While March 2020 was an unhappy month for everyone, investor or not -- some are hurting from the coronavirus more than others. In the business world, employees and stakeholders in Dave & Buster's Entertainment (NASDAQ:PLAY) are one such example. In response to the pandemic and shelter-in-place orders all over the country, the company closed its 137 locations on March 20, furloughed over 15,000 hourly workers, and reduced its management and corporate headcount by nearly 90%. Senior leadership took a 50% pay cut too.  

Neither have shareholders been exempt. Dave & Buster's stock is down 71% year to date as of this writing, compounding the 10% decline in 2019 even as the broad market rallied nearly 30%. The situation isn't too surprising as Dave & Buster's sits at the crossroads between some of the hardest hit industries: restaurants, sports, and entertainment. And when the company is able to reopen its doors, it will be an uphill battle getting customers to return with lingering fears of the outbreak, and it's still unclear when major sporting events will resume. Plus, the restaurant side of the business was never its strong suit. This is more than just a cash crunch but a fight for survival. 

A digital board displaying stock prices in green and red.

Image source: Getty Images.

The problem with more stores

To underscore the dire situation, Dave & Buster's performance was lackluster before the COVID-19 breakout occurred. Sure, revenue and earnings were rising, but that was thanks to new store openings. As with many other corners of the restaurant industry, opening new locations was being prioritized at the expense of profit margins. As I've discussed many times before, foot traffic at the average U.S. restaurant has been in decline for years, cannibalized by new real estate opening faster than existing stores could be filled. Dave & Buster's wasn't the cause of the problem, but it was contributing to it, and long-term declines in traffic were never going to end well.

To illustrate the situation, the company opened 16 new stores in fiscal 2019, a 12% increase in total unit count. However, revenue only increased 7%, and earnings before interest, tax, depreciation, and amortization (EBITDA) grew less than 1%. As a percentage of sales, the EBITDA margin fell to 20.7% compared with 22.1% in the year prior. In fiscal 2017, EBITDA margin was 23.6%, and in 2016, it was 23.8%.

The problem is that, while new stores add new sales to the mix, ignoring issues at the existing store base has meant comparable sales (a combination of foot traffic and average guest spending) have been in decline. And when sales at existing stores continue to fall, profitability per location also falls -- not exactly a great long-term trend.

Period

Amusement and Other
Comparable-Store Sales

Food and Beverage
Comparable-Store Sales

Combined
Comparable-Store Sales

2017

2.1%

(4.6%)

(0.9%)

2018

(0.1%)

(3.5%)

(1.6%)

2019

(1.6%)

(4.1%)

(2.6%)

Data source: Dave & Buster's Entertainment.

Dave & Buster's was swimming naked

That brings us to the current situation, during which Dave & Buster's has zero revenue. To be fair, no one knew a global pandemic was coming, and few could have predicted an unprecedented shutdown of the economy was on the way. And one individual company can't control the bad behavior of an entire industry (i.e., restaurant over-expansion). However, unprecedented "black swan" events happen. It's not possible to predict exactly when and what will happen, but being prepared is possible.

It's now clear Dave & Buster's wasn't prepared at all. As the company grew its store count, it also grew its debt balance ($658 million at the end of fiscal 2019, compared with $366 million at the end of fiscal 2017). Rather than simultaneously increase cash reserves in tandem with the new debt, management spent money on share repurchases and store upgrades that haven't paid off. That may be a vote of confidence from leadership in the company's future prospects, but it has left the company in a real pickle. Total current assets were $95 million at 2017 year-end, compared with just $79 million at the end of 2019.

Management reported it drew down the full amount of its revolving credit line and had $100 million in cash at the end of March. Though expenses have been slashed, the company still has only a few months left before it runs out of cash. The company now plans to sell $75 million in new stock to raise more liquidity and buy itself time. Based on the current market cap of $360 million, the new equity raise would dilute current shareholders by over 20%.

And of course, remember that these actions only keep Dave & Buster's barely hanging on for the time being. Once stores reopen, the company will still need to navigate a post-pandemic world, one in which consumer behavior is likely to have been altered -- at least for a while, if not permanently. This restaurant and entertainment company is at serious risk of becoming a casualty to the coronavirus market meltdown.