Wells Fargo On Dave & Buster's: Time To Hit 'Pause'

Dave & Buster's Entertainment Inc PLAY reported Tuesday concerning first-quarter earnings, which prompted Wells Fargo to hit the "pause" button.

The Analyst

Wells Fargo's Jon Tower downgraded Dave & Buster's from Outperform to Market Perform with a price target lowered from $65 to $48.

The Thesis

Dave & Buster's earned $1.13 per share in the quarter, which missed the Street's estimate by 2 cents. Tower said the miss was driven by three factors: lower than expected revenue of $363.6 million versus expectations of $371.7 million, same-store sales miss at negative 0.3% versus expectations of 1.6% and store-level margin compression of 180 basis points.

Tower said the report generates incremental concern related to the company's ability to drive same-store sales growth without margin erosion. In addition, management's plan of opening new stores to drive long-term growth at the expense of near-term metrics like same-store sales is the proper move.

Investors are now less likely to buy the stock as a long-term unit growth story amid same-store volatility, according to Tower. As such, the stock is likely to trade within a "tight range" over the next year.

Price Action

Shares of Dave & Buster's were trading lower by 21% Wednesday and hit a new 52-week low of $40.38.

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Photo credit: Mike Mozart, Flickr