Action: Buy here with a long-term PT of ~$28/sh for roughly 100% upside from 9/17/2020 closing price.

Investment thesis:

Dave & Buster’s (NASDAQ:PLAY) dropped around 26% on 9/17. The sudden drop in price should not necessarily be viewed as an increase in risk. In fact, after examining the most reasonable causes for the drop, the reaction appears to be unfounded and the resulting price more likely reduced risk, rather than increased risk, in a potential investment here.

Using conservatives estimates of growth and recovery, a reasonable price target for PLAY is around $28/share or nearly 100% upside from here.

A sensationally titled WSJ Pro article:

On 9/17/2020, WSJ Pro published a misleading article sensationally titled “Dave & Buster’s Warns of Bankruptcy if No Lender Deal Struck”. The article was part of WSJ Pro which coincidentally is not even accessible to normal WSJ subscribers, but instead only accessible to WSJ Pro subscribers. Furthermore, even if you were willing to buy a WSJ Pro subscription on the morning of the release to read the article, you would have needed to first get a demo with a live representative.

This left readers of the provocative title with no easy means of determining if the article provided details that backed up the headline. The news seems to have caused the stock to drop 13% down on the open, hit an intraday low of $13.01/share, and closed 26% down from the previous day.

The article itself rehashed disclosures made in the most recent earnings release and conference call without providing the context that was made in them. A boilerplate risk disclosure that many other travel, food, and airline companies have made about needing to renegotiate with lenders due to Covid-19 related covenant triggers. Instead, the article was posited as something company specific and worthy of highlighting in and of itself.

It’s best if you read the disclosure yourself:

Effective April 14, 2020, the Company negotiated an amendment to its existing credit facility, which included relief from compliance with financial covenants for the periods ended May 3, 2020, August 2, 2020 and November 1, 2020. During the financial covenant suspension period, the Company is required to maintain a minimum liquidity amount of $30,000. If the Company is not in compliance with financial covenants after the suspension period or some other event of default arises, the Company’s lenders could instruct the administrative agent under the existing credit facility to exercise remedies including declaring the principal of and accrued interest on all outstanding indebtedness due and payable, terminating all remaining commitments and obligations under the revolving credit facility and requiring the posting of cash collateral in respect of 103% of the outstanding letters of credit under the revolving credit facility. Additionally, the full amount due under the interest rate swap agreements would become due. Although the lenders under the existing credit facility may waive the default or forebear the exercise of remedies, they are not obligated to do so. Failure to obtain additional waivers would have a material adverse effect on the Company’s liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code to implement a restructuring plan.”

There is no reason given by the WSJ as to why covenants, which were waived during more uncertain Q1 times with all stores closed, will not be waived now even though most stores are open. Also, they don’t explore the various scenarios that don’t lead to filing bankruptcy including 1) bank simply extending the waiver, 2) bank renegotiating with a penalty or higher interest loans, 3) PLAY refinancing the loan with a different source (e.g. another bank or govt program, like the main street facility) 4) or supplementing with issuance of more equity as was done recently, etc.

Eventually, other media outlets picked up the story and the above boilerplate language about covenant violation risk was transformed into stories like “Dave & Buster’s eye bankruptcy” by Foxbusiness.com which added to the selling pressure.

Discussion on Same-Store Sales:

The revenue shortfall mentioned in the WSJ article “Second-quarter revenue fell 85%” is devoid of context and adds to the fear that bankruptcy may be near. Nothing could be further from the truth, in fact when we look at the full context and same-store sales (SSS) numbers, as presented in the earnings report and the earnings call, the improving trajectory is most reassuring. Here is the full detailed context:

