Why You Shouldn’t Give Up on Dave & Buster’s

Dave & Buster’s (NASDAQ: PLAY) reported somewhat underwhelming second quarter results, yet many analysts are still bullish on the company – and they have every reason to be.

Though the company beat quarterly expectations, guidance for upcoming months is especially concerning for some investors. However, D&B has a long history of outperforming the restaurant industry as a whole.

The stock is currently priced at $52, well below its 52-week high of $73.48. Let’s take a look at whether this is still a buying opportunity.

D&B’s Growth Over Time

The restaurant industry as a whole has certainly had its troubles over the past couple years, with poor comparable (comps) sales across the board and an overarching decline in foot traffic. However, D&B has bucked the trend with excellent comps growth. Though the company’s figures have trended a bit downward in the past couple quarters, sustained growth has occurred throughout the entirety of the industry’s recession.

If you have ever been to a Dave and Buster’s restaurant/arcade, you know how much fun the experience can be. Though D&B games are fairly costly, their food is good and the atmosphere is lively.

This dining and gaming experience is clearly geared toward young adults who are looking to have fun with friends, family and co-workers. These young adults have a special place in their heart for D&B, and will likely continue to patronize the chain for years or even decades to come.

Studies have shown millennials are more inclined to spend on experiences like those at D&B than they are to spend on retail items. Considering this is exactly what D&B provides, it is clear that the company is positioned for continued growth.

A Closer Look at D&B Quarterly Results

D&B’s second quarter results included a profit increase of 42 percent and a revenue increase of 15 percent.

The problem with the results lies in the company’s guidance for the remainder of the year. Comps for the entire year will drop to two percent or less. This is down from the prior guidance of three percent. Trailing price-to-earnings will likely dip from 21 to 19 once anticipated ’17 earnings are factored in. Revenue guidance stood strong at $1.17 billion.

The company is increasing its new restaurant openings from a dozen to 14. If D&B fulfills this promise, the restaurant chain will have 106 total sites by the end of ’17. The company’s free cash flow continues to grow thanks to the steady expansion of operations.

A Unique Experience

D&B’s strongest appeal is the arcade element. It is difficult to find arcades in America that cater to individuals who grew up playing video games at home. The arcade industry peaked in the late 80s and mid-90s, only to nearly completely disappear in the 2000s when home consoles became much more popular.

The combination of tasty food with fun arcade machines, sports-themed games and flat screen TVs makes the D&B experience quite enjoyable. This is somewhat of a niche business yet the niche is certainly thriving. Gaming and sports have never been more popular. D&B’s delicious food offerings make the experience that much more enjoyable.

D&B went public in 2014 with an IPO priced at a mere $16. The stock peaked this past summer, and has since dipped by about 30 percent.

Savvy investors understand the price correction was bound to happen at some point. After all, D&B is a restaurant stock that peddles food, games and sports. Furthermore, the rest of the casual dining industry has endured quite the plunge in recent years.

Do not be alarmed by D&B’s drop. The company has beat the street’s quarterly estimates every single quarter since going public. Company executives have stated they plan on operating 200 stores in due time. Such an accomplishment represents a doubling of the business’s current store total.

The Verdict: Buy and Hold

D&B’s stock should move upward as time progresses and more locations are added to the company’s portfolio. The worst case scenario is a price stagnation as the odds are quite low that the stock will continue to free fall following the drop spurred by D&B’s mixed second quarter results.

Though D&B lacks the potential for significant innovation or a breakthrough product that propels it into a high-flying growth stock that soars past Wall Street’s expectations, the company certainly has a rock-solid business model.

Buy the recent price dip and hold. The stock should rebound quite nicely in the coming months and years.

Regards,

Ethan Warrick
Editor
Wealth Authority


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