Dueling Fools

Dueling Fools

Dave & Busted
Bull Argument

By Rick Aristotle Munarriz (TMF Edible)
October 6, 1999

I'm a fan of Dave & Buster's. No doubt about it. There is something enchanting about taking in an excellent meal or playing a high-tech video game knowing full well that there is a bouncer at the door keeping token-toting teens outside. I don't want to sound elitist but, c'mon, I've paid my dues, I'm a hardworking adult now. Why should I only be relegated to ear-popping dance clubs or canasta tournaments if I want to cut loose among fellow grown-ups?

For those who have made it to a Dave & Buster's, you probably understand where I'm coming from. It's as close to nirvana as a 50,000-square-foot box can house. Billiards? Sure. Motion simulators? Hop on. Catch the big game at the mahogany bar? Pick your poison. Elegance meets decadence and the giddy patrons know they are being treated to something special.

That is why the company has lasted so long and has fared so well. Closing in on 20 years, almost old enough to gain after-hours admission itself, Dave & Buster's is not a fly-by-night eatertainment showcase. However, it wasn't until 1995, when mall retailer Edison Brothers spun off the chain, that the company was finally afforded a chance to expand ambitiously. So, if you haven't had a D&B experience -- fret not, one will open near you eventually.

D&B has long been the envy of the restaurant industry. Then again, when you derive just 30% of your sales from food with the majority coming from high-margin diversions, you are setting yourself apart from the crowd in a hurry. Think about it. While video games and shuffleboard tables might cost a bit upfront, it's mostly gravy after that. The quarters pile up on the Asteroids machine with very little overhead.

Did I say quarters? D&B now uses debit-based Power Cards. Prepay for your plastic and then just swipe the night away. If you run out of virtual tokens you can always recharge your card. It's a great concept. You don't need to fumble for tokens or head into the dining area with your pockets jingling.

Did I say Asteroids? D&B stocks some sensational video games that your neighborhood mall arcade simply can't afford. The quality of the billiard tables? Ditto. Only the larger competitors, like Gameworks, have the financial muscle and unit economics available to justify these interactive magnets.

Did I say competitors? D&B is in its own zone. You won't find too many leisure havens packed with suits for executive lunches or actual crowds on weekday nights anywhere else. D&B aimed well. Rather than gun for the teenager with a $10 bill in his wallet it's going for adults with plastic disposable income.

As lucrative as the niche may be, don't expect upstarts to be hitting the pike anytime soon. The company's brand awareness has helped erect a pretty large barrier to entry. Any wannabe that tries to ape D&B will be dismissed as a knockoff. It's a cozy position for D&B to be in -- a prized tenant with landlords providing sweetheart lease deals and risk-free yet royalty-rich global franchise deals being penned as we speak.

But this lovefest wouldn't be complete, and Bill's pending bearish case might actually stick, if I didn't touch on the stock's steep decline last month. The market was brutal, cutting D&B in half, all because the company announced a soft summer season.

I'd be curious to find out why Bill thinks the plunge was fair. It stinks of overreaction in my eyes and it's easy to see why. Planet Hollywood filed for bankruptcy. Planet was a unique case in the themed restaurant industry. Chains like Dave & Buster's and Hard Rock Cafe have been around, running profitably, for decades. Yet along comes Planet Hollywood, crashing the party with double-digit same-store sales slumps and widening deficits, and Wall Street assumes all high-volume eateries are serving up charbroiled fundamentals.

So D&B stumbles, with comps falling a scant 2%, and folks begin asking if Bruce Willis and Sylvester Stallone are D&B shareholders too. Sales still rose 42% and the temporary margin erosion spared respectable profitability.

By the end of next year there will be more than 30 D&Bs worldwide. Germany will join the United Kingdom as international franchisees. The portability of D&B's excitement apparently is seaworthy enough to cross the Atlantic and then some. Even after tumbling over themselves to revise estimates lower, analysts expect D&B to earn $1.46 next year.

Don't let a hiccup blur reality. D&B is a growth company being served in a value bowl. Eat up! You too, Bill.

Next: The Bear Argument