Investors seem pleased with Dave & Buster's Entertainment (PLAY -0.15%) as its metrics rebound from their lows a year ago when the COVID-19 pandemic and the government's drastic lockdowns and retail closures were in full swing. The restaurant chain has enjoyed a roughly 36% positive jump in its 2021 stock price, and over 151% during the past 12 months.
Yet it's still behind its financial position in 2019, when its stock price in June was very similar to today's, while heavily diluting its shares and taking on more debt. Its stock price seems hard to justify currently, and investors should be cautious about buying into the company at current prices, with two standout reasons to consider:
1. It's performing better, but only compared to a trough
It's the contrast to the dark days of the early U.S. COVID-19 pandemic that is making Dave & Buster's first-quarter results shine. Revenue of $265.3 million soared 66% year over year compared to 2020's anemic $159.8 million, while at the bottom line, $19.6 million in net income yielded an adjusted $0.40 earnings per share (EPS), well above Q1 2020's $1.37 loss per share (adjusted).
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Both metrics beat the consensus estimates of Wall Street analysts. EPS delivered a 700% positive surprise above the average analyst prediction, while revenue racked up a more modest 3.1% positive surprise. These figures show the company is bouncing back faster than analysts thought likely, helping explain its stock market rise.
While the recovery shows Dave & Buster's successfully weathered the pandemic, it still hasn't even reached its 2019 level of performance. Looking back at Q1 2019, over 24 months ago, quarterly revenue was $363.6 million, while adjusted EPS amounted to $1.13 per share. Comparing 2021 to the pre-pandemic year of 2019, Dave & Buster's revenue has dropped 27%, while EPS has plunged 64.6%. CEO Brian Jenkins says the results are "a new high-water mark in our post-Covid sales recovery," but they still fall well short of the company's past performance.
Looking ahead, CFO Scott Bowman said "we expect total second quarter revenues to be in the range of $335 million to $350 million which is comparable to 2019" during the Q1 earnings conference call on June 10. The stock market's valuation of the company seems to be pricing in significant growth through the rest of 2021.
2. Dave & Buster's has sold lots of stock
Besides selling at almost their 2019 prices, one of the defining traits of Dave & Buster's shares in 2021 is there are a lot more of them. At the end of fiscal year 2019, the company had 34.1 million shares outstanding. Buybacks had reduced the number of outstanding shares from 2018's 40 million, adding value for shareholders. During the year, the per-share stock value ranged from approximately $37 to $59.
Now, after supplementary stock issues made to raise cash during the period when the U.S. government crashed the retail economy in reaction to the coronavirus, 48.2 million shares of Dave & Buster's stock are outstanding. The company boosted its outstanding shares by more than 41.3% since 2019, diluting existing holdings, and yet has been trading in the $41 to $46 range for several months, well within the share price range of 2019.
The company has also added approximately $110 million in long-term net debt to its balance sheet. Obtaining this new debt, including the issuance of bonds, during the COVID-19 crunch added to the company's "war chest" but forced it to accept higher interest rates, raising its interest payments from roughly 4.04% to 9.42%.
Solid gains or market excitement?
Dave & Buster's recovery from its COVID-19 lows is undoubtedly fast and impressive, and the company appears to be at little risk of bankruptcy. However, it has not even grown back to its pre-pandemic top- and bottom-line results, yet the market is pricing it as though it were performing exactly like it was in 2019 already. And this does not even take account of the strong share dilution that took place in between.
In fact, it could be argued, from a purely rational shareholder perspective, share prices equal to 2019's could only be justified by 41.3% growth over and above 2019's revenue and earnings (EPS) metrics, to counterbalance the 41.3% increase in outstanding shares and the corresponding dilution. While share valuation is more complex than a direct 1-for-1 correspondence between changes in shares outstanding and changes in revenue, the comparison highlights how the market is valuing the company's shares equal to a period of its history when it was performing better than currently, with a lot fewer shares outstanding.
The combination of lower performance, significantly higher share numbers and resulting dilution, and higher, more expensive debt on its balance sheet makes Dave & Buster's current share price look overvalued by post-pandemic stock market exuberance, with maybe a whiff of inflation thrown in. Those who are investing in entertainment stocks or restaurant stocks may want to bypass this stock for now, waiting for a lower entry point or investing in some of the many other quality stocks posting big gains now instead.
