It’s Fun and Games for Dave & Buster’s Entertainment Inc

A $55 price tag seems fair for PLAY stock

For the past month, it has been all fun and games for Dave & Buster’s Entertainment Inc (NASDAQ:PLAY).

The themed-dining restaurant and arcade operator recently reported robust first-quarter numbers that beat on both the top and bottom lines. Comparable sales fell less than expected. Revenues rose more than expected. Margins didn’t get slashed as much as everyone feared. Earnings came in well above expectations.

All together, the report was simply much better than expected. PLAY stock is up more than 13% to $55 in response to those numbers.

But that jump is part of a bigger rebound in PLAY stock. Over the last month, the stock has rallied 45%.

Will the party continue in PLAY stock? Do these better-than-expected numbers give the bulls more ammunition?

I’m not convinced. I love the growth narrative surrounding PLAY stock, as the company is at the heart of a secular shift among consumers towards experience-oriented destinations. But at $55, PLAY stock seems appropriately priced, considering the company’s realistic growth prospects.

As such, while I was a buyer on the dip towards $40, I am now a seller on the rally towards $60.

Dave & Buster’s Is at the Heart of a Revolution

The biggest growth driver for Dave & Buster’s is unit growth potential through a huge shift in mall real estate strategy.

Formerly, malls were exclusively shopping destinations that featured a big Macy’s Inc (NYSE:M) on one end, a big Nordstrom, Inc. (NYSE:JWN) on the other end, and a bunch of clothing stores in between.

That mix of nothing but clothing stores worked for a bit. Until it didn’t. Thanks,, Inc. (NASDAQ:AMZN). E-commerce came along, eroded the value prop of having so many brick-and-mortar clothing stores, and malls struggled.

But now, malls are reinventing themselves, and they are bouncing back as a result. Instead of populating themselves with clothing stores whose value prop is easily replicated and even enhanced online, malls are filling their real estate with experience-oriented destinations that cannot be replicated online. Think things like restaurants, movie theaters, gyms, arcades, mini-golf, bars and salons.

Dave & Buster’s is at the heart of this revolution. As a sports bar crossed with a family restaurant crossed with a kids arcade crossed with a nightclub, Dave & Buster’s is all about the experience. And not exclusively for any demographic. Rather, Dave & Buster’s has an exceptionally wide value-prop that appeals to people of all ages.

From this perspective, Dave & Buster’s is essentially the phoenix rising out of the ashes that is brick-and-mortar retail. This narrative of malls shifting to experience-oriented destinations has longevity, and as such, Dave & Buster’s long-term growth narrative is quite robust.

PLAY Stock Is Priced for Perfection

But at $55, PLAY stock is appropriately priced for this robust growth narrative.

The company currently operates 112 stores. Management pegs North America store potential at around 240 stores, which is believable considering the volume of empty mall real estate in North America. Thus, 10%-plus unit growth is a lock for the next five-plus years.

Moreover, comparable sales growth has slipped into negative territory, but that comes on the heels of multiple consecutive years of positive comparable sales growth. Thus, in the bigger picture, recent negative comps are just a blip in an otherwise healthy unit economics narrative. Over the next five years, comparable sales growth should hang out in the flat to uper low single-digits range as consumers continue to trend towards experience-oriented destinations like D&B.

Meanwhile, margins are also under pressure right now due to poor comps. But once comps normalize, so should margins. Cosequently, operating margins should be able to bounce back to 15% in the medium term.

Under these assumptions for 10% unit growth, positive comparable sales growth, and margin stabilization, I believe PLAY can realistically do about $5 in earnings per share in five years. A market-average 16-times forward multiple on $5 implies a four-year forward price target of $80. Discounted back by 10% per year, that equates to a present value of right around $55.

Bottom Line on PLAY Stock

PLAY stock is supported by a strong growth narrative that is powered by malls reinventing themselves as experience-oriented destinations. Upside from that narrative, however, feels fully priced into PLAY stock here and now. Any prices closer towards $60 feel a little premature.

As of this writing, Luke Lango was long AMZN and M.

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