Description

Overview

Dave & Buster's Entertainment, Inc. (NasdaqGS:PLAY, “D&B” or the “Company”) is a long. D&B is a leading owner and operator of ~200 stores that offer a combination of interactive games, television viewing areas, and full-service dining. Founded in 1982, the Company is headquartered in Coppell, Texas and completed an IPO in 2014. The business had FY2021A revenue and Adj. EBITDA of $1.3bn and $352mm (27% margin), respectively, with ~30% of gross profit from food & beverage and ~70% from amusement. Stores average 45k square feet (ranging in size between 16k-70k square feet) and have an average unit volume of ~$10mm.

D&B is an attractive opportunity as the Company is a market leader in the “eatertainment” space, with strong brand equity and broad customer appeal, stable base of existing stores with high operating margins and cash flow, strong history of organic growth and compelling new store expansion opportunity. Our investment thesis is further bolstered by the recent acquisition of Main Event, which increased the Company’s scale and broadened its customer base from primarily young adults to include families.

With the closing of the Main Event acquisition, the pro forma business is projected to generate 2023E revenue of $2.3bn and EBITDA of $532mm (23% margin) and is currently trading at a 2023E EBITDA multiple of 5.3x. PLAY’s stock has been volatile this year and is currently trading at $35.44, which is 33% below its 52-week high of $52.54. We believe the stock’s fair value is $50 (6.6x 2023E EBITDA), representing ~40% upside.

Investment Merits

D&B is a leading owner of dining and entertainment stores with strong brand equity and broad customer appeal, with ~18% share (pre-Main Event acquisition) of the ~$9bn NAM family entertainment center market. The Company has a 40-year operating history with presence in over 40 states, which reduces exposure to regional/state trends. The business is an attractive hybrid of casual dining, television/sports viewing and amusement.

While operating in a competitive industry, D&B has moderate barriers to entry from (i) brand equity / customer awareness, (ii) new store capital requirements ($5mm+), (iii) operational requirements and know-how to effectively offer “eat drink play and watch” under one roof and (iv) scale and nationwide footprint enables cost-efficient national marketing unavailable to smaller players.

The Company has a stable base of existing stores with high operating margins and cash flow. Excluding Covid impact, the existing store base has demonstrated relatively stable SSS performance, with store-level EBITDA margins and Adj. EBITDA margins consistently 25%+ and 20%+, respectively, over the past decade. In addition, D&B’s relatively low maintenance capex and negative NWC results in high cash flow.

D&B has a strong history of organic growth (FY13-19A store count CAGR of 13%) and a compelling new store expansion opportunity. There’s an opportunity to further penetrate NAM market (60% penetrated today) with upside through potential international expansion. New stores have attractive unlevered pre-tax cash on cash returns of 20%+.

Unlike restaurant peers, the Company has limited food & beverage cost inflation risk given (i) high food & beverage gross margin of 73% and (ii) ~70% of total gross profit is from amusement.

Valuation

Our valuation target of 6.6x 2023E EBITDA is a ~3x discount to PLAY’s average LTM EBITDA multiple of 9.8x from 2014 to February 2020 (i.e., pre-Covid). D&B trades like a restaurant despite having the majority of its profits from amusement, which is a higher margin and more differentiated business. We think on a SOTP basis, D&B is a compelling buy given we believe the stock should trade more in line with its amusement peers who typically trade at a premium to restaurant peers. In addition, the Company has been owned by private equity in the past and we believe the current valuation could be attractive for a take-private. Prior sponsor ownership has included (i) Wellspring, who took the business private in 2006 for a TEV of $375mm and (ii) Oak Hill, who bought D&B from Wellspring in 2010 for a TEV of $570mm (~7.5x LTM EBITDA) and subsequently took the business public in 2014.

Risks

D&B operates in a highly competitive industry with significant substitution offerings (e.g., restaurants, bars, amusement centers). That said, Dave & Busters has strong brand equity and its “eat drink play and watch” multi-faceted offering cannot be easily replicated at home or elsewhere without having to visit multiple destinations. In addition, there are few direct competitive offerings of scale within the family entertainment center space.

The current environment of high inflation and rising interest rates could result in an economic recession. As a mitigant, D&B had relatively stable performance during the global financial crisis, demonstrating recession resilience.

A large percentage of the Company’s cost structure is fixed (e.g., labor and store leases). Due to store closures during Covid, in FY20 sales and gross profit declined ~70% while Adj. EBITDA declined ~125% from ~$310mm to ~$(80)mm. However, except for Covid, the business has demonstrated a resilient top-line and many of the Company’s leases include a variable component tied to revenue.

Catalyst

Upcoming earnings releases, time