PLAY - Dave & Buster's: Playing The Waiting Game

2023-10-02 17:33:57 ET

Summary

• Dave & Buster's has overhauled its management team in hopes of improving future performance.
• The company has grown revenue steadily over the past decade but has a very high level of debt.
• The relatively new management team has outlined six growth initiatives, including market optimization and technology enablement, to drive future revenue growth.

Sometimes a leadership change is necessary to drive the business forward. One notable example is when founder and then CEO of Chipotle (CMG) Steve Ells stepped down and was replaced by Brian Niccol. Despite Ells early success, the company had various issues at the time of his departure including food safety concerns. Niccol was able to address the problems and bring Chipotle back to prominence as the stock price of Chipotle has increase by over 300% over the last five years.

Today I’d like to discuss a restaurant and entertainment company that has completely overhauled its management team in the hopes it can improve future performance. That company is Dave & Buster’s (PLAY)!

The Company

Dave & Buster’s Entertainment provides consumers with an entertaining restaurant experience. As of the company’s 10K filing there were 151 Dave & Buster’s branded stores in 41 states with 53 Main Event locations across 17 states. Dave & Buster’s completed the acquisition of Main Event last year.

As you can see from the graphic below, the company has steadily opened new locations and grown revenue since the first Dave & Buster’s opened in 1982:

Dave & Buster’s offers a full menu with drinks (alcoholic and non-alcoholic) while providing various entertainment options such as games and numerous televisions to watch live sports. I’ve been to Dave & Buster’s on several occasions. It’s a great place to watch a football game and play some arcade games. The selection of games is impressive and Dave & Buster’s provides quite a selection so children of all ages will find options.

Moat and Opportunity

Although Dave & Buster’s competes with various restaurants and different entertainment providers such as bowling alleys and theme parks, I do believe Dave & Buster’s has differentiated themselves from the competition, as the graphic below illustrates:

Dave & Buster’s offers a very unique experience for consumers as Dave & Buster has arcade games (including some virtual reality experiences), food and drinks, and also holds numerous events such as birthdays and corporate events. Additionally, Dave & Buster’s has kids games so both parents and their children can play games (which is certainly different from say Chuck E. Cheese).

In my opinion, Topgolf is Dave & Buster’s closest rival in terms of offering food, drinks, and providing entertainment. However, Topgolf doesn’t have arcade games and I don’t believe is as “kid friendly.”

As the management team noted on their Q2 2023 conference call, the company has six key growth initiatives which will drive future revenue growth. These six initiatives are market optimization, strategic game pricing, improved food and beverage, remodels, special events, and technology enablement.

Of these six, I think market optimization and technology enablement will be vital to the organization’s success. Companies must keep up with technology and if Dave & Buster’s can improve their service model and enhance their gaming ecosystem, customers will keep coming back. As noted on the company’s investor presentation , if Dave & Buster’s can get 20% of guests to visit just one more time each year that would equate to an increase in adjusted EBITA of $140 million over three years. During the quarter , the company’s CEO noted Dave & Buster’s loyalty database now has 5.2 million users which is up from 4.8 million last quarter. It’s nice to see progress is already being made on this initiative.

Lastly, there is further opportunity for the company to add new stores. Dave & Buster’s research suggests there is an opportunity to add over 550 stores:

That figures seems aggressive to me but the company has created “new mini” stores and has international opportunities, Dave & Buster’s certainly seems to have areas where they could add new stores.

Management

As you can see from the below, Dave & Buster’s management is experienced but the majority are relatively new to the organization:

Chris Morris is the company’s Chief Executive Officer, and he was CEO of Main Event prior to taking on this role. Morris has also held senior leadership positions at California Pizza Kitchen and On the Border.

Michael Quartieri is the company’s Chief Financial Officer. Quartieri has held leadership roles at LiveOne, Scientific Games and Las Vegas Sands ( LVS ).

I think the company’s growth plan, which I’ve mentioned above, is aggressive. However, the management team is experienced and a detailed investor presentation has been shared with the public in terms of how management plans to executive on these growth drivers.

Given the short duration of senior leadership, I’ll be watching to see how much progress is made on these growth initiatives.

Financials

In Q2 2023, Dave & Buster’s revenue was roughly $542 million which is an increase of nearly 16% compared to Q2 2022. However, pro forma comparable store sales (which included Main Event stores) decreased 6.3%. Management noted the comparisons were difficult due to the post-COVID increase the restaurant industry experienced in the prior year. During the quarter, two new Dave & Buster’s stores opened as well as one new Main Event location.

If you zoom out and look at the big picture, Dave & Buster’s has continued to grow revenue as well as adjusted EBITA over the last decade as you can see from the below graphic:

Additionally, Dave & Buster’s has a 3-year CAGR of over 36% and a five-year CAGR of over 12%.

Dave & Buster’s balance sheet is concerning, as the company has a significant amount of long-term debt as you can see below:

In a high interest rate environment (one that is unlikely to change any time soon) I don’t love having $1.3 billion dollars of debt on the books.

Risks

Dave & Buster’s lists numerous risks to the business on their annual report . I’m going to discuss three risks which I believe could hurt the organization.

The first, which I’ve mentioned above, is the company’s debt level. Dave & Buster’s has a significant level of debt and given the high interest rate environment, it might be difficult for the organization to allocate the capital necessary to fund expansion and growth initiatives if the company has to payoff their debt and pay off higher interest expenses.

Next, I think consumer spending and debt is at least a short-term risk for the organization. Debt (especially credit card debt ) levels are extremely high currently and many Americans will have to resume paying off their student loans. As stated on the company’s investor presentation, 76% of their customers earn less than $100K annually. This group of consumers would likely be more impacted by high interest rates thus leaving less income on discretionary spending.

Lastly, there is a chance the senior leadership team fails to execute on their plans. The team is certainly experienced, but most are new to the organization. For now, I’m willing to give the leadership team the benefit of the doubt that they’ll be able to execute on their plans.

Valuation

As you can see from the below valuation metrics from Seeking Alpha , the overall value grade for Dave & Buster’s is a “C.”

I believe price-to-earnings are a good metric to review this company. In this case, Dave & Buster’s appears to have a low P/E compared to peers in this sector:

Thus I believe Dave & Buster’s is currently undervalued.

Conclusion

Dave & Buster’s is a unique company which provides a food, drink, and entertaining experience that is unmatched.

However, the company is struggling to grow same store sales after the post COVID boom, and the organization has a high level of debt.

The organization has a new management team which has outlined some aggressive strategies.

I do like the growth initiatives outlined by the new management team, however I’m unwilling to buy the stock now despite it being undervalued. For now, I’m going to give this new management team a few quarters and see how much progress is made on these growth initiatives.

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