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

Dave & Buster's Entertainment, Inc. PLAY's Tuesday earnings report will likely reinvigorate the bull versus bear debate, as some bulls highlight the stock's depressed valuation while bears point to multiple disappointing metrics.

The Analyst

Jefferies' Andy Barish maintains a Buy rating on Dave & Buster's with a price target lowered from $74 to $67.

The Thesis

Dave & Buster's earnings report was mixed, as the company reported better-than-expected EPS and EBITDA, but same-store sales of negative 1.3 percent that were worse than the flattish estimate Barish was modeling. (See Barish's track record here.) 

Same-store sales are expected to persist and the fourth quarter is off to a poor start, likely due to a headwind of mild weather, Barish said. 

The company's development pipeline is "full," and new openings continue to generate strong returns, although they come at the expense of margins in some cases, the analyst said.

Tight labor cost controls helped keep unit-level margins flat, and investors should expect deleverage in the fourth quarter and into 2018, according to Jefferies. 

Overall, the near-term visibility is a "bit more challenged," but the Dave & Buster's could find support due to its valuation at 8.5x 2018 EBITDA, Barish said. The company's share buyback program also adds support, and the stock could be attractive as a shareholder return story in the near-term until a same-store sales catalyst plays out, the analyst said. 

Price Action

Shares of Dave & Buster's were trading higher by more than 5 percent after Wednesday's opening bell.

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