Dave & Buster’s Stock Earnings: Ready To Move Higher, 4x EBITDA (NASDAQ:PLAY)

Investment Thesis

Dave & Buster’s (NASDAQ:PLAY) is seriously cheaply priced for what it’s aiming for, $1 billion of EBITDA in the next few years.

However, closer in time, according to my estimates, Dave & Buster is priced at approximately 4x EBITDA. And this consideration doesn’t even account for the approximately 8% in share repurchases that I believe are coming this year.

All in all, there’s so much to like here, that I find it difficult to rate it as anything less than a buy.

Why Dave & Buster’s? Why Now?

Dave & Buster’s is a chain of entertainment and dining venues where people can enjoy a variety of arcade games, simulators, and other attractions, while also dining on food and drinks. It’s like a combination of a restaurant and an arcade, providing a fun and lively atmosphere for individuals, families, and groups to enjoy games and entertainment while grabbing snacks.

Dave & Buster’s near-term prospects seem promising, driven by several strategic initiatives aimed at fueling growth and enhancing profitability. Firstly, the company’s focus on expanding its store base domestically and internationally presents a significant growth opportunity. With six new domestic stores opened in the recent quarter and additional franchise agreements signed for international expansion, Dave & Buster’s is poised to capture market share in new regions and capitalize on its strong brand awareness.

Furthermore, the implementation of organic growth initiatives, such as marketing optimization, strategic game pricing, and improved food and beverage offerings, is expected to drive increased guest traffic, higher spending per visit, and improved guest satisfaction. By leveraging digital marketing, personalized loyalty programs, and innovative menu offerings, Dave & Buster’s aims to enhance customer engagement and drive repeat visits. Additionally, ongoing store remodels aim to modernize the guest experience, attract new customers, and increase revenue through improved entertainment.

Nonetheless, despite its promising prospects, Dave & Buster’s faces key challenges too. One significant challenge is inflationary pressures.

Rising costs, particularly in labor and food, could squeeze EBITDA margins, especially if the company struggles to pass on its hoped-for price increases to consumers.

Another challenge for Dave & Buster’s is the competitive environment it operates in which is likely to challenge Dave & Buster’s ability to retain customers.

With this background in mind, let’s now discuss its fundamentals.

Revenue Growth Rates Could Reach 8% CAGR This Year

Dave & Buster’s consolidated revenues for fiscal Q4 2023 came in 6% higher compared with the same period a year ago. This figure included the extra week in the calendar year. On a pro forma combined comparable store sales (including Main Event branded stores) decreased 7% y/y compared with the same period a year ago.

Furthermore, Dave & Buster’s marginally missed analysts’ estimates on the top line by just under 1%. Nevertheless, as far as Wall Street is concerned, a miss is a miss.

And yet, I do not believe this story finishes here. Why? Because Q4 of the prior year was always going to be a really tough period to compare against. After all, the prior year’s revenue was up 64% y/y on a GAAP basis.

Consequently, I believe this means that as Dave & Buster’s enters fiscal 2024, its comparables will rapidly become a lot easier.

Accordingly, we are more likely than not to see Dave & Buster’s revenues grow by at least mid-single-digits CAGR, if not perhaps even touching low double digits in some quarters, notably fiscal Q3 2024 (ending October 2024, the computer-generated labeling is not accurate above).

With that context in mind, let’s now discuss its valuation.

PLAY Stock Valuation – 4x EBITDA

The highlight from the fiscal Q4 quarter was that Dave & Buster’s adjusted EBITDA margins reached 25.3%, an 80 basis points improvement from the same period a year ago. This caps a very strong fiscal 2023 period, where its total adjusted EBITDA margins expanded by 70 basis points. Why do I stress this improvement in profitability?

Because the change in its profit margin profile is what drives investors to buy into management’s vision for $1 billion of EBITDA in the next coming years.

Recall, back in June 2023, Dave & Buster’s new management team declared that in approximately 3 years, $1 billion of EBITDA would be on the cards.

What’s more, despite management openly admitting that fiscal Q4 was a challenging quarter, its underlying EBITDA was still up close to 10% y/y.

Thus, here are some back-of-the-the-envelope assumptions. Let’s say that Dave & Buster’s new store opening, plus pricing increases, drive revenues higher by 8% y/y. And that through cost-saving initiatives, this translates into 26% EBITDA margins, which is just a nudge higher than the 25.3% delivered in fiscal Q4, which was a tough quarter impacted by challenging weather.

This translates into $620 million of EBITDA, without any need for heroics. This puts the stock priced at 4x EBITDA.

On top of all this, note that in March 2023, Dave & Buster’s announced that they would authorize the repurchase of up to $100 million of its stock. Most companies announce open-ended share repurchases and seldom complete their announced repurchases. Much less in a timely fashion. Not only did Dave & Buster’s repurchase the $100 million in less than a year, but they actually ended up repurchasing $300 million. Great, right?

Well, allow me to tell you that now, once again, management has renewed its share repurchase program, with a further $200 million of repurchases announced.

So, not only has Dave & Buster repurchased 16% of its diluted shares outstanding since fiscal Q4 of the prior year (the graphic above hasn’t been updated for its most recent results), but there appears to be a further 8% of shareholder returns on the cards.

Thus, to repeat my stance, even though these repurchases are open-ended, given this new management team’s drive to put capital to work to increase shareholder value, I not only suspect that these repurchases will be completed within 12 months, but I wouldn’t be surprised to see this authorization increased in the coming quarters of fiscal 2024.

The Bottom Line

In conclusion, Dave & Buster’s presents an intriguing investment opportunity. Despite its ambitious goal of achieving $1 billion in EBITDA in the next few years, the stock appears meaningfully undervalued, at approximately 4x EBITDA.

This valuation doesn’t fully account for the anticipated 8% share repurchases expected this year, which will further enhance shareholder value.

Also, the company’s recent performance, including improved adjusted EBITDA margins and resilient revenue growth, underscores its potential for profitability and growth in the coming years.

With promising near-term prospects and a solid plan for capital deployment, I am bullish on PLAY.