The pullback may never come. From TheStreet.com:
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Time to Dine on Dave & Buster's? A Case Study
By James Brookes-Avey
Special to TheStreet.com
9/9/00 10:00 AM ET
Usually when I write a case study for the TheStreet.com, I chronicle from start to
finish an investment in my firm's "Best Undervalued Growth Stock" (or BUGS)
portfolio. I thought this time readers might like to judge an investment for
themselves while the story is still unfolding -- a BUGS saga whose last chapter
has yet to be written.
As chief investment officer of a small investment advisory firm, I study scores of
such works-in-progress, potential BUGS, all the time -- some more promising
than others. Not all will eventually go on to become full-fledged BUGS, earning a
place in our model portfolio. Some may rebound or get bought out before our
algorithm finally flashes buy. Here's a potential BUGS pick we've been tracking
for a long time but have yet to take a position in. What do you think of its
prospects?
Just over a year ago, shares of Dallas, Texas-based Dave & Buster's
(DAB:NYSE - news), a chain of large, upscale restaurant and entertainment
complexes, crashed. On the last lazy Friday in August 1999, D&B shares
plunged from $24.88 to $13.75 (some 45%) following an earnings warning.
Management announced a 2.2% decline in same-store sales (brought on by
weak performance at the company's three Southern California restaurants and
unusually mild weather) would result in second-quarter earnings per share of
between 14 cents and 16 cents, far short of the 28 cents analysts were
expecting. Even worse, this would be below the 21 cents D&B earned in the
same period during the previous year.
Until the selling climax, Dave & Buster's had been a notable success story.
Since its founding in 1982 by co-CEOs David Corriveau and James "Buster"
Corley, the company's mix of casual food, drinks and a dizzying array of games
for adults (pocket billiards, shuffleboard, virtual reality and carnival-style tests of
skill) was a hit with fun-starved yuppies. Led by Montgomery Securities, Dave
& Buster's went public in June 1995, split three for two in 1997 and moved onto
the New York Stock Exchange two years later. Along the way, D&B shares
had prospered, buttressed by impressive three-year compound annual growth
rates ranging from 45% to 51%.
Now, though, there was finger-pointing, investor skepticism and the raised
specter of another good-idea eatery gone bad, like Boston Chicken or Planet
Hollywood. The company moved swiftly to allay such fears, dismissing general
managers at its Ontario, Irvine and Orange County, Calif., restaurants, as well as
the manager of that region. The number of new store openings planned for the
year was cut, from eight to four.
Watching and Waiting
Impressed by management's commitment and the strength of its past earnings
momentum, we added D&B shares to our watch list of potential BUGS to track,
resisting the Pavlovian response to buy on the first dip. Such caution was
merited. The other shoe dropped on Dave & Buster's just 15 weeks later, in
December 1999, when upon delivering another earnings disappointment, D&B
shares further collapsed from $9 to $5.81 (or another 35%). Earnings per share
came in at just 2 cents, not the already-reduced target of 18 cents Wall Street
was expecting.
In the spring months that followed, management apparently began to turn things
around. We reread the annual report and listened to the occasional conference
call, posing some useful (we hoped) questions for the co-founders' response. A
number of actions gave existing shareholders hope: Store operations were
improved; insiders bought shares; radio and TV advertising began to support
word-of-mouth, and a $110 million revolving credit facility was established with
FleetBoston Financial to refinance the company's debt.
We continued to bide our time, ignoring the rise in D&B shares in March and
April, which we felt was premature. D&B's relative strength (as measured by
Investor's Business Daily) remained stubbornly low. Finally though, after four
disappointing quarters, the company at last delivered some undeniably good
news. For the second quarter ending July 30, 2000, revenues rose 35% and
earnings per share of 17 cents beat estimates by a penny. On rising trading
volumes, D&B shares immediately jumped above their 50-day moving average.
The Case for D&B
So, is now the time to finally jump into Dave & Buster's and ride its rebound?
Perhaps. On the plus side, this potential BUGS at no time ever actually lost
money during its turnaround phase. Earnings, albeit greatly reduced, continued
to pile in as the turnaround unfolded, a hallmark of a good BUGS pick. Overseas
licensing agreements have added to the total market opportunity. New games
have refreshed the customer experience. Selling today for around $8.13, D&B
shares are still just 70% of their 52-week high. They come with a
price-to-earnings ratio of 12, a PEG of 0.33 and trade at just 3.5 times cash flow.
On the negative side, the debt remains -- some $98.8 million. Not a huge
amount, and one probably easily handled by D&B's positive cash flows. Yet the
best BUGS are those depressed-price companies whose balance sheets are
awash with cash and have little or no long-term debt and thick after-tax profit
margins.
To reiterate, our firm's BUGS model portfolio has no position in Dave & Buster's
at this time, yet clearly it is on our radar screen. (Our model portfolios are
managed accounts in which we invest our clients' money. Any difference in our
clients' account starting dates can produce materially different results for different
clients.) A full year of dead-money time has now elapsed. As a budding BUGS
hunter yourself, what would you do now? Take the plunge, or wait for a better
opportunity to come along?
Dave & Buster's next quarter's comparisons should be extremely favorable (an
estimated 15 cents vs. just 2 cents for last year's third quarter). Will this be
enough to jolt D&B shares decisively back toward the $20 price range and
perhaps beyond? Have the valuations become so compelling that fund managers
would be remiss not to open positions? Will Greenspan's earlier hiking of interest
rates serve to cool off the economy in what has traditionally been Dave &
Buster's strongest season? Or are its margins too thin to stage any lasting
recovery? |
