Beleaguered Dave & Buster's Entertainment (NASDAQ:PLAY) stock has dropped over 70% year to date, down in the dumps and seemingly banished there for good as the entertainment venue, sports bar, and restaurant concept remains temporarily closed. The lockdowns intended to slow the spread of the COVID-19 pandemic have brought on financial ruin for many businesses in the restaurant and entertainment industries, but as I discussed last month, D&B was especially at risk with a rising burden of debt, dwindling cash, and profit margins headed in the wrong direction leading up to the crisis.
Things are improving for the better, though, right? The economy is beginning to open back up, which could mean D&B may be able to start generating some revenue again. And in the meantime, the company just finalized a fresh capital raise through the sale of 9.58 million new shares that infused it with $110 million in cash. Shares outstanding totaled 31.2 million at the end of the company's fiscal year 2019, so existing shareholders just experienced significant dilution of their stake in the company. But liquidity was an immediate need. Management had previously reported it had about $100 million in cash at the end of March after fully drawing down its line of credit, but even with stores closed, that only left it with months to go before bust.
Fresh cash buys D&B some more desperately needed time, but it's still far from a low-risk rebound bet. Investors looking to capitalize on the world eventually returning to normal -- whatever that may look like -- might give pause before jumping on this stock.
An uncertain world post-pandemic
Dave & Buster's said it will be using the proceeds from the equity sale to bolster its balance sheet, which should help it navigate the next few months as it plans an eventual reopening of stores. However, putting a plan in place to resume operations is only the opening battle.
Once the green light goes on, small entertainment venues are likely to face an uphill fight. That's especially the case for this arcade operator. The fact is, consumers' eagerness to return to an indoor facility and play games that countless others have been touching is an unknown. There's also the question of just how many will have the budget to spend at their local arcade and sports bar (if sports are even on at that point). There's also competition that could be a factor, not the least being other restaurants chomping at the bit to fire up again. Over half of D&B's sales in the final quarter of 2019 came from the entertainment side of the business. But with so many consumers stuck at home the last two months, video games have surged in popularity. It's unclear how many will quickly ditch the new consoles and games and head to an arcade.
Of course, the counterargument is that many households have pent up energy in need of burning off once restrictions preventing them from doing so are eased. And there are signs that many are more than ready for some out-of-home entertainment and vacationing -- if Royal Caribbean's first quarter 2020 scorecard is any indication. I suspect the ultimate traffic D&B gets will depend on the region -- with those cities hardest hit by the virus itself and the ensuing lockdown set to do poorly. But a quick rebound across the board for all stores? I'm just not so sure.
Flush with new cash and new debt, too
Getting back to the infusion of liquidity, therein lie other problems. D&B revealed that it had just $24.7 million in cash and equivalents and $648 million in debt at the end of fiscal 2019. It raised cash up to $100 million by the end of March through its line of credit, but that likely means that debt has increased an equal amount and will surpass $700 million -- which means higher interest payments. All the while, money keeps exiting the balance sheet to keep the company on life support.
So, though an additional $110 million was just raised, it would not be surprising to see the total cash balance well below $200 million when the first quarter of 2020 is reported. When stores do begin to open again, that liquidity may not last long. This figure assumes D&B will be running at full capacity, but full-year 2019 operating expenses (less non-cash depreciation and amortization) came out to $1.07 billion.
All of this is to say Dave & Buster's Entertainment is far from being out of the woods. This could be a long-term rebound story -- given enough time to reverse the psychological impact the pandemic and economic scrimping has made on the collective consumer consciousness. But the recent capital raise via equity may ultimately not be enough, leaving the company looking for more help in another few months if guest traffic doesn't lead to a quick profit. I'm still sitting on my hands.