.5 instead of Flat to +1.5%. Net Income will be $103-113M instead of $105-117M. EBITDA will be $283-295M instead of $285-300M.

So: on the surface, results were affected by weather and a calendar shift, and the full year is adjusted mostly to reflect the first quarter shortfall.

However: there is no tangible reason to think that trends will improve. As discussed on the conference call: The second quarter has started off “choppy”. Virtual Reality has not provided much of a lift, extra labor is involved, volatility is to be expected in this “hit driven” area, and pricing of this attraction is still a question mark of sorts. Food & Beverage initiatives, including a Fast Casual test, haven’t paid off yet even if customer surveys are promising. Competition was called out, once again, as a negative factor, and is not expected to abate.

There is a lot more detail we could provide, but, in the interest of getting this summary out as promptly as possible, you get the picture.

Conclusion:

PLAY may now seem like an attractive turnaround speculation since it now trades near its lowest price in several years, and the valuation does not seem expensive at about 13.5x ’19 earnings and 6.5x trailing EBITDA. New store returns continue to be attractive and the Company as a whole throws off a great deal of apparent free cash flow which can be used  for new stores, dividends and stock buybacks. However, as we have described several times over the last two years, the underlying long term trends are challenging and expected to remain so. Earnings and EBITDA have been essentially flat for several years now, the Company has spent over half a billion dollars to keep it that way, and there is no predictable reason to expect improvement. Deteriorating returns on investment do not make for a premium valuation so we considered PLAY adequately valued at the current time.

 

REPRINTED BELOW FROM 4/15/19 – DAVE & BUSTER’S (PLAY) – REPORTS Q4 AND ’18 YEAR – IMPORTANT OVERVIEW !!

We take a long term view. This management team, led by previous CEO, Stephen King, who stepped up to Chairman in August, did a fine job of refurbishing the brand prior to bringing D&B public again in late 2014. It is important to note that hundreds of millions of dollars were spent in that effort, and it would have been disappointing indeed if operating results had not improved dramatically for at least a few years.

We have pointed out in our previous commentary that the return on the incremental investment is shrinking, just as it did when D&B was publicly held the last time. We update that discussion with the following table, which starkly shows this trend.

 

 

You can see that capex was $162M in calendar 2015, and the operating results were still ramping up, to the new “plateau” of $143M in pretax income in calendar 2016.

After that improvement demonstrated by calendar 2016 results as a result of previous spending: ($181M was spent in 2016(but we assume couldn’t have affected  the $143M of Pretax Income by much), on top of $181M in 2016, an additional 219M was spent in 2017, $216M in 2018 (a total of $616M), and pretax income is projected to be the same in 2019 ($135-150M) as 2016 ($143M).

In essence: after the ramping of results through calendar 2016, presumably as a result of the last re-invention , ($181M in 2016, 219M in 2017, and $216M, a total of $616M) will have been spent, Pretax Income will have been essentially flat, and EBITDA will be up about 30M. That’s zero current return on a pretax income basis, only about 5% on an EBITDA basis, and (we have to say again) depreciation is not free cash flow.

Management could counter that three years is not the end of the story, and there is no doubt a “tail” in terms of return on upfront investment. On the other hand, it is pretty clear that continual refurbishment of this concept is a requirement. It’s also a major feature of this story that new locations have a huge first year return. That is no doubt true, but that would mean that new stores are providing a very large part of the total results, and older stores are falling off sharply. If there is a first year return of over 50% on new stores, that would be something like $100M on the last 15-16 stores, $200M on the other 110.

In any case, if earnings at PLAY are going to continue to grow, at say 10-20% annually, more new stores have to open, materially more than the 10-12% budgeted (some of them with a smaller footprint), to offset the declining contribution from the growing base of mature stores where contribution is declining.

While most analysts may not want to talk about this strategic reality, it’s possible that PLAY’s price performance, essentially flat for the last two years, is reflecting the above discussion. At only 18x projected earnings and about 8.5x last twelve months EBITDA, the stock might seem attractive when the first year cash on cash returns for new stores  are over 50%. However, the longer term view indicates that it will be increasingly difficult to build upon the current results, especially in a retail environment that is generally unforgiving.

REPRINTED BELOW FROM 9/17/18 – DAVE & BUSTER’S (PLAY) REPORTS Q2 – STOCK UP 7% – HOW IS BIG BET ON VIRTUAL REALITY DOING?

Dave & Buster’s Entertainment reported their Q2, ending 8/5/18, last Thursday, and the stock responded positively, up 7-8% on the slight sales “beat”, the more material EPS beat, and positive company commentary regarding results of the new Virtual Reality platform.

Conclusion: The upward move in PLAY stock was mostly a function of “beating” expectations for comps and EPS, which have been coming down in the last six months, and a short position among traders who are inclined to panic. Forward guidance was raised by the Company, but the amounts were modest, and were reductions in certain negative expectations, rather than inspiring confidence that traffic and margin trends will turn positive any time soon.  On the positive side, initiation of a dividend, providing a yield of about  1%, and continued stock buybacks are positive factors. However, management has distinguished itself by its unwillingness to hold shares outright, promptly selling shares acquired by way of options. On balance, we view PLAY stock as “fairly priced”, with a still strong operating model generating impressive levels of store level EBITDA. This apparent attractiveness, however,  is offset by the risk element of the “fashion driven” Amusement segment that is the main driver of profitability and cash flow.

REPRINTED BELOW FROM 12/11/2017 – DAVE & BUSTER’S (PLAY) – THE BATTLE OF THE BULLS AND BEARS !

The Positives:

  • (1) Cash on cash returns are still among the very highest in the restaurant and retail universe.
  • (2) There is a very long runway for future growth, which  has been extended by virtue of the smaller format.
  • (3) The balance sheet continues to be strong, relatively unleveraged, with substantial cash flow for unit expansion, stock repurchase, and dividends possible as well.
  • (4) There is potential improvement in the food element, separately and/or in conjunction with the new smaller format, including a Fast Casual approach to food & beverage.
  • (5) A lower corporate tax rate would improve future after tax EPS, though it obviously would not affect EBITDA.

The Negatives:

  • (1) Comps have been coming down, narrowing overall, with a continuation movement toward Amusements, now 56.9% of revenues. With less than 30% of sales from food, D&B is more of an amusement park than a restaurant.
  • (2) Average Unit Volumes are coming down, at least partially due to the increasing mix of smaller stores.
  • 3) Margins at the store level have been coming down modestly, and may not recover due to higher marketing, higher rents, higher commodity prices, and sluggish traffic trends, especially within the food & beverage segment
  • 4) Competition, and cannibalization is playing an increasing role in suppressing sales and margins.
  • (5) Depreciation, that is the useful life of Amusements,  continues to be an underlying issue. EBITDA is a valid measure of “cash on cash” return at the store level, but it seems to require increasing amounts of original (undepreciated) capital as the years go on.  Noone can be sure of the useful life of Amusements. The Company declares that it is “between five and twenty years”. We discuss this issue at more length in the full Corporate Writeup on our  website (9/14/17) at : https://www.liptonfinancialservices.com/2017/09/dave-busters-entertainment/.  We have not seen this issued addressed in either company documents or analyst discussions. If our concerns are misguided,  we welcome further discussion of this issue by the company or the money management community.

DAVE & BUSTER’S (PLAY) – REPORTS Q4 AND ’18 YEAR – IMPORTANT OVERVIEW !!

 

Dave & Buster’s (PLAY) –  reports Q4 and full ’18 – IMPORTANT OVERVIEW !!

Dave & Buster’s (PLAY) reported their fourth quarter and full calendar ’18, ending 2/3/19.

I should preface the following remarks with the fact neither I nor my affiliates are currently long or short PLAY at the current time, which of course could change at any time.

Rather than rehash the quarter line by line, and make projections that are largely guided by management, we try here (as usual) to provide what we call an unfiltered commentary, in the hope of providing insights that other analysts and money managers hesitate to provide.

The results were slightly better than analysts expected so the stock has rallied several points in a market that is seemingly unforgiving and/or representing a “relief rally”. In a nutshell, comps firmed up a bit in Q4 but operating results were still down for the quarter and the year. Management reiterates that new stores are doing well, the runway for growth is still long, the new virtual reality platforms are promising, and improvements are coming for both Food & Beverages as well as Amusements. Management guidance for calendar ’19 is for results down modestly in terms of pretax income, EBITDA, post tax earnings down somewhat  more because of a higher tax rate.

We take a longer term view. This management team, led by previous CEO, Stephen King, who stepped up to Chairman in August, did a fine job of refurbishing the brand prior to bringing D&B public again in late 2014. It is important to note that hundreds of millions of dollars were spent in that effort, and it would have been disappointing indeed if operating results had not improved dramatically for at least a few years.

