Dave & Buster’s Spins the Wheel With a $100 Million Stock Repurchase – Buyback Wednesdays

Since we last covered the “eatertainment chain” Dave & Buster’s in a Buyback Wednesdays article in April 2023, a lot has changed at the company, warranting a fresh examination. Over this period, the stock dropped from $35 to the $29 range, reflecting a ~21% decline. We saw C-suite changes, rapid store expansion and fast-paced remodeling of existing stores.

Insiders have purchased shares on the open market and the company has been buying back its own stock. This “double dipper” scenario (insider buying + buybacks), coupled with a high short interest (17.91% of float) and a recently announced $100 million buyback plan makes this an interesting setup.

If you haven’t been to Dave & Buster’s, this video provides a great walk through.

Over the past year, the stock has underperformed significantly, lagging behind the S&P 500’s 24% gain. Shares are down 20% over the last six months and have dropped sharply from their April 2024 peak of $68.29, driven by back-to-back weak quarterly earnings and the abrupt departure of the CEO.

Dave & Buster’s Entertainment, Inc. (PLAY): $29.48

Market Cap: $1.14B

EV: $2.73B

Key Insights

• D&B’s shares fell 13% after missing guidance and the unexpected resignation of its CEO.
• Active stock buybacks (20% in 3 years) and Hill Path Capital’s ongoing involvement point to the stock being potentially undervalued.
• Significant investments in remodeling and new store openings put pressure on free cash flow and increased reliance on debt, raising concerns about future financial stability.
• The company has experienced seven consecutive quarters of comparable store sales declines, attributed to reduced discretionary spending and heightened competition from in-home entertainment options.
• Opening additional franchised locations, especially internationally, could reduce CapEx and improve margins over time.

Key Performance Metrics

• Comparable store sales: D&B defines its comparable store base as locations open for at least 18 months before the start of the current fiscal year, excluding stores permanently closed or slated for closure. Unfortunately, this metric has declined for almost two consecutive years, driven by reduced discretionary spending and more importantly heightened competition within the entertainment sector.
• New store openings: D&B has been growing its topline by opening new stores at a rapid pace. It is expanding its footprint by 7.5% year-over-year including Main Event locations. It operates 228 venues (including 60 Main Event stores), with three Q3 openings and four more planned, totaling 14 new stores in FY 2024. 

Expanding Globally 

After signing up 38 franchised stores in Australia, Saudi Arabia and Egypt, D&B has officially launched its first franchise location in Bangalore, India, as part of its international expansion strategy. The Bangalore franchise is the first of several planned locations in India, with a second store in Mumbai expected to open in Spring 2025. The company anticipates up to four of these stores opening in the next 12 months.

Remodeling – Will This Save The Ship From Drowning?

To address declining revenues and comparable store sales, the company has undertaken a major initiative to remodel its older venues. This includes installing new game arcades, digitizing the customer experience, and enhancing interior aesthetics. Currently, about one-third of the remodels are complete, with the goal of 100% completion by FY2026 (their fiscal year ends in January or February). However, remodeling comes with significant costs, including $3.5 million in capital expenditures per location and temporary closures that have negatively impacted comparable sales by 50 to 100 basis points year-over-year. 

Early remodels, such as the one in Friendswood, Texas, have exceeded expectations, showing higher loyalty sign-ups and a significant increase in net promoter scores (NPS) alongside double-digit sales growth. But the later ones have failed to follow the same trajectory and showed mid to high single-digit growth.

The question now is: “Will these remodels deliver the anticipated results and justify the significant capital and time invested?” Considering the intense competition in the industry and D&B’s waning popularity, the answer so far is “no”.

However, the CFO of the company is quite optimistic about the remodeling project and commented,

“We completed 11 new fully programmed remodels and are on track to have 44 completed by the end of fiscal 2024. Our fully programmed remodels continue to outperform the rest of the store base and we are excited for the opportunity these remodels give us to drive traffic, sales and EBITDA.” 

Other Strategies To Improve Foot Traffic

Besides remodeling, the company has tried its hand with a bunch of other strategies to recover and grow.

• D&B actively promoted its special events and banquet menu business, achieving mid-single-digit growth in Q3 2024 (slightly above the prior quarter), driven by new premium food offerings, marketing, digital channels, and online group reservation improvements.
• The company onboarded a new marketing agency and thoroughly reviewed its media strategy, including digital marketing, analytics, and customer targeting.
• The popular Eat & Play Combo was relaunched to attract price-sensitive guests by offering a fixed-price dining and entertainment experience.
• Enhanced food and beverage quality, service, and menu offerings were supported by a new service model, though the “50% off food promotion” did not improve comparable sales as expected.
• A Winter Pass was launched in 36 locations to boost loyalty and visit frequency among premium or loyal guests.
• The strategic games pricing initiative raised chip prices for the first time in 25 years, tailored to specific market conditions.
• Significant IT upgrades improved connectivity, supporting its gaming ecosystem, remodels, loyalty program, and service model.

