Dave and Buster Entertainment Today
Dave and Buster Entertainment
(As of 12/13/2024 ET)
- 52 week range
- $25.00
▼
$69.82
- P/E ratio
- 13.60
- Price target
- $53.38
After years of struggling to gain traction, Dave & Buster’s Nasdaq: Play He has the opportunity to revitalize the business with a new CEO. The sudden departure of former CEO Chris Morris casts a cloud over the outlook and increases uncertainty about execution, but a good pick could put an end to that. The board says it has been looking for a successor, so it may take a long time to find the right person. The company is in good financial standing and can generate profits. The only question is how long it will take to convert the ship.
Dave and Buster struggle with headwinds in the third quarter
Dave & Buster’s business experienced several headwinds in the third quarter, including economic and consumer conditions, significant calendar and weather mismatches and the impact of redesign efforts. The bottom line is that revenues declined 3% year-over-year despite increasing store count, weak consensus performance, and shrinking margins. The revenue weakness was driven by a negative 7.7% adjusted for the calendar change, as traffic and tickets were impacted. The bad news is obvious, but there’s a bright side: Redesign efforts continue to produce results at completed sites. These sites resonate with consumers and outperform outdated layouts.
Margin news is the worst in the report. The company’s margin has contracted due to costs, investments and deleveraging, and is not expected to bounce back quickly. Adjusted EBITDA margin contracted by 240 basis points to 15.1%, sending the dollar down 16%. GAAP losses widened, and adjusted profitability proved elusive, resulting in negative cash flow for the quarter. The result is that many of the items impacting margin, including consumer and redesign headwinds, are expected to have a diminishing impact in future quarters, resulting in improved cash flow and leverage.
The company failed to provide specific guidance but provided enough detail for an upbeat business outlook. Q4 sales may be lower than pre-release forecasts but should show significant sequential growth. Strength will be driven by seasonal trends and supported by a rebounding events business, improving customer satisfaction, new stores and remodeling. The company is on track with its redesign efforts, demonstrating its ability to execute, and the number of stores increased by three during the quarter. The company plans to complete at least 40 remodels by the end of the year, and the number of stores will continue to grow.
Dave and Buster buybacks are at risk
Dave & Buster’s continued to repurchase shares in the third quarter, cutting the number by more than 5% year over year, and will likely continue to repurchase shares. However, as the company struggles to gain traction and negative cash flow, the pace may slow, or buybacks may be paused until cash flow improves. As it stands, the company’s total net leverage ratio is within the target range at 2.6x but is relatively high in relation to equity at over 6x, so there is cause for concern. The company refinanced some debt during the quarter, which helped, but it can only keep its balance sheet healthy for so long while burning capital.
Analysts were not impressed by the news, and issued several revisions, including several rating downgrades and further price target cuts. The result is that analysts have lowered their sentiment towards Hold, and the consensus price target fell by more than 10% overnight. Consensus indicates significant upside, around 80%, with shares hitting long-term lows, but reviews are lower and suggest this stock is a good value with little room for upside.
Dave and Buster hit rock bottom, but will they bounce back?
Dave & Buster’s stock price plummeted after its third-quarter release, falling more than 15%, fueled by short selling. Short interest was high ahead of the release at 16% and is likely to be higher now. The question is whether the market can fall further, and the answer is yes. The price action is at an important support target but is not showing signs of a rebound yet. The market could fall below support in this scenario and likely confirm it as resistance soon after. This would signal a complete reversal in the market, which could lead to a sustained downtrend and selling to much lower levels. If the market confirms support near $30.50, it will likely continue to move sideways as it has done in the past few years.
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