MW Dave & Buster's struggles to capture spending, and CEO exit is a bombshell

By Ciara Linnane

Truist downgraded the stock to hold from buy and said CEO move muddles the turnaround story

Dave & Buster's Entertainment Inc.'s stock tumbled 14.6% early Wednesday after the gaming and restaurant chain posted wider-than-expected third-quarter losses and the surprise exit of its chief executive after just two years in the role.

Management characterized the quarter as "frustrating as thegreen shoots from our strategic initiatives are unable to poke through the macro headwinds."

But it was the exit of CEO Chris Morris that caught analysts' attention, as he was the primary driver of the strategic plan launched about 18 months ago, noted Truist analyst Jake Bartlett, who downgraded the stock to hold from buy.

Truist was encouraged by Morris's past turnaround success, at his previous company Main Event, a Dallas-based operator of arcade and virtual-reality-game centers that Dave & Buster's acquired in 2022.

Morris's compensation was aligned with shareholder interests, said Bartlett. The CEO would have earned a roughly $11 million payout if the stock held above $67.54, rising to about $26 million if it held above $101.31.

The stock $(PLAY)$ closed Tuesday at $36.80 and has fallen 31.7% in the year to date, while the S&P 500 SPX has gained 25.6%.

"While PLAY's Board appears committed to carrying out the turnaround plan devised by Mr. Morris and his team, his departure gives us less visibility on how the plan may evolve (especially under a new CEO) and be executed," Bartlett wrote. "'Setting the stage' for the turnaround (upgrading technology and improving operations) took more effort than expected (and was exhausting), but makes Mr. Morris' early exit all the more disappointing, in our view, suggesting the payoff may not be as quick as we had expