Dave & Buster's: Entertainment-Themed Restaurant Is Showing Growth

The dining and entertainment company is recovering from pandemic levels

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Sep 12, 2022
Summary
  • Dave & Buster's operates 200 restaurant and entertainment venues in North America.
  • The company is facing labor shortages and commodity inflation.
  • Dave & Buster's should generate upside as sales growth continues and cost pressures recede.
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Dave & Buster's Entertainment Inc. (PLAY, Financial) is the owner and operator of 200 venues in North America that offer entertainment and dining experiences to guests through two concepts: Dave & Buster’s and Main Event. The company operates 148 Dave & Buster’s locations in 41 states, Puerto Rico and Canada. Each venue offers a full menu of entrées and appetizers, alcoholic and non-alcoholic beverages and an extensive assortment of entertainment attractions centered around playing games and watching live sports. The company also operates 52 Main Event locations in 17 states, offering state-of-the-art bowling, laser tag, arcade games and virtual reality experiences.

Founded in 1982, the company currently has a market capitalization of $1.9 billion. Revenue for this fiscal year is expected to exceed $1.8 billion.

Business model

The company’s brand and theme phrase is "Eat, Drink, Play and Watch." For dining, the company offers a broad selection that appeals to multiple demographics and includes appetizers, shareables, high-quality burgers and steaks, pasta and healthier alternatives as well. The bar menu offers a wide selection of beers, wines and spirits, as well as family-friendly offerings such as sodas and lemonades. Each venue typically offers approximately 145 redemption and simulation games as well as a proprietary virtual reality platform. The games allow customers to win tickets, which can be redeemed for prizes. Lastly, each venue carries dozens of high-definition televisions of various sports used primarily to broadcast sporting events.

In 2021, games generated 66.5% of total revenue, while food represented 22.7% of sales and drinks generated the remaining 10.8%.

Financial review

The company reported second-quarter financial results on Sept. 7. Total revenue grew 24% to $468 million compared to same period in 2021. Dave & Buster's stores increased revenue by 10.4%. Main Event was acquired in July 2022 and added $51.4 million in revenue. Comparable store sales at Dave & Buster's increased 9.6% from the same period in 2019, a more relevant comparison due to Covid-19 pandemic disruptions.

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Adjusted Ebitda set a company record at $119.6 million, or 25.5% of revenue, compared with adjusted Ebitda of $119.2 million, or 31.6% of revenue, in the second quarter of 2021. Labor shortages and commodity inflation continues to weigh on margins.

The company has $100.3 million in cash as of the end of second quarter and $1.2 billion in total debt. The Main Event acquisition was financed with debt. As part of the process, Dave & Buster's refinanced its existing $500 million revolving credit facility and closed on a new $850 million term loan due in 2029.

The company generated $84.5 million in operating cash flow during the quarter and recorded $591.8 million in liquidity, which included $100.4 million in cash and $491.4 million available under its $500 million revolving credit facility. During the quarter, the company repurchased 764,988 shares worth $25 million under its current share repurchase program.

Valuation

Consensus analyst earnings per share estimates for 2022 are $3.34 and $3.86 for 2023. The resulting current low price-earnings ratios are somewhat misleading as the company’s debt load has significantly increased. The enterprise value/Ebitda ratio is slightly elevated at approximately 11 on a forward-looking basis.

The GuruFocus discounted cash flow calculator produces a value of $52.48 using next year's normalized earnings per share estimate of $3.86 as the starting point and a 6% long-term growth rate. The company does not pay a dividend, but does routinely buy back shares.

Guru trades

Gurus who have purchased Dave & Buster's stock recently include Jim Simons (Trades, Portfolio)' Renaissance Technologies and Paul Tudor Jones (Trades, Portfolio). Gurus who recently reduced our sold out of positions include Steven Cohen (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).

Conclusion

Dave & Buster's appears to have upside and is on the road to recovery from Covid-19 pandemic-related issues. The core business seems to be doing well as the company indicated that customers are spending more at levels that are higher than 2019 and 2021. If the inflationary issues and labor shortages alleviate over time, the company will be able to generate significant free cash flow, which can be used to pay down debt.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure