From June 11th until September 10th, Dave & Buster’s Entertainment, Inc. (PLAY) stock has increased by 23.2% while the S&P 500 Restaurant Index increased by 15.7%. This difference between the two (7.5 p.p.) made me wonder if the market was too bearish on the company before June or if it had been too bullish on PLAY after June.
Below Forecasted Store Call Was Correct But Based On Poor Qualitative Information
Five minutes into the 2Q 2020 results conference call, Mr. Brian made the following statement: “recall that our goal was to get 90 to 95 stores open, barring a COVID-19 resurgence, which, in fact, did occur, forcing us to close or reclose 9 stores.”
As soon as I heard that statement, my blood boiled. There is a big difference between 90 to 95 stores and 90% (123) to 95% (130) of stores. So, I pulled up the 1Q 2020 results conference call transcript and found the following statements.
our projected reopening schedule anticipates having about 90 to 95 stores opened by the end of July – Mr. Brian Jenkins > 00:19:13 into the call
it’s really encouraging to hear that you expect to have stores open 90% to 95% by the end of July – Mr. Jake Bartlett from SunTrust > 00:37:32 into the call
So July is the 90% to 95% – Mr. Brian Jenkins > 00:38:04 into the call
When I listen to the audio, at no point do I hear Mr. Brian say the word percent, yet the transcript has the % signs in the text. Since Mr. Brian did not correct Mr. Jake when he said, “90% to 95%,” the transcription confirms that it is 90% to 95%. I do not believe that I am the only one that fell into this trap. Market analysts’ average revenue estimates had the company’s revenue forecasted at $78.5 million.
Another thing, the company claims that it did manage to open the 90 to 95 stores but then had to reclose nine of them. If this did occur, it occurred before July 21st, which is the date I began pulling this data from D&B’s website. Figure 1 and Figure 2 will not attempt to show that this occurred based on the opinion that I do not believe it happened.
Table 1 – Status of Dave & Buster’s Stores
|Store Status – 07/24/2020||82 (60%)||55 (40%)||137|
|Store Status – 09/08/2020||91 (65%)||47 (35%)||139|
|PLAY’s Store Status – 08/02/2020||84 (61%)||53 (39%)||137|
|PLAY’s Store Status – 09/09/2020||89 (65%)||48 (35%)||137|
Table 1 demonstrates that the information from D&B’s locations page is almost 100% accurate. It also indicates that we can use this page to monitor the company’s progress in reopening its stores in the future. The first time I presented this information, readers questioned its reliability, which is understandable as it demonstrated that the company was behind schedule on reopening its stores. The only thing that recently occurred is that the locations page shows 139 stores, and the company’s financials show 137. I believe the reason behind this is because they permanently closed the Chicago and Houston Store.
Figure 1 – Evolution Of Store Reopenings
Source: Data from Dave & Buster’s Locations Page and compiled into this spreadsheet by the analyst and PLAY’s 1Q20 & 2Q20 Press Releases
I created figure 1 to demonstrate what probably occurred throughout the company’s evolution of the reopening of its stores. For the weeks that the company didn’t provide information (via locations page or press releases), I used the straight-line method to estimate their values. The CEO said in PLAY’s earnings call that they expect all stores to be open by the end of December and that New York and California would be the last stores to open.
Using the information from Figure 1, I was able to calculate that Dave & Buster’s had a weekly average of 45.6 stores open during the second quarter. The company’s total net revenue was $50.83 million, meaning that the average store revenue per week was 85,670. According to the company, they believe that they will be able to achieve a breakeven EBITDA at the enterprise level when store revenues reach 50% to 55% of Fiscal Year 2019’s levels. In 2019, total revenue was $1,354.7 million and $338.7 million quarterly. I used 52.5% (average of 50% to 55%) as my breakeven sales point and concluded that the company’s total quarterly sales must reach $177.8 million to achieve a breakeven enterprise EBITDA.
Figure 2 – Q3 2020 Revenue Estimates
Source: Company’s financials, press releases, and analysts estimates
According to my model, as demonstrated by Figure 2, I believe the PLAY’s total net revenue for Q3 2020 will be $111.7 million. I assume that average revenue per store per week will increase gradually throughout the quarter until eventually arriving at a level of 8% ($92,524) more than that experienced in Q2 2020. In 2019, the average comparable store revenue was $10.5 million or $201,923 weekly. Taking into consideration that capacity was reduced by 50%, the average weekly store revenue should be around $100,962 when operating at its new full capacity.
The company’s fourth-quarter has traditionally been the second-best quarter for revenue growth due to the holiday season (including sporting events). Taking into consideration seasonality and the assumption of a 5% increase in capacity utilization, I estimate that the company’s 4Q20 net revenue will be about $159.7 million, $18.3 million below the necessary revenue level to have a breakeven EBITDA at the Enterprise level.
I remain bearish on Dave & Buster’s as there is a low probability of the company being profitable until a COVID-19 vaccine is available for the general public. Depending on when a vaccine becomes available, a D&B store could be paying both deferred rent and current rent while still earning less than half their average revenue.
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Disclosure: I am/we are short PLAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Technically I am short PLAY because I am selling call options but I do not have an actual short position on the company.