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Why Investors Should Get Some Play from Dave & Buster's Stock

By Will Healy – Jun 28, 2020 at 11:16AM

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Revenue can bounce back once COVID-19 becomes less of a factor.

Dave & Buster's (PLAY -0.03%) stock became one of many victims of the COVID-19 pandemic. The forced closures of its entertainment venues sent the stock plunging to single-digit levels. Although shares recovered partially from the March lows, it did not see the kind of rally enjoyed by many consumer-discretionary stocks.

Nonetheless, the company pivoted to build reserves as the pandemic hit. Moreover, many of its locations have since reopened, allowing the company to earn revenue again. Although Dave & Buster's faces a tough road ahead, an eventual resurgence once coronavirus recedes should boost this stock.

The effects of the pandemic

As with many businesses, the pandemic stopped Dave & Buster's in its tracks. The contagion caught the company off-guard, and Dave & Buster's found itself without its major source of revenue for an extended period.

Man and woman playing a guitar game at an arcade.

Image source: Getty Images.

The fact that the company shut down operations for about half of its fiscal 2020 first quarter showed in the results. Comparable sales fell 58.6% from the same quarter last year -- this led to a net loss of $43.5 million, or $1.37 per share.

Management moved quickly to shore up the balance sheet, suspending the dividend and share repurchase program. The company ended the quarter with $157 million in cash and equivalents after turning to its revolving credit facility and raising $75 million through an equity offering. An additional $111 million equity raise in the current quarter should give Dave & Buster's some breathing room as the short-term remains uncertain.

Where Dave & Buster's goes from here

However, the market has already priced in the turmoil surrounding the pandemic into this stock. Year to date, shares have fallen 70% as of this writing, extending a multiyear decline after the stock set a high of nearly $75 per share in June 2017.

PLAY Chart

Data by YCharts.

To be sure, COVID-19 will remain a cloud over Dave & Buster's and its business until the outbreak is under control, and consumers return to their pre-pandemic habits. For any investors bullish on this eventual return to "normalcy," the prospects for this stock will quickly brighten once society moves on from the pandemic.

Most recently, management has taken a strategic approach to reopening its locations. Where allowed, they have reopened based on "pre-COVID high-volume days and dayparts." While opening hours are down 35% from pre-COVID levels, they're focused on the times that generated 90% of the company's revenue. Management has also rearranged the space in stores to accommodate social distancing with strict sanitation protocols.

This challenging situation has driven Dave & Buster's stock down to an attractive valuation. The stock trades at a price-to-sales (P/S) ratio of just 0.51. This metric averaged 1.81 over the last five years, and by comparison, the current P/S ratio for the S&P 500 stands at approximately 2.2.

Despite the current headwinds, analysts project losses for this fiscal year only. Next year, they expect the company to report earnings of $0.39 per share. That is well off the $2.93 reported in fiscal 2019, but it points to the light at the end of the tunnel.

The balance sheet also indicates the company has adequate cash reserves to ride out the pandemic with $255 million of cash on hand as of mid-June. Moreover, management has instituted a plan that protects customers while preserving most of the company's pre-COVID revenue stream. Since investors can now buy shares at a deep discount, they can see major gains as stores reopen across the country.

Will Healy has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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