Is it still a good time to invest?

Dave & Buster’s NASDAQ: PLAY Investors can rejoice in the CQ1 results because they confirm a story that has been told over the years. The company has focused on growth, revenue quality, profitability and capital returns, but has failed to increase its stock price. Now, the company is in rally mode, aided by activist investors with a track record of success. The stock is up nearly 100% since the start of the rally, including a 5% post-release gain that confirms a bullish technical outlook

Dave & Buster’s weekly price action chart shows a clear, almost textbook rally with a consolidation of the bull flag pattern. The 5% price surge confirms the pattern and suggests that the rally will continue and could double from here on. In that scenario, this stock could rise to $120 to $125 over time, and any price decline that occurs along the way likely represents a buying opportunity.

Dave & Buster’s long-term goals are strengthened

Dave & Buster’s reported a strong quarter despite revenue and earnings falling short of consensus. Results are better than feared due to the impact of weather conditions, which were estimated to impact results that would be materially better. Regardless, the company reported net revenue of $599.1 million, a 6.3% increase over last year. The gains are mainly due to the extra week and the new stores; comp sales fell 7% year over year.

Margin news is solid. The company expanded margin across the board, despite the deleveraging effect of weak comps and the cost of new store openings and renovations. Restaurant-level operating margin increased by 80 basis points and operating margin by 130 basis points, resulting in a 1,000 basis point improvement in GAAP net income and a 21% increase in adjusted earnings.

The company did not provide specific guidance for 2024, but provided enough bullish commentary to affirm the prospects for robust EBITDA growth over time. CEO Chris Morris described 2024 as a transformational year for the company due to the expected accelerated store count, burgeoning international expansion and accelerating renovations. In his words, the company’s resolve to reach an EBITDA of $1 billion is strengthened.

The company plans to open nineteen new stores within twelve to eighteen months, four of which will be in overseas markets. Refurbishment tests that began last year were successful, and the new format will begin rolling out system-wide this year.

Dave & Buster’s cash flow and returns on capital add value

Dave & Buster’s efforts to improve cash flow include the balance sheet and debt. The company has little debt with a net debt-to-EBITDA ratio of 2.2X versus the 3.5X allowed under agreements, and carrying costs are declining. The company has worked to narrow its reach and reduce costs by an estimated $50 million per year.

The result of operations and cash flow management is the ability to aggressively repurchase shares. The company repurchased $300 million or 8.5 million shares in F2023, reducing its share count by 17.5%. As the board approved an additional $100 million in repurchases, bringing the total allowable to $200 million, aggressive repurchases are expected to continue.

Dave & Buster’s is a multiple price expansion game

Dave & Buster’s is a high-value restaurant compared to others, but it still has plenty of room to maneuver given its valuation compared to market leaders. Market leading restaurant games include Texas Roadhouse NASDAQ:TXRH AND Darden Restaurants NYSE:DRI, which trade at significantly higher multiples. Darden is four handles above Dave & Buster’s 15X and Texas Roadhouse is nearly double that. The bottom line is that PLAY is a desirable stock and will become more desirable as the quarter progresses – capital will flow into the market and it should continue to support higher stock prices.

The market for PLAY rose more than 6% in early pre-market trading and above critical resistance. The move to a new high is bullish and the momentum should carry the market higher, but there is a risk. If the market fails to sustain the new highs, it could remain range-bound at current levels. As good as the outlook is, economic uncertainty still clouds the outlook and could prevent prices from rising until the end of the year.

Before you consider Dave & Buster’s Entertainment, you’ll want to hear this.

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