We have pointed out in our previous commentary that the return on the incremental investment is shrinking, just as it did when D&B was publicly held the last time. We update that discussion with the following table, which starkly shows this trend.

You can see that capex was $162M in calendar 2015, and the operating results were still ramping up, to the new “plateau” of $143M in pretax income in calendar 2016.

After that improvement demonstrated by calendar 2016 results as a result of previous spending: ($181M was spent in 2016(but we assume couldn’t have affected  the $143M of Pretax Income by much), on top of $181M in 2016, an additional 219M was spent in 2017, $216M in 2018 (a total of $616M), and pretax income is projected to be the same in 2019 ($135-150M) as 2016 ($143M).

In essence: after the ramping of results through calendar 2016, presumably as a result of the last re-invention , ($181M in 2016, 219M in 2017, and $216M, a total of $616M) will have been spent, Pretax Income will have been essentially flat, and EBITDA will be up about 30M. That’s zero current return on a pretax income basis, only about 5% on an EBITDA basis, and (we have to say again) depreciation is not free cash flow.

Management could counter that three years is not the end of the story, and there is no doubt a “tail” in terms of return on upfront investment. On the other hand, it is pretty clear that continual refurbishment of this concept is a requirement. It’s also a major feature of this story that new locations have a huge first year return. That is no doubt true, but that would mean that new stores are providing a very large part of the total results, and older stores are falling off sharply. If there is a first year return of over 50% on new stores, that would be something like $100M on the last 15-16 stores, $200M on the other 110.

In any case, if earnings at PLAY are going to continue to grow, at say 10-20% annually, more new stores have to open, materially more than the 10-12% budgeted (some of them with a smaller footprint), to offset the declining contribution from the growing base of mature stores where contribution is declining.

While most analysts may not want to talk about this strategic reality, it’s possible that PLAY’s price performance, essentially flat for the last two years, is reflecting the above discussion. At only 18x projected earnings and about 8.5x last twelve months EBITDA, the stock might seem attractive when the first year cash on cash returns for new stores  are over 50%. However, the longer term view indicates that it will be increasingly difficult to build upon the current results, especially in a retail environment that is generally unforgiving.

For more information, readers can access our full previous writeups using the “Search” function on our home page.

Roger Lipton

DAVE & BUSTER’S (PLAY) REPORTS Q2 – STOCK UP 7% – HOW IS BIG BET ON VIRTUAL REALITY DOING?

DAVE & BUSTER’S (PLAY) REPORTS Q2 – STOCK UP 7% – HOW IS BIG BET (VIRTUAL REALITY) DOING?

Dave & Buster’s Entertainment reported their Q2, ending 8/5/18, last Thursday, and the stock responded positively, up 7-8% on the slight sales “beat”, the more material EPS beat, and positive company commentary regarding results of the new Virtual Reality platform.

Conclusion: The upward move in PLAY stock was mostly a function of “beating” expectations for comps and EPS, which have been coming down in the last six months, and a short position among traders who are inclined to panic. Forward guidance was raised by the Company, but the amounts were modest, and were reductions in certain negative expectations, rather than inspiring confidence that traffic and margin trends will turn positive any time soon.  On the positive side, initiation of a dividend, providing a yield of about  1%, and continued stock buybacks are positive factors. However, management has distinguished itself by its unwillingness to hold shares outright, promptly selling shares acquired by way of options. On balance, we view PLAY stock as “fairly priced”, with a still strong operating model generating impressive levels of store level EBITDA. This apparent attractiveness, however,  is offset by the risk element of the “fashion driven” Amusement segment that is the main driver of profitability and cash flow.

The most pertinent details of the Q1 report are as follows:

