Description

Dave & Buster’s (“D&B”, NASDAQ:PLAY) is one of the few truly differentiated dining concepts with a credible and demonstrated store growth strategy.  Despite best-in-class unit economics (both AUVs and margins) far above peers, PLAY is currently trading at a discount to every casual dining comp.  At just 6.6x 2015 Adjusted EBITDA (7.5x unadjusted EBITDA), the stock yields 13% fully-taxed, pre-growth capex.  Compare this to BJRI/CAKE/TXRH/BWLD trading at an average 8.3x Adjusted EBITDA (9.3x unadjusted EBITDA) and ~8.9% FCF yield pre-growth.  D&B’s (i) stable operational performance and (i) exceptional growth opportunity together argue for a multiple at least in-line with the peer average, if not closer to BJRI’s 10.2x Adjusted EBITDA.  Based on a ‘base case’ for 8x Adjusted EBITDA, the stock is worth $26/sh (+30%) in 6-9 months – with further upside to $34/sh (+75%), based on 10x Adjusted EBITDA, as mgmt executes on its growth plans and D&A gains attention from the Street/buyside.    

Thesis:

• Business: Truly differentiated concept with stable organic growth, industry leading unit economics, and little exposure to the commodity inflation negatively impacting casual dining peers.
• Valuation: Trades at a discount to all of its peers (1.5-2.0x EBITDA and ~400bps FCF yield).  A premium is warranted.  Successful execution of D&B’s store growth strategy and greater Street/buyside coverage will close this valuation gap. 
• Growth: Steadily accelerating new store growth (10% annual growth target) with long runway both domestically and internationally.  New location year-one CoC returns exceeding 50% and unlevered IRRs of ~25%.  New store pipeline filled for the next 18 months.
• Upside: 8x Adjusted EBITDA is an undemanding target for D&B, and will result in +30% upside.  With successful execution of its growth strategy, PLAY will eventually trade at a growth multiple closer to BJRI's 10x (+75% upside).
   

History: D&B was public until 2006, when it was taken private by Wellspring, and then subsequently sold to Oak Hill June 2010.  The mgmt team, regarded as excellent operators, took the reins in 2006.  Oak Hill intended to take D&B public again in September 2012 but pulled the deal on advice of the underwriters after a couple other IPOs broke that week.  This turned out to be a mistake by the underwriters, as D&B continued to fire on all cylinders and grow EBITDA by over 30% in the two years since.  Earlier this year, the press reported on rumors that D&B was being marketed to PE buyers, which resulted in bids up to $1.1bn.  Seeing more value in the public equity markets, Oak Hill elected to IPO D&B in early October (100% primary).  Amidst spiking market volatility, the deal came at the bottom of the range ($16/sh) for a $1bn valuation, even as the books were said to be multiple times covered.  It closed that day at $17.28/sh and has since traded as high as $19.50/sh. 

Business: D&B’s concept combines a casual dining restaurant with a sports bar and arcade under one roof.  Their marketing slogan “Eat, Drink, Play, Watch” is targeted to adults and families and promotes a number of different motivations for visiting: (i) family dinners/celebrations, (ii) date nights, (iii) professional sports game night, (iv) work events; etc.  Customers are families (~36% of visitors) and higher-earning adults (~64% of visitors) aged 21-29 with avg household income of $80k.  Balanced mix of male/female.  D&B locations vary in size from small-format (<30k) to large-format (>30k feet) floor plans.  The concept has proven successful in freestanding, mall-based and flexible formats.  Its AUVs speak to the brand’s broad and scalable customer appeal, while its high games and alcohol revenue mix drive industry-leading store-level margins.

• AUVs exceeding $10mm (50/50% split between food/drink and games), versus:
  • CAKE/Maggiano’s: $9-10mm
  • TXRH/BJS/CHUY/OliveGarden: $4-6mm
  • BWLD/BLMN/RRGB/Chili’s: $3mm
• Store-Level EBITDA margins exceeding 25%, versus:
  • CAKE: 19-20%
  • BWLD/RRGB/CHUY: 18-19%
  • TXRH/BJRI/EAT/DRI/BLMN: 16-18%
• SSS growth trends consistently positive in low-SD % and YTD accelerating into mid-SD%

