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Why Dave & Buster's Entertainment Is a Winning Play

By Motley Fool Staff – Apr 5, 2017 at 11:52AM

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Shares have doubled in the past two years, and even with a conservative forecast, the business model is a cash cow.

In this segment from Motley Fool Money, Chris Hill recruits Simon Erickson and Jeff Fischer to explain the enviable business model that Dave & Buster's (PLAY 1.27%) has managed to create. With high margins and a short runway to profitability for each new location, the stock seems poised to continue its impressive run. But will a potential recession in the coming years put a damper on results?

A full transcript follows the video.

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This video was recorded on March 31, 2017.

Chris Hill: Over the past few years, shares of Dave & Buster's have doubled. Fourth quarter profits came in higher than expected this week, but Simon, the company is lowering expectations for 2017, and probably not a bad idea, when you look at what a pretty nice run they've had the last couple years.

Simon Erickson: Jeff, this is a company that's really gaming the system -- I really like the way that our producer, Mac Greer, described this -- this is kind of a casino. They're printing money right now. They have Amusements, that's about 53% of revenue. These are the games that have really high margins after you put them into the stores. Of course, food and beverages is the other half of the business, and of course, people that are older, that are able to drink high margin ticket items is working for them, too. Chris, the story for me at Dave & Buster's is the unit economics of the new stores they're building out. They now have a total of 92 stores, and they're opening about 11 or 12 a year. But the cash on cash return, which means, if you took the EBITDA that they're making the first year, divide it by the development costs of the stores, it's at 52% right now. That's fantastic, that means they're paying off all of their development costs in 20 months, and that's an excellent business proposition for anyone who wants to buy shares.

Hill: See, my concern with a company like Dave & Buster's is that it really does seem like such a discretionary spending type of business. We've been in an economic boom here in the U.S. for a bunch of years, and at some point, when the next recession hits, it seems like Dave & Buster's is going to be among the first businesses to be hit.

Erickson: Yeah, that's right. They're kind of targeting their cash on cash returns of about 35%. When you see that management is expecting that to be about 17% lower than what they're getting, you're definitely getting the consumers that have discretionary income right now. We might see that contract a little bit in the next couple of years if we have a recession.

Jeff Fischer: Yeah, it's almost like a casino in that regard. It's not where you're going to go when times are tough. That said, I wonder how much the maintenance is going to be in the locations, to keep the games up to date. Any thoughts on that?

Erickson: To be determined. I think a lot of it is the upfront costs they're putting in there, and they're still getting 52% on them. Very high margin.

Chris Hill has no position in any stocks mentioned. Jeff Fischer has no position in any stocks mentioned. Simon Erickson has no position in any stocks mentioned. The Motley Fool recommends Dave and Buster's Entertainment. The Motley Fool has a disclosure policy.

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