3 Reasons Not to PLAY Dave & Buster’s IPO

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Entertainment-themed restaurant Dave & Buster’s filed papers with the Securities and Exchange Commission yesterday to take its game to the next level.

dave & buster's dave and busters ipo dave and busters stock dave and busters ipo play stockThe restaurant, which prides itself on its quirky, game-filled atmosphere that’s fun for all ages, plans to test the IPO market. Dave & Buster’s also locked down the ticker symbol PLAY in its SEC filings, and if all goes well, PLAY will be traded on the Nasdaq.

Every now and then, a company announces an IPO and investors line up around the block to get a piece of it. I doubt we’ll see that sort of response with the Dave & Buster’s IPO, and in fact an investment in PLAY in its early stages of trading is more like playing the lotto.

Here are three reasons why you should stay far, far away from the Dave & Buster’s IPO.

Reason No. 1: Dave & Buster’s Is a Wannabe Buffalo Wild Wings (BWLD)

Buffalo Wild WingsThere’s nothing wrong with wanting to be great at something. Personally, I wanted to “be like Mike,” as a kid, and I’m glad I did. Children are supposed to indulge in fantasy.

Companies going public and seeking millions of hard-earned dollars from investors aren’t supposed to suspend reality in quite the same way — or at all, really.

In Dave & Buster’s S-1, the company emphasizes its focus on live sports, as if it were a novel or unique aspect the restaurant industry has never seen before. On the contrary, Buffalo Wild Wings is absolutely crushing this segment, and if Dave & Buster’s really wants to go head-to-head with BWLD it’s gonna have some problems.

Reason No. 2: Dave & Buster’s Is Both Tiny AND Not Growing Quickly

tiny snailListen, I’ve got nothing against the little guy, especially when it comes to the stock market. Small-cap stocks can be exciting and extremely lucrative if you choose them right.

But they can also rob you blind in the blink of an eye.

I don’t care if a company is doubling sales every year or posting consistent bottom-line growth — small-caps can ruin your portfolio, especially if you buy into the hype.

Consider Noodles & Co (NDLS), for instance. I love their food and find their 30% per-annum bottom-line growth even more impressive. But NDLS stock has imploded since it went public last year.

Dave & Buster’s sales grew at a measly 4.5% annual rate in its most recent fiscal year, and its profits plunged 75% in the same period. It doesn’t even have a franchise model yet.

Hopefully by now I’ve made my case, but just in case you’re really into the idea of owning Dave & Buster’s stock, there’s one last reason you shouldn’t give PLAY any play when it IPOs.

Reason No. 3: Dave & Buster’s Is Loaded With Debt

retail sales 1. Get Rid of Your CashThere’s a section in the Dave & Buster’s filing that discusses how it plans to use the proceeds from its IPO. Here one would hope to see something about expansion plans or store improvements. Instead, the company mentions only a bunch of debt it has to pay off.

A few pages later, Dave & Buster enlighten you as to how much outstanding debt they have on their books. The company owes more than $528 million.

The IPO is only slated to bring in about $100 million.

Perhaps Dave & Buster’s has been emboldened by recent IPOs in its industry like Zoe’s Kitchen (ZOES), Noodles & Co, and El Pollo Loco (LOCO). Regardless, unless fundamental changes occur with PLAY’s ability to grow, solidify its niche, and repay its debt, I’d much rather stop in for a bite to eat than load up on shares for my portfolio.

As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on twitter @divinebizkid.


Article printed from InvestorPlace Media, https://investorplace.com/2014/09/dave-busters-ipo-play/.

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