Dave & Buster’s Entertainment (NASDAQ:PLAY) stock is in a pandemic-induced free fall. Since the nation began to shelter in place, every Dave & Buster’s location has been closed for business. Right now, it may seem that Dave & Buster’s stock is priced for the worst-case scenario. But the reality may be far worse.
In and of itself, the fact that Dave & Buster’s will have no revenue presents no existential threat to the stock. After all, it’s not like other major chain restaurants find themselves in any better shape. In a normal, or even an extreme, recession, a stock like PLAY would find a bottom.
But this is not an ordinary recession. And this is not going to be an ordinary recovery.
An Adult Version of Chuck E. Cheese
My oldest two children grew up in the golden age of Chuck E. Cheese and I spent many an afternoon there eating pizza and playing video games. I’m not a germaphobe, but I admit my head was usually on a swivel watching for kids displaying signs of sickness.
Confined spaces and high-touch surfaces just seemed like a breeding ground for disease. And InvestorPlace’s Josh Enomoto agrees. In a recent article, Enomoto aptly sums up the current problem for the Dave & Buster’s franchise.
“As with adult gaming venues, the company represents the antithesis of various health agencies’ recommendations. First, you have the same circulated air that you’re breathing. Second, Dave & Buster’s is a socializing platform, mixing people with games, food and drinks.
In other words, it’s a combustible mix for spreading infectious diseases.”
When the economy opens up, things will be the same and they will be different. In a best-case scenario, Dave & Buster’s will adopt stringent safety standards. The company will most certainly have to do something to make customers feel more comfortable being in close quarters.
The problem for Dave & Buster’s isn’t the novel coronavirus. There will be a vaccine soon enough. But much like the Spanish Flu, this will change our national psyche for more than a season. There will be those that wonder if this was a worst-case scenario, or the tip of a larger spear?
The point of that macabre thought is that customers will have options. And in a world of options, it’s likely that Dave & Buster’s may not make the cut.
Will Cost Cutting Provide a Floor for Dave & Buster’s Stock?
There is no playbook for what Dave & Buster’s faces. However the company looks to be making a sincere effort. And for the moment, investors like what they hear.
In after-hours trading on April 2, PLAY stock rose when the company beat analysts’ expectations for revenue and profit. Dave & Buster’s also revealed the massive steps it was taking to save money while its restaurants are closed.
First, the company is temporarily furloughing all of its hourly employees (over 15,000). It is also reducing store management and corporate staff by 90% and cutting senior management pay by 50%. In addition to those measures, board members will have their compensation suspended for the remainder of the year. The company also announced it will halt all capital spending and new store construction as well as dividends and share buybacks.
Will the Customers Return?
The last time the United States faced a remotely comparable situation was the H1N1 (swine flu) outbreak of 2009-2010. But that isn’t a perfect comparison because Dave & Buster’s was not a publicly traded company at the time.
Chuck E. Cheese was trading publicly in 2009 as CEC Entertainment and saw its stock take a sharp decline. Was that due to the swine flu, the financial crisis or a little of both? That’s hard to say. But the company did acknowledge that it saw a severe drop in sales for about six weeks during the epidemic.
But Chuck E. Cheese did not have to stop operating during that time. The customer response to the coronavirus sequestering will be the subject of doctoral thesis papers for decades to come.
However, the message to investors is clear. Until there is more clarity on when stores are opening, and if customers will come back, this is one falling knife to stay far away from.
Chris Markoch is a freelance financial copywriter who has been covering the market for over five years. He has been writing for InvestorPlace since 2019. As of this writing, Chris did not hold a position in any of the aforementioned securities.