Dave & Buster’s – The Buyback Cannibal

D&B has consistently been active and opportunistic with its share buybacks. They strategically ramp up repurchases whenever the stock price dips. Since 2022, the company has bought back nearly one-fifth of its outstanding shares and remains on this trajectory, repurchasing $28 million worth of stock in Q3 for a year-to-date total of $88 million.

Recognizing its undervaluation, D&B doubled down on its buyback strategy with the December 2024 announcement of an additional $100 million share repurchase plan—an impressive 9% of its market cap at announcement. This marks the company’s second buyback announcement in 2024, following another $100 million plan unveiled in April.

The present buyback rate along with a high short interest of 17.91% could potentially trigger a short-term rally in the stock.

Insider Purchases 

The insiders at the company have been consistently optimistic, buying shares on the open market. As is often the case with insiders, they are early and the stock price hasn’t shown strong signs of stabilizing.

Former CEO Christopher Daniel Morris made a notable move on October 7th, purchasing 14,912 shares at an average price of $33.67 per share, totaling $502,087. As the stock price dipped further, interim CEO Kevin M. Sheehan swiftly stepped in, acquiring 56,770 shares in two transactions over a week for a total of $1.46 million. Interestingly, Sheehan had previously sold 75,000 shares in April 2024 at $65.72 per share and waited exactly eight months to buy back shares at less than half the price, perfectly timing the market.

This strategy of selling high, waiting, and buying low mirrors a similar insider trend at Tidewater (TDW), a marine transportation company we highlighted in our Insider Weekends article.

Since October 2024, insiders have purchased over 1 million shares of company stock, collectively valued at $2.76 million.

CEO Exit Adds More Trouble 

The sudden resignation of the company’s CEO, Chris Morris, after just two and a half years in the role, raises concerns and is a red flag. Mr. Morris stepped down as CEO and Director to take on a new role as CEO of European Wax Center (EWCZ), leaving Kevin Sheehan to once again step in as interim CEO. Sheehan had previously served in this capacity from fall 2021 to mid-2022. Meanwhile, the Board has been collaborating with Heidrick & Struggles, a global executive search firm, over the past few months to identify the company’s next permanent CEO. 

But this abrupt CEO departure adds a layer of complexity and it’s understandable why investors are adopting a wait and see approach.

Role of Activists

Hill Path Capital remains the most active among D&B’s major shareholders, holding a 17.5% stake valued at $283.4 million as of June 30, 2024. Co-founder James Chambers plays a key role, serving as chair of the compensation committee and as a member of the finance committee, which oversees the company’s capital structure. Chambers also sits on the boards of SeaWorld Entertainment (SEAS) and The One Group (STKS), in addition to D&B.

Another Hill Path co-founder, Scott Ross was previously a partner at Apollo Management for a decade where he focused on private equity and debt investments in the lodging, leisure, entertainment, consumer and business services sectors. He was a driving force behind SeaWorld’s successful turnaround, bringing valuable expertise that could prove critical for D&B’s recovery. He is currently the Chairman of SeaWorld and has previously served on the boards of Great Wolf Resorts and CEC Entertainment (the parent company of Chuck E. Cheese).

These are precisely the kind of informed investors D&B needs at this crucial moment to help steer the company back on track and potentially setting the company up for an acquisition.

Valuation

The stock appears cheap with a forward P/E of 10.8 and a forward EV/EBITDA of 8.9. The low valuation however reflects the market’s pessimism that the good times might not return to this business.

Source: Dave & Buster’s (Investor Day Report)

Financials

D&B had grown its top line after the pandemic, rising from $436 million in FY2021  to $2.2 billion in FY2024 (fiscal year ends in January or February) partly because of a big rebound in spending and partly because of an acquisition. Lately, revenue growth has declined in the last few quarters, with the latest quarter generating the lowest revenue since May 2022. Year-over-year revenue growth in Q3 declined 3% while the projected revenue growth for fiscal 2026 is a decent,  though not very impressive, 4.68%.

In 2024, the company completed two sale-leaseback transactions with unrelated third parties. In July, it sold two store properties for $44.8 million, and in September, one store property for $28.5 million, leasing them back in both cases. These transactions allow the company to replenish its capital for new investments. 

The company had $7.2 million in operating cash outflow during the third quarter, ending the quarter with $8.6 million in cash and $537.4 million of availability under its $650 million revolving credit facility. As the company began generating less cash due to weak store sales, the need for investment in remodels and openings ended up outweighing OCF, causing Dave & Buster’s to resort to more leverage. 

Rising Net Debt – A Big Concern

Net debt of $1.59 billion compared to a market cap of $1.17 billion is worrisome for a company struggling with revenue growth and margins.

