Restaurant stocks are always a hot favorite among investors, especially when it is a growth stock. A great player in this industry is Dave & Buster's Entertainment Inc. (PLAY, Financial).
The restaurateur has posted excellent quarterly results, including a 13.11% increase in total revenues. During the fourth quarter and fiscal 2015, the company opened four stores and 10 stores including one relocation.
The company began in 1982 and now operates in 82 venues in North America that combine dining and entertainment and offer customers (both adults and families) the opportunity to "eat, drink, play and watch," all in one location. The company owns and operates stores in 30 states and Canada.
Dave & Buster's offers a full menu of entrees and appetizers, a full selection of alcoholic and nonalcoholic beverages and an extensive assortment of entertainment attractions centered around playing games (including skill- and sports-oriented games, video games, interactive simulators and other traditional games) and watching live sports and other televised events.
Strong fourth-quarter results
On March 29, the Dallas-based company reported financial results for its fourth quarter and full year 2015, which ended on Jan. 31. The company’s total revenues increased 13.11% to $234.21 million, compared to $207.07 million in last year's fourth quarter. Comparable store sales increased 6.0%, compared to a 10.5% increase in the same period last year. Further, noncomparable store revenues increased 46.3% to $55.5 million, compared to $38.9 million for the comparable prior-year period.
The company’s operating income increased 36.07% to $38.06 million, compared to $27.97 million in the year-ago quarter. Net income for the reported quarter shot up 56.55% to $22.95 million, or 53 cents per diluted share, compared to $14.66 million, or 34 cents per diluted share in the year-ago quarter. Pro forma net income (on a non-GAAP basis) increased 61.36% to $22.8 million, or 53 cents per diluted share, compared to $14.13 million, or 34 cents per diluted share, in the same period last year.
Store-level EBITDA increased 25.67% to $76.9 million, compared to $61.19 million in the same period last year. Further, adjusted EBITDA increased 28.88% to $66.35 million, compared to $51.48 million for the comparable prior-year period. As a percentage of total revenues, store-level EBITDA and adjusted EBITDA increased approximately 320 basis points to 32.8% and 340 basis points to 28.3%.
Dave & Buster's ended the quarter with cash and cash equivalents of $25.49 million and long-term debt less current liabilities, net unamortized discount of $330.75 million.
Fiscal 2015 results
For fiscal 2015, the company’s comparable store sales increased 8.9%, and total capital additions were $138 million, which consisted of development costs for store openings, several remodeling and related projects, new games and maintenance capital. Further, the following chart provides the company’s different metrics for fiscal 2015, compared with fiscal 2014.
Fiscal 2015 | Fiscal 2014 | % change | |
Total revenues | $866.98 million | $746.75 million | 16.10% |
Operating income | $110.04 million | $73.86 million | 48.98% |
Net income | $59.62 million, or $1.39 per diluted share | $7.64 million, or 21 cents per diluted share | 680.37% |
Pro forma net income (on a non-GAAP basis) | $65.0 million, or $1.52 per diluted share | $32.8 million, or 78 cents per diluted share | 98.17% |
Store-level EBITDA | $253.86 million | $198.80 million | 27.70% |
Adjusted EBITDA | $215.43 million | $165.13 million | 30.46% |
Stores
In the fourth quarter, Dave & Buster’s has opened stores in Friendswood (Houston), Texas; Glendale (Phoenix), Arizona; Springfield (Greater Washington, D.C.), Virginia, and San Antonio. For fiscal 2016, it plans to open a total of nine to 10 new stores spanning the small and large store formats.
Projections for fiscal 2016
For fiscal 2016, Dave & Buster’s expects total revenues and net income in the range of $967 million to $987 million and $74 million to $80 million. Comparable store sales are expected to increase 2% to 4%. The company expects the effective tax rate of approximately 36.5% to 37.5%, and diluted share count of 43.3 million to 43.5 million. Adjusted EBITDA is expected in the range of $243 million to $251 million.
The company expects five-year average cash-on-cash returns in excess of 25%. Further, for the long term, Dave & Buster’s expects total revenue growth of approximately 10% and low double-digit annual adjusted EBITDA growth.
Growth strategies
- Pursue disciplined new store growth.
- Expand the Dave & Buster’s brand internationally through multistore licensing.
- Grow comparable store sales.
- Margin improvement.
To drive higher guest satisfaction, the company is taking several innovative steps, which will keep its brand fresh, entertaining and differentiated. Further, to strengthen its position in the international market, Dave & Buster’s plans to open its first store in the Middle East in 2017.
How Dave & Buster's stands out
Dave & Buster’s is focusing on expanding its brand appeal "Eat, Drink, Play and Watch." The company is confident that its one-of-a-kind dining, entertainment and sports-viewing venues will resonate with guests outside of North America, while adding yet another layer of growth to its business model. From fiscal year 2011 to fiscal year 2015, revenue and adjusted EBITDA and margin grew at a CAGR of 9.87% and 16.97%.
(Source: company website)
A peek into the restaurant industry
According to reports, the U.S. economy surged by 5% in the third quarter of 2014 (since 2003, this has been the strongest three-month period). Consumer behavior has changed and so the restaurants have come up with different marketing strategies – loyalty programs, ordering, etc.
As per the National Restaurant Association, restaurant industry sales are expected to reach $783 billion in 2016 and will represent the seventh consecutive year of real growth in restaurant sales. Further, the National Restaurant Association has predicted that the restaurant industry will remain the nation’s second-largest private sector employer with a workforce of 14.4 million and will create 1.7 million new restaurant jobs by 2026.
On a concluding note
Overall, Dave & Buster’s is a rock solid company with solid stock price performance, robust revenue growth and notable return on equity. It has provided 22 consecutive quarters of LTM adjusted EBITDA growth. Restaurant stocks are booming, and this company is no exception. Its category defining concept, outstanding store-level economics, long-term platform for growth, significant white space and experienced management team will help to provide greater shareholder returns.
Disclosure: I do not hold any position in the company.