Source: Dave & Buster's.
If at first you don't succeed, try an IPO again. Dave & Buster's is gearing up for its second go as a publicly traded company, filing its prospectus on Monday night in anticipation of hitting the market in a few weeks. It will trade on the Nasdaq exchange under the appropriate ticker symbol P-L-A-Y.
There won't be a shortage of interest in the Dave & Buster's IPO. The chain of restaurants with ample video game arcades is a lot larger and more profitable than it was when it bowed out as a public company eight years ago. Wellspring Capital Management took it private in 2006 in a deal for roughly $257 million in cash plus debt. It was handed off to Oak Hill Capital Partners in 2010 as a $570 million transaction. Now -- another four years later -- Dave & Buster's will be handed off again.
Dave & Buster's was one of the darlings of the "eatertainment" craze during the late 1990s. Investors bought into Planet Hollywood, Rainforest Cafe, and Dave & Buster's as high-volume restaurant operators that offered patrons sensory feasts. It didn't last. Planet Hollywood buckled, closing several of its eateries. Rainforest Cafe ran into the open fishing line of seafood mogul Landry's. Dave & Buster's -- sputtering financially after taking on the remnants of upscale billiard hall operator Jillian's -- hung around for a few more years before Wellspring arrived on bended knee.
Let's play a game
Dave & Buster's had 46 locations at the time of the Wellspring buyout in 2006. Today it watches over 69 mammoth hotbeds of food, drinks, and games.
Source: Dave & Buster's Form S-1 filing.
Some things haven't changed. Dave & Buster's still relies on the arcade to drive a little more than half of its revenue. Amusements, food, and drinks account for 51.2%, 33.6%, and 15.2% of the sales mix, respectively.
You won't find too many eateries where food and beverages combine to account for less than half of the overall sales. Cracker Barrel (CBRL +1.40%) with its attached country stores is as close as it gets among publicly traded operators, but even Cracker Barrel relies on food and beverages to drive nearly 80% of its business.
The lopsided revenue mix is a big driver at Dave & Buster's because it generates gross margins on the amusements end of its business.
Top-line growth hasn't necessarily been impressive. Revenue climbed a mere 4.5% to $635.6 million last year. This won't necessarily be a deal breaker with investors, especially the ones that see an IPO as a catalyst for accelerating expansion. In a time when many eateries are proving vulnerable, it's important to point out that comparable-store sales have remained positive at Dave & Busters. The chain clocked in with upticks of 1%, 3%, and 2.2% over the past three fiscal years, picking up the pace with a 5.2% gain through the first half of this fiscal year.
This is a scalable model, and we're seeing heartier growth as we work our way down the income statement. Operating income has grown from $34.2 million in fiscal 2011 to $43.7 million in 2012 to just over $51 million last year. Hefty debt interest payments have gobbled up a lot of that, but Dave & Buster's is coming off back-to-back years of profitability. If it's able to use its public status to gnaw away at its debt, the bottom-line growth could be explosive.
Challenges and opportunities
A challenge for Dave & Buster's will be tapping expansion markets. It's already hit a lot of the low-lying fruit in metropolitan destinations, and it's lately been targeting smaller markets where it can open stores that take up just 25,000 to 35,000 square feet. That's a far cry from the 47,000 square foot average of its older stores.
We can offset that challenge with the opportunity in sports viewing. Buffalo Wild Wings (BWLD +0.00%) has shown investors that there's a big market for sports bars, and Dave & Buster's bars and arcades are surrounded by TVs tuned in to whatever pro or college sport is in season. Late last year it rolled out a national marketing campaign that positioned Dave & Buster's as the "only place to watch the games and play the games." Buffalo Wild Wings doesn't have to worry about Dave & Buster's just yet, but it could make things interesting if it expands into smaller markets with its smaller locations.
Even though some of last year's hottest eatery IPOs have struggled this year Dave & Buster's should still be a strong IPO when it puts on its game face later this year.
