Dave & Buster’s: Game On, Less Than 3x EBITDA (PLAY)

Investment Thesis

Dave & Buster’s (NASDAQ:PLAY) stock dropped 12% premarket as investors didn’t appreciate the company missing analyst’s estimates.

Furthermore, its earnings call lacked focus. This, when combined with a miss on the top line, left investors predisposed towards selling PLAY. A sell first, ask questions later, investment “strategy”.

However, I maintain that Dave & Buster’s comparables will naturally improve starting fiscal Q2, which will overshadow its lackluster and unclear strategy. In 90 days’ time, I’m inclined to believe that its share price will be higher than $50 and climbing higher.

Rapid Recap

In my previous analysis back in April, I said:

[…] according to my estimates, Dave & Buster is priced at approximately 4x EBITDA. And this consideration doesn’t even account for the approximately 8% in share repurchases that I believe are coming this year.

All in all, there’s so much to like here, that I find it difficult to rate it as anything less than a buy.

Since that time, the stock has moved in one direction. Down. In hindsight, it was a bad call to rate PLAY a buy.

Yet, if you’ve read my work before, you’ll know that I have no qualms about reversing a call if I believe I’m wrong. Although, I don’t believe I’ve made a mistake to be bullish on PLAY. Hence, I restate my bullish rating today.

Why Dave & Buster’s? Why Now?

Dave & Buster’s is a chain of entertainment and dining venues where guests can enjoy a wide range of arcade games, simulators, and other attractions, along with a variety of food and drinks. It combines the elements of a restaurant and an arcade, offering a fun and lively atmosphere for individuals, families, and groups to indulge in games and entertainment while enjoying snacks.

Despite a challenging macroeconomic environment and a difficult prior-year comparison, recent trends in May and early June indicate improving top and bottom-line performance. Key initiatives include an enhanced marketing engine, a refined games pricing strategy, and successful promotions in food and beverage offerings.

The company is also focusing on opening new stores and completing remodels, with projections of substantial revenue improvements.

Also, the loyalty database has grown significantly, and the introduction of a new service model is expected to drive incremental sales. Additionally, management reaffirms that they are steadfast on their goal to achieve $1 billion in adjusted EBITDA, in the medium term.

However, Dave & Buster’s faces headwinds too. The company encountered incremental labor and marketing costs during the first quarter, associated with new initiatives and marketing tests. However, these are not expected to be repeated.

Further, comparable store sales decreased by 5.6% in the first quarter. Also, traffic deceleration remains a concern, with macro pressures contributing to this trend.

Plus, the success of the remodeled stores will be critical to its future prospects, but the full rollout will take time, with 35% of the fleet expected to be completed by the end of 2024.

Given this balanced background, let’s now discuss its fundamentals.

Dave & Buster’s Comparables Will Improve

In my previous analysis, I said:

[…] we are more likely than not to see Dave & Buster’s revenues grow by at least mid-single-digits CAGR, if not perhaps even touching low double digits in some quarters, notably fiscal Q3 2024

In hindsight, I was too optimistic here. Q1 2024 was down 2% y/y, which puts a damper on the prospects of reaching low double digits revenue growth rates in some quarters of this year.

That being said, keep in mind that fiscal Q1 of the prior year was a particularly challenging quarter. Consequently, even as I recognize the headline figure that the comparable same store sales were down close to 6% y/y, it’s important to think about this context.

Moreover, even more important is to think about the remainder of fiscal 2024. Once we move into fiscal Q2 and the remainder of this fiscal year, its comparables will ease up immediately.

Given this consideration, I, personally, wouldn’t throw in the towel here. What I will state is that the earnings call didn’t come out with a particularly clear narrative of how Dave & Buster’s would regain traction throughout 2024. And that is, of course, is something that investors would have latched onto and aided their selling decision.

Next, let’s discuss its valuation.

PLAY Stock Valuation – 3x EBITDA

In my previous analysis, I said,

Let’s say that Dave & Buster’s new store opening, plus pricing increases, drive revenues higher by 8% y/y. And that through cost-saving initiatives, this translates into 26% EBITDA margins, which is just a nudge higher than the 25.3% delivered in fiscal Q4, which was a tough quarter impacted by challenging weather.

This translates into $620 million of EBITDA, without any need for heroics. This puts the stock priced at 4x EBITDA.

And now, here is what we actually got reported in the quarter. Dave & Buster’s adjusted EBITDA was down 13% y/y to approximately $159 million. Needless to say, this is a poor result, particularly given that its topline was only down 2% y/y.

That being said, its EBITDA margins this quarter stood at 27.1%, which further supports my previous argument that there’s a high likelihood that Dave & Buster’s will deliver 26% EBITDA margins this year. After all, despite the tough environment, Dave & Buster’s is already reporting 110 basis points higher than my previous estimate.

What’s more, we know that Dave & Buster’s had its strongest quarters in spring and Q4, meaning that this quarter just reported was always going to be one of the weakest quarters of the year.

Consequently, I remain confident that Dave & Buster’s will deliver at least $620 million of EBITDA this year. This puts the stock priced at less than 3x EBITDA.

Although, keep in mind that Dave & Buster’s carries approximately $1.3 billion of net debt, which given its market cap is only $1.8 billion (including the premarket drop), signifies that there’s a lot of debt to be tackled before significant capital returns can be executed.

The Bottom Line

Now is an opportune time to buy PLAY because, despite recent setbacks, Dave & Buster’s is positioned for a turnaround starting in fiscal Q2.

The company’s improved marketing strategies, refined game pricing, and successful promotions are already showing positive trends. With the loyalty database growing and new service models driving incremental sales, management is confident in achieving $1 billion in adjusted EBITDA in the medium term.

Moreover, the stock is attractively priced at less than 3x EBITDA, presenting a compelling investment opportunity as the company’s fundamentals strengthen and revenue growth resumes.