Comp store sales were down 2.4% (estimates were for down 2.7%), on top of a 1.1% increase in ’17. “adjusted” earnings per share was $0.84 vs. $0.59 a year earlier and $0.67 which was the latest analyst estimate.  Adjusted Corporate EBITDA was  up 7.4% on a comp week basis, excluding a litigation settlement in 2017. The comp store decline was driven by 2.6% decrease in walk-in sales, 0.1% increase in special events, negative 1.2% in Amusements and Other, and negative 4.1% in Food & Beverage. Since there were price increases of 1.1% in Beverages and 1.9% in Food, traffic in F&B was negative by 5.5-6.0%.  On a line by line basis: Total cost of sales was 10 bp higher in Q2, reflecting a decline in both F&B and Amusement margins, but helped by the higher percentage of the more profitable Amusement sector. Amusements and Other comprised 59.2% of total revenues up 150 bp YTY, continuing the long term trend toward becoming an Amusement Park rather than a Restaurant. F&B costs were 40 bp higher, Cost of Amusement and Other was 30 bp higher. Payroll and Benefits was 10 bp higher, at 23.1%, due to “deleverage in our comp stores (on the lower comps), the unfavorable impact of about 4% wage inflation and incremental payroll supporting the Virtual Reality launch”. This was partially affset by YTY improvements in the non-comp store set.” Other store operating expenses were up 40 bp, due to higher occupancy costs at non-comp stores, slightly higher marketing expenses that include tests in the digital media space. Management pointed out on the conference call, explaining the slightly higher labor component, that “newer stores tend to be less efficient from a labor  perspective relative to mature stores”. We have to interject here that this has been the case for many years now, and the number of stores opening (versus the mature base) is not rising. We conclude that new stores are therefore costing more per store in opening “inefficiencies”, probably including heavier marketing. Indeed, the strong performance of the newest stores, as described by management, has been a positive recent feature of this situation, and, overall, that’s a good thing. Overall store level EBITDA was down 60 bp YTY, resulting in a still very impressive 29.8%

Wrapping up the P&L discussion of Q2, it seems to us that the fundamentals were “acceptable”, modest sequential improvement, most impressive because of the estimate “beat”. In essence, actual results beat expectations for relatively flat operating income.

Of course, the introduction of the new Virtual Reality platform, the reception of the ride/game, and the general effect on the overall business were very much on everyone’s mind. On the conference call, management indicated that “guest response has been strong and bodes well for future game releases on this platform”. Just as we, and some other observers, had predicted, the Jurassic Park based Virtual Reality ride/game only seemed to help by a point or so (two at the most), and if guests stayed longer, came more frequently, or spent more, neither the Amusement or F&B comps demonstrated it.   We stand by our discussions over the last six months, to which we have linked below, that Virtual Reality is unlikely to be a “game changer” and materially change the lackluster trajectory of comp sales. The Company confirmed what we pointed out months ago, that there is a labor content to this ride/game/platform  because the attraction must be attended to with at least one crew person. The profitability of  this offering may or may not enhance overall margins, because higher margin activities would be taking place in the same space, and it may take more than a point or two of incremental sales to offset the higher labor component. The Jurassic Park Virtual Reality experience was introduced midway through Q2, and Q2 showed higher labor expense. Our observation, about which we have written before, is that the VR platform is one of the quieter places in the  facility. Even when occupied by “riders”, there is very little “energy” in the immediate vicinity, compared to almost all of the rest of the Amusement area. We also question the notion, as suggested by management, that the ride doesn’t have to be attended to at all times. Our observation is that, most of the time, the ride/game has to be “sold” by a well trained attendant. The attendant (or two) that manage this platform, has to be personable, attentive, and diligent in efficiently loading and  unloading riders, as well as cleaning the viewing goggles and seats.

Also on the Conference Call, an intensified focus on the F&B side of the business was described, including a fast casual taco concept that will be installed at a Dallas location this fall. It makes sense to us that many PLAY customers don’t want to sit down for a full fledged meal, but could respond to a taco offering, “on the run”.  It’s possible that  a “food court” of sorts could replace at least part of the current “Bar & Grill” area, and success with this experiment would be a major positive development.

Other than the above, it is more or less “business as usual”, opening stores as planned, the latest class of stores doing well, more Virtual Reality games (and others) to come, more effective promotions, better training. No details were provided as far as the cost of developing Virtual Reality or other games,  the incremental traffic necessary to justify that expense, or the expected lifespan of these offerings. Clearly, though, as we have described before, PLAY is more of an Amusement Park than a Restaurant. With Amusements & Other at almost 60% of total sales, and Alcoholic Beverages about a third of the remaining 40%, only 26-27% is from Food. Since a great deal of capital (the amount not disclosed) is being spent on “proprietary” game content, PLAY becomes dependent on the ability to correctly predict gaming trends, an order of magnitude more risky, than most restaurant/retail operations we can think of.

