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Why Dave & Buster's Stock Plunged 22% Today

What happened

Shares of Dave & Buster's Entertainment (NASDAQ: PLAY), which owns dining and entertainment centers, fell dramatically on Thursday, declining as much as 22% in the first half of the trading day. A news article from a major financial publication drove the decline, but it's really the big picture that's the problem.

So what

At one point in time, before the global pandemic, Dave & Buster's business model of mixing food and entertainment, in the form of video games, was seen as a plus. The internet couldn't replace the full experience that the company offered patrons.

But when COVID-19 led to the shuttering of nonessential businesses, Dave & Buster's sales came to a virtual halt. Even though the company has started to reopen its restaurants, the lingering impact from the coronavirus is still a major headwind. Simply put, customers are leery of going into a group setting where everyone is touching the same games. It's an understandable fear, but it puts the entire Dave & Buster's concept into question.  

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If that were the only headwind Dave & Buster's is dealing with, it would be bad, but not terrible. Unfortunately, the company's balance sheet is also heavily leveraged with a debt-to-equity ratio of roughly three times at the end of the second quarter. Weathering the current storm will be difficult and, it seems, it is getting to the point where it may be impossible. The company is set to lay off staff as it works with lenders to adjust debt terms, according to The Wall Street Journal. If Dave & Buster's cannot come to terms with its lenders, there's a high likelihood that it could end up filing for bankruptcy. Not surprisingly, investors sold the stock on that news.  

Now what

The financial impact of COVID-19 has been far-reaching and, in many cases, extreme. Dave & Buster's is just another name in a long list of companies that are having difficulty handling the changes that the illness has caused in the business environment. At this point, long-term investors should probably pass on Dave & Buster's. There's a very real risk that it won't be able to muddle through this downturn without seeking court protections.

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Reuben Gregg Brewer 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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