In Q3, D&B took significant steps to fortify its balance sheet and improve liquidity. It secured a new $700 million term loan due in 2031, redeemed the remaining $440 million principal of its senior notes due in 2025, paid down $200 million of an existing term loan due in 2029, increased its revolving credit facility to $650 million, and extended the facility’s maturity to 2029.

While these measures offer relief, they also come with the added burden of increased interest expenses.

Peers

The entertainment sector has been hit hard by a pullback in discretionary spending, impacting major players like Topgolf Callaway (MODG), and Lucky Strike Entertainment Corporation (LUCK), besides D&B. Over the past year, Topgolf and Lucky Strike have also underperformed significantly, but D&B has been the worst performer of the group.

Lucky Strike, formerly Bowlero Corporation, delivered strong Q1 FY2025 results, with significant year-over-year growth in both revenue and earnings. Same-store sales also showed a modest increase of 0.4%.

Topgolf also posted decent Q3 2024 results, beating revenue and earnings estimates. However, net revenue declined 2.7% year-over-year, and the company lowered its full-year revenue and EBITDA guidance, signaling challenges ahead. Same-venue sales fell 11% in the third quarter. To address financial struggles and rising debt, management plans to separate Topgolf from Callaway Golf Company to unlock shareholder value.

Sluggish Q3 Results

The third quarter, historically the company’s lowest seasonal volume period, faced additional challenges compared to the previous year due to a fiscal calendar mismatch, unfavorable weather across key regions, and disruptions at several stores undergoing remodels.

Dave & Buster’s reported poor Q3 results with a big miss in both revenue and EPS.

• Reported revenue of $453 million for the third quarter, reflecting a 3% decline compared to the same period in fiscal 2023. 
• Entertainment revenue totaled $294.6 million, down 2.5% year-over-year (YoY) and falling short of the $304.8 million estimate, while food and beverage revenue reached $158.4 million, a 3.9% YoY decrease, also below the $162.4 million estimate. 
• Comparable store sales declined 7.7% compared to the corresponding calendar period in fiscal 2023. 
• The company posted a net loss of $32.7 million, or $(0.84) per diluted share, a sixfold increase from the $5.2 million loss, or $(0.12) per diluted share, reported in Q3 fiscal 2023.
• Adjusted net loss stood at $17.5 million, or $(0.45) per diluted share, a sharp contrast to the adjusted net income of $0.4 million, or $0.01 per diluted share, in the prior year.
• Adjusted EBITDA was $68.3 million, down 16.3% YoY, representing a $13.3 million decline from Q3 fiscal 2023.

Headwinds

The low-end consumer segment is experiencing a significant decline, with their spending dropping at twice the rate of other income groups. This ongoing pressure on consumer spending continues to impact the company’s performance.

The company has poured significant capital and effort into each remodel. The big question remains: what happens if these remodels fail to deliver the anticipated results?

Bottom Line

Turnarounds are not my favorite investing setup. When they work, you end up with outsized gains but the batting average is very low and you end up with more duds than you bargained for. That said, there are several things I like about D&B at these levels including the Double Dipper situation we define as a combination of buybacks and insider buying. The involvement of an activist investor with deep ties to private equity, opening of new franchised locations and the completion of a renovation cycle all augur potential positive inflection in the future.  

Based on the one-year price targets offered by 7 Wall Street analysts, the average target price for D&B is $39.71 with a high estimate of $48 and a low estimate of $33. The average target implies an upside of 30.68% from the current price of $30.39. This implies analysts are optimistic about the stock’s potential growth in the coming year.

Welcome to edition 97 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

With the earnings season winding up and the holiday season setting in, there was a slight decrease in the number of companies announcing buybacks, from 155 last month to 105 this month.

Top 5 Stock Buyback Announcements 

1. Olin Corporation (OLN): $32.13

On December 12, 2024, the Board of Directors of this chemical products company announced that it had approved a new share repurchase program, increasing its authorization by $1.3 billion to $2 billion, equal to around 29% of its market cap at announcement.

2. The Western Union Company (WU): $10.43

On December 13, 2024, the Board of Directors of this money movement and payment services provider announced that it had approved a new $1 billion stock repurchase agreement. This represents around 27.5% of its market cap at announcement.

3. Archer-Daniels-Midland Company (ADM): $49.43

On December 11, 2024, the Board of Directors of this processor and transporter of agricultural commodities announced that it had approved an additional 100 million share repurchase program, equal to around 21% of its market cap at announcement.

4. Academy Sports and Outdoors, Inc. (ASO): $57.57

On December 4, 2024, the Board of Directors of this sporting goods retailer approved a new $700 million share repurchase program, equal to around 20% of its market cap at announcement. 

5. Science Applications International Corporation (SAIC): $113.95

 On December 5, 2024, the Board of Directors of this enterprise IT services provider authorised a new $1.2 billion share repurchase program, equal to around 19.7% of its market cap at announcement. 

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