Markets

Is Dave & Buster's a Buy on the Pullback?

Shares of Dave & Buster's Entertainment (NASDAQ: PLAY) are trading about 9% lower after reporting fiscal second-quarter revenue that was below consensus expectations. The company's top line was down 85% year over year as a result of store closures from COVID-19. While much of the store fleet has reopened, Dave & Buster's faces a number of headwinds that still stand in the way of its recovery.

Dave & Buster's venue

Image source: Dave & Buster's.

Geographic concentration will hurt revenue

Dave & Buster's forecasts that its remaining stores will reopen before the end of December, assuming there are no additional delays from the pandemic. Reopenings have happened in phases with 26 stores open at the end of May, 66 at the end of June, and 89 as of Sept. 9. Due to the store closures, comparable-store sales fell 87% year over year during the quarter.

Management expects the locations in California and New York to be the last to reopen. There are 27 stores in those two states, comprising about 20% of the total. However, those stores also traditionally made up about a quarter of revenue, and several of the consumer discretionary company's most profitable locations are in those markets.

New York City currently has strict rules around restaurant operations -- indoor capacity is capped at 25% maximum occupancy, and customers are required to have their temperatures taken prior to dining. Seating and service at bars is prohibited, while seating at tables is capped at 10 people.

And as of September, only some counties in California have resumed indoor dining at restaurants. The counties where restaurants are open are subject to strict capacity limitations as well. California Restaurant Association President Jot Condie spoke of challenges for the industry there: "Restaurants in every corner of the state are on life support right now. Every day that passes with a dining room closed, a restaurant owner is more likely to shut the doors permanently."

Capacity restrictions will hinder growth

Given that many states may continue to restrict capacity levels and limit large gatherings, Dave & Buster's may not return to growth until fiscal 2021 or later. Fewer customers mean fewer purchases of food and beverages, and amusement revenue (about 58.4% of total revenue for the fiscal year ended Feb. 2020) will remain depressed too. The company's reopened stores are only offering a condensed menu and reduced hours. Seating and gaming have been reorganized to maintain social distancing.

Dave & Buster's 68 reopened stores saw a 42% comparable-sales drop for the two-week period ended Sept. 7. Historically, Dave & Buster's has seen higher revenue during the year-end holiday season, but there's likely to be a shortfall in 2020 with fewer large gatherings.

The company is taking measures to preserve cash

Dave & Buster's is taking measures to maintain a healthy balance sheet, including deferring a portion of rent expenses through December. The deferrals will be paid back over twelve to eighteen months after December. The company ended the second quarter with $224 million in cash, including the capital raised from May's equity offering, but its debt burden has nearly doubled in the past year to $732 million, leaving the company with another potential hindrance to its eventual recovery.

Like the broader restaurant industry, Dave & Buster's is facing both near-term and mid-term headwinds, the resolution of which are out of the company's control. Until there is more certainty around the pandemic and the current economic malaise, investors should be wary of this volatile stock.

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Pearl Wang has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Busters Entertainment. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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