What To Do With Dave & Buster's Now?

Dave & Buster's Entertainment Inc PLAY reported a better-than-expected third quarter print Tuesday, but investors appear to be concerned with a 1.3-percent same-store sales decline which was worse than the 0.7-percent decline expected.

Here is a summary of how some of the Street's top analysts reacted to the print.

The Analysts

• Wells Fargo's Jon Tower maintains an Outperform rating on Dave & Buster's with a price target lowered from $69 to $59.
• BMO Capital Markets' Andrew Strelzik maintains at Outperform, price target lowered from $70 to $62.
• Raymond James' Brian Vaccaro maintains at Outperform, price target lowered from $70 to $60.

Shares of Dave & Buster's were trading lower by 8.8 percent to $46.53 Wednesday morning. The stock fell as much as 16 percent in the after-hours and pre-market sessions.

Wells Fargo: Stock Overreaction

Dave & Buster's' third quarter showed momentum that started in the second quarter carried over, Tower said in a note. This is overshadowed by, among other things, poor food and beverage same-store sales due to a promotional mismatch (discontinuation of the all-you-can-eat chicken wings promotion for most of the quarter) year-over-year and conservative guidance for fiscal 2019.

Tower said investors are likely underestimating the fact that management isn't signaling any expectation for negative same-store sales performance in 2019. In fact, same-store sales are likely to become positive in the fourth quarter and carry over into 2019.

Coupled with the stock trading at 14.6 percent ex-growth on 2018 expected free cash flow yield, the stock is "well below" casual dining peers and "too cheap to ignore."

BMO: Stock Isn't 'Broken'

Dave & Buster's 2019 guidance fell short of the Street's expectations which Strelzik said begs the question -- is management expecting the coming year to be a transition period? Specifically, is the company shifting towards a new unit mix of smaller units and fewer new markets with expectations to stabilizing EBITDA growth rates in fiscal 2020 to be inline with prior growth rates. It's unclear if guidance implies a longer lasting departure from its long-term growth algorithm.

Nevertheless, Strelzik said the company is expected to show positive comps while doubling its unit base although at a productivity rate below prior levels. The stock's multiple of seven times EBITDA implies the business is "broken" and such a low multiple is reserved for structuring declining businesses with zero unit growth. This isn't the case as the company remains a secular growth story that boasts a level of protection against multiple issues plaguing the casual dining industry.

Raymond James: Favorable Risk Profile

Dave & Buster's' earnings were impacted by management's decision not to offer the unlimited chicken wings deal, but the promotion was reinstated and has likely helped improve fourth quarter food comp trends, Vaccaro said. The addition of new VR content will also help lift comps at a time when the company is up against much easier comparisons on two and three-year stacks.

Looking forward to the company's ICR conference in January, management could reassure investor concerns at that time which Vaccaro said creates a favorable risk-reward profile for investors at current levels.

Related Links:

Dave & Buster's Challenges Persist, But Jefferies Says Its Valuation Can't Be Ignored

Analysts Rave About Dave & Buster's Amid Q1 Earnings, 'Jurassic World' VR Launch

Photo credit: Michael Rivera (Own work), via Wikimedia Commons