Growth: Under PE ownership since 2009, D&B has generated stable low-SD % SSS growth, which accelerated in 1H’14.  Slow (low-SD%) new store growth began accelerating in FY’12, as mgmt demonstrated the ability to open both small-format, as well as its traditional large format, locations.  In FY’11-13, new locations generated year-one CoC returns of 55%.  Going back further to FY’08, CoC returns averaged 43%.  New stores experience a year-one ‘honeymoon’ period, which drives a 15-20% productivity boost and 2-5% margin boost.  Thereafter, the location generates low-SD% SSS growth and store-level EBITDA margins exceeding 25%.  Net of pre-opening expense and games/maintenance/remodel capex, I estimate stores generate an unlevered IRR of ~25%.  Mgmt’s targeted year-one economics follow:

• Large-Format
  • Sqft: 30-45k
  • Revenue: $11.6mm
  • Margins: ~28%
  • Development Costs: ~$8.3mm
  • CoC Return: ~35%
• Small-Format
  • Sqft: 25-30k
  • Revenue: $7.5mm
  • Margins: ~28%
  • Development Costs: ~$6mm
  • CoC Return: ~35%

The new location pipeline is filled for the next 18 months, with 14 signed leases and six stores currently under construction.  Mgmt sees the opportunity for over 200 locations in North America (versus 69 currently) and plans to sign on its first international location by the end of FY’14 for a FY’16 opening. 

Model: Based on mgmt’s execution of its new store growth strategy and by maintaining low-SD % SSS, D&B should grow revenue by low-DD% and EBITDA by low/mid-teens %.  On a pre-growth (ex- growth capex/preopening expense) basis, D&B should generate ~$2.50/share of FCF in 2015.  Most of this cash will be reinvested into new store growth. 

Valuation: PLAY trades at 6.6x 2015 Adjusted EBITDA and a 13% FCF yield before growth.

Comps: PLAY trades at an unjustified 1.5-2.0x EBITDA discount to peers, and its FCF yield is ~400bps wide of peers.  With continued successful execution of its store growth, PLAY should trade closer to BJRI’s 10x multiple

Conclusion: I am generally cautious around restaurant operators, and casual dining concepts in particular given secular headwinds and commodity pressures facing the group - but D&B is one of the very few truly differentiated dining concepts, and this unique positioning shields it from many of the competitive pressures facing peers.  Its favorable mix of gaming and alcohol revenue means limited commodity inflation exposure and drives store-level margins far in excess of peers.  As mgmt successfully executes on its growth strategy, while maintaining low-SD% organic growth, the stock is poised to experience multiple expansion.  Its current undemanding valuation, only slightly above rumored PE bids for the Company from earlier this year, mitigates downside as mgmt proves its story to the Street.  Upside optionality on SSS trends maintaining at the mid-SD% seen in 1H'14.

Risks:

• Execution- typical risks related to store growth and expansion into new and adjacent markets.
• Real Estate- D&B’s uniquely large store footprint adds challenges in sourcing new real estate; mgmt has demonstrated an excellent ability to navigate this hurdle and lock-in attractive locations for store expansion.
• Liquidity- PLAY continues to be closely held with a small float.
• Sponsor- Oak Hill continues to hold an ~80% stake and will likely look to monetize its position in the future.
• Special events exposure- inherently more volatile, but only ~12% of revenue versus ~20% pre-recession.
• ‘Orphan’ stock- with no perfect comps, the Street and buyside are currently not focused on this name.  Initiations by Jefferies/Stifel after the quiet period ends should help.

DISCLAIMER:  DO NOT RELY ON THE INFORMATION SET FORTH IN THIS WRITE-UP AS THE BASIS UPON WHICH YOU MAKE AN INVESTMENT DECISION - PLEASE DO YOUR OWN WORK.  THE AUTHOR AND HIS FAMILY, FRIENDS, EMPLOYER, AND/OR FUNDS IN WHICH HE IS INVESTED MAY HOLD POSITIONS IN AND/OR TRADE, FROM TIME TO TIME, ANY OF THE SECURITIES MENTIONED IN THIS WRITE-UP.  THIS WRITE-UP DOES NOT PURPORT TO BE COMPLETE ON THE TOPICS ADDRESSED, AND THE AUTHOR TAKES NO RESPONSIBILITY TO UPDATE THIS WRITE-UP IN THE FUTURE.   

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