Dave & Buster’s 30% upside is still in PLAY

Key Points

• Dave & Buster's had a mixed quarter, but cash flow was solid and sustained robust share repurchases. 
• The company's share count is down more than 17% YOY, and more repurchases are on tap. 
• Analysts and institutions are on board the PLAY train, and analysts see a double-digit upside ahead. 

Dave & Buster’s NASDAQ: PLAY turnaround struggled in 2023, but this is good news for investors. The struggles are due more to tough comps compared to 2022 than anything else and provide ample opportunity to build positions in a high-quality value play in the discretionary sector.

The stock price action in Dave & Buster’s is range-bound at levels deemed a deep value by more comparisons than one, suggesting a robust and potentially vigorous rally once it gets underway. Until then, the Q3 results align with the long-term outlook, which suggests a solid 15% to 20% upside compounded by capital returns. 

Dave & Buster’s has a mixed quarter; margin shines

Dave & Buster’s had a mixed quarter, with revenue falling compared to last year. The $466.9 million fell 3% YOY and missed the consensus estimate by 150 basis points. The decline is due to a 7.8% drop in pro forma comps offset by a higher store count. The company added two new Dave & Buster’s and one new Main Event during the quarter and has plans to increase the store count by year-end and next year. However, the takeaway is that business is normalizing at a higher level than before the COVID-19 pandemic.

The margin news is more favorable, with margin contracting compared to last year on deleveraging but far less than expected. The company produced a GAAP operating loss but adjusted profits of $0.01 that outpaced the Marketbeat.com consensus by $0.13 and aided the already strong balance sheet. The salient detail is cash flow. The company’s cash flow is down YOY but marginally, allowing for capital returns and reinvestment. 

Dave & Buster’s didn’t give formal guidance but laid an optimistic outlook for the next two years. The company says it will have three more stores opened by the end of the fiscal year for 16 this year, with seven planned for 2024 and 7 in 2025. 

Dave & Buster’s isn’t playing around with share repurchases

Among the company’s many levers is its real estate pipeline, which it used to generate $100 million in cash via sale leaseback that it gave right back to investors. The company repurchased $100 million of shares in Q3, about 2.8 million in total, bringing the YTD total to $300 million or about 17% of the share count, and there is still $100 million left under the current authorization. Because the company’s cash flow is solid, the balance sheet is healthy, and there is a healthy pipeline of real estate projects in play, the company will likely continue to aggressively repurchase shares in Q4 and fiscal 2024. 

Cash flow, share repurchases and valuation are why the sell side is interested in this stock. Both analysts and institutions are buying and holding this name, and the analysts project a healthy 15% to 20% upside at the consensus midpoint. More importantly, institutions have combined holdings of over 92% and growing. While much of the institutional holding is fund-based, a large portion is not. Two prominent long/value investment firms (Hill Path Capital and Eminence Capital) hold about 25% of the company between them, and several others are low-to-mid-single-digit stakeholders. 

The technical outlook: Dave & Buster’s is trying to bust out of a trading range

The price action in Dave & Buster’s has been range-bound for nearly three years and is making another attempt at breaking out. The post-release action has the market up as much as 10% to trade at critical resistance. The critical resistance is near $47.25 and may cap gains soon. However, a more sustained rally may form if the market can follow through and move above this level. The $50 would also present a hurdle to the consensus $53.75 target in that scenario.  Longer-term, the growth, cash flow and share repurchases should lead to a significant price-multiple expansion for this restaurant play.