• As of August 2, 2020, there are 137 stores, however, it’s not possible to have the same-store sales number for all of them since the 2019 base of comparable stores is only 115.
• For Q2 ending Aug 2nd, it’s true that revenue was down 85%, but that was when all stores, both open and closed ones, are considered for Q2. The Company reopened 1 store on April 30, had reopened 26 stores by the end of May, 66 stores by the end of June, and ended the second quarter with 84 reopened stores in 27 states. So a large portion of stores was closed and even the opened ones were not operating at full capacity. So, the more relevant number would be to look at SSS and look at them for the most recent week or two.
• We can take SSS numbers only among the 115 stores in the comparable database. For them, the SSS improved from 99% down at the beginning of the quarter to 87% down for the entire quarter. The trajectory is even better if we look inside the quarter with SSS down 78% for week ending Aug 2nd and down only 70% during the two-week period ending September 7th. Note this comparison is still unfair since it includes stores that are closed.
• The numbers improve further if we only look at SSS at the opened stores. Although 84 stores were opened by the end of 2nd quarter, the intersection with the 115 comparable stores was only 68 stores. So we can only report SSS numbers for these 68 “reopened comparable stores”. For them, in the two-week period ending September 7th, SSS was down 42%.
• Equivalently, they were reporting 58% of 2019 sales for “reopened comparable stores” for the two-week period ending September 7th which is quite remarkable and gives a completely different picture. We see a company recovering and on the mend as time elapses. The trajectory is exactly what we would hope for.

Liquidity:

Turning over to the balance sheet, Dave & Buster’s ended the quarter with $224 million which includes the $111 million raised from the equity offering in May. In the recent Q2 earnings call, Scott Bowman the CFO mentioned the cash burn rate to be $3.3M per week excluding the rent payments which Dave & Buster’s has successfully negotiated to defer.

In addition to this, it was stated that they expect to spend $60M in capex for fiscal 2020, of which they have already incurred $47M leaving $13M for the rest of the year. With $224M in cash minus $13M capex and a burn rate of $3.3M, they are able to survive ~64 weeks or ~16 months.

Also, let’s not forget CEO Brian Jenkins in Q2 earnings call mentioned that the majority of stores have started generating positive EBITDA with same-store sales at 58% as of Sept 6th and recent layoff of 1,300 employees reduces the cash burn rate by at least ~$500,000 a week (considering average pay $8/hr & 40hr/week).

And with no significant maturity payments until 2022, this gives Dave & Buster’s enough cash to survive until the vaccine is available and sales numbers are back to pre-virus.

Worst Case:

Let’s assume in the worst-case scenario, they are unable to defer rent for the rest of the year, this would mean an additional cash burn of ~$3.5M a week bringing the total burn rate to ~$7M a week. So, even if there was another lockdown due to which Dave & Buster’s is completely shut down, with liquidity of $224 million minus $13M in capex, they still would have enough cash on hand to survive 30 weeks ($211M/7M) or approx. 7 months.

Valuation and forecast:

Dave & Buster’s net revenues were at $210M for the 6-month period ending in July. Taking a conservative approach for the rest of the fiscal year to be at 40% of 2019 based on the latest information from Q2, this would mean the total revenue for fiscal year 2020 can be projected ~ 70% down from 2019.

Assuming that customers continue their caution in attending stores, a conservative scenario for future growth to be 60% of 2019 sales for 2021, 90% of 2019 sales for 2022, and back to pre-virus numbers in 2023, a terminal growth of 4% and a discount rate of 10%, we get a price target of $28. Even with such low projections Dave & Buster’s seems to be relatively undervalued.

Conclusion:

After examining the events that led to the price drop on 9/17/2020, it appears the most probable cause was the WSJ article. The story did not disclose any previously known information and presented PLAY’s routine boilerplate warnings about remote scenarios as if they were discussing upcoming likely scenarios of negotiating waivers on loan covenants.

On the contrary, if we look at the same-store sales trajectory, we see a company recovering and on the mend as time is elapsing. The trajectory is exactly what we would hope for. Using conservative long-term revenue projections, we get a dcf value of $28 per share and a 100% upside to the closing price on September 17th, 2020.

Disclosure: I am/we are long PLAY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.