Dave & Buster’s Stock: Is Now the Time to Make a PLAY?
Dave & Buster’s (NASDAQ: PLAY) FQ2 earnings report was no blowout with tepid revenue growth and a significant contraction in earnings.
However, it still highlights the company’s strengths and the significant potential for recovery, which has greatly improved. The company found its new CEO, choosing 25-year KFC veteran Tarun Lal to take the position.
Lal’s experience encompasses every aspect of KFC’s U.S. operation and provides a solid foundation for his work with Dave & Buster’s. Because the company is already in the midst of a turnaround, there is risk and opportunity.
A CEO in alignment with company priorities can accelerate the turnaround and drive a significant increase in shareholder value sooner, rather than later.
Dave & Buster’s Crashes on Weak Results: Floor in Sight
The bad news is that Dave Buster’s Q2 results included significant margin contraction that began at the gross level and worsened at the operating level. The increases are tied to increased input and operating costs, new store openings, and the turnaround effort, which includes undoing mistakes made by the former CEO.
The critical takeaway is that many costs will diminish over time, and others will pay off in the form of increased employee and customer satisfaction and, ultimately, revenue and earnings.
The good news is that Dave & Buster’s Entertainment resumed growth in Q2. The growth is tepid at 0.05%, 100 basis points below MarketBeat’s reported consensus, but it ends several quarters of contraction and is expected to be followed by acceleration in Q3.
More importantly, the company’s operating quality was sufficient to sustain financial health while reinvesting and buying back shares. The buybacks slowed compared to the prior year but remain substantial, equating to nearly 3% of the market cap for the quarter, helping to reduce the share count by approximately 14% compared to last year.
And Dave & Buster’s balance sheet is in good shape. The company has been bolstering its cash position with a sale-leaseback program that allows for aggressive repurchases. Highlights at the end of Q2 include increased cash, current, and total assets, only partially offset by an increase in debt and liabilities.
The net result is a 14% increase in shareholder equity despite the massive share count reduction and an expectation for continued gains as the year progresses.
Not only are more sale-leasebacks expected, but the store count is growing, providing increased leverage for the business rebound. The target for 2025 is 11, including new stores in overseas markets, a critical factor in the long-term growth outlook.
The international market is still a small portion of the total footprint, but is expected to grow over time and sustain a mid-to-high single-digit growth pace for the company.
Sell-Side Interest Pushes PLAY to Its Floor
The sell-side interest has helped the price action in PLAY shares trend lower over the past 18 months. However, with short interest rapidly falling, institutional interest still strong above 90%, and analysts signaling a bottom, the downtrend is nearing its end.
The post-release activity includes two analysts' revisions within the first hours of the report. Both lowered their stock price to align with the long-term lows but maintained Hold ratings that align with the broad consensus. No analyst rates the restaurant stock as a Sell.
The price action in PLAY isn’t overtly bullish but reveals a floor near levels aligning with the COVID-19 period. The critical level is near $17 and unlikely to be broken without a significant deterioration in the business.
The likely scenario is that PLAY will remain under pressure, trending sideways within its established range, until subsequent earnings reports reflect the impact of turnaround and growth efforts.
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