Conclusion: Stated at the beginning of this discussion

Below are links to our most recent writeups on PLAY

DAVE & BUSTER’S (PLAY) – VIRTUAL REALITY GAME/RIDE – WILL IT BE A “GAME CHANGER”

DAVE & BUSTER’S ENTERTAINMENT

 

 

DAVE & BUSTER’S (PLAY) – VIRTUAL REALITY GAME/RIDE – WILL IT BE A “GAME CHANGER”

DAVE & BUSTER’S (PLAY) – VIRTUAL REALITY GAME/RIDE (based on Jurassic Park) – WILL IT BE A “GAME CHANGER”

Our full descriptive report dated May 3rd

DAVE & BUSTER’S ENTERTAINMENT

and our update on June 19th  (   https://www.liptonfinancialservices.com/2018/06/dave-busters-play-up-38-in-one-month-whats-going-on/ )

after PLAY stock had run up 38% in one month, presumably because of enthusiasm from the Virtual Reality introduction, can be reviewed.

It seems to us that the hope surrounding a recovery in both amusement and F&B comps revolves around the recent introduction of the Virtual Reality game/ride based on Jurassic Park, and timed to coincide with the latest movie. Now that the game/ride has been in the stores for about a month, we have visited locations at both peak and light dayparts, so we present here our “anecdotal” observations.

In general, the game/ride is often located on the periphery of the amusement section, manned by at least one attendant to check people in with their special $5 ride card (which inconveniently has to be purchased separately at the front desk), seat them, and help them adjust their helmet/goggle. While many riders express enthusiasm as they are bounced around, “scan”, not “kill” the dinosaurs, and get wind blown on their face, we don’t find a great level of excitement by the onlookers. It seemed to us that the “buzz” seems less around this particular attraction than around many other amusements, even if there is a waiting line. While the attendants have indicated that some do come back, the departing riders seemed to have enjoyed it, but don’t seem to be wild about another ride immediately. Quite a few people wander by, look it over, and keep walking. Not many are intrigued enough to linger, though no doubt some will buy their $5 card and come back.

On June 19th, we went through a calculation to show that, based on four sessions per hour ($20.00 for the four seats) and five hours per day, $146,000 per year could be generated or 1.5% of sales in a $10M location. We have observed a waiting line at peak periods, but much lighter use at mid-week times (both day and evening) and some locations are closing it down at 8pm. (This possibly conflicts with a report by SunTrust Robinson Humphrey last week that their field research shows “PLAY is offering this game every day and most hours”, whatever “most” means.) Since the ride is only 5 minutes, we think more like eight sessions per hour (including changeover) is realistic at peak times, but we think an average usage of perhaps 2.5 hours per day (with all four seats occupied) would be a reasonable approximation. That would be 32 riders per hour for 2.5 hours or 80 riders per day generating $400 per day or the same $146,000 per year. We could obviously be off in this rough approximation, but we believe the order of magnitude is close enough. Even if we are low with this approximation over the first several weeks, and we might be, considering the successful Jurassic Park movie premier and the TV support from PLAY, we doubt that it will be any higher than this just a few months from now. One of the key observations by an attendant was that the frequency of use is not building materially, so the necessary word of mouth to build long term usage doesn’t seem to be in play. The “game” aspect of this game/ride does not seem compelling. Riders can “scan” the dinosaurs, and create a personal competition to outscore your co-riders, but the skill level or satisfaction from this aspect is hard to pinpoint. We have taken the ride, and the visuals are impressive. We are admittedly far from the “target audience” but feel like “you’ve seen one dinosaur, you’ve seen them all”.

An important consideration here is whether this new amusement, the updated software when it comes, and other Virtual Reality offerings will reverse the now established negative trend in the amusement section. Management also hopes that customers will stay longer, and spend more, as they wait for their turn with the VR experience. Our guess is NO and NO. Management, and optimistic analysts, have expectations that an exclusive “Halo” game (not VR) to be introduced in late July and additional chapters of Jurassic Park (for late summer and early fall) will re-establish momentum. We have no insight relative to amusements to come, but we don’t believe the Jurassic Park Virtual Reality game/ride, and its future iterations, if they are comparable to what has so far been introduced, will prove to be a “game changer”.

One last thought: Neither management, nor the analytical community, is talking about what the new VR platform has cost to develop, and what the depreciation schedule looks like. There is also a labor component on an hourly basis that is not a factor with most of the other amusements. An attendant, or even two, at peak times, is not a huge factor, but the necessary attendant even when there is light usage becomes a noticeable expense. There has to be an obvious attendant standing by, at virtually every moment of operation.

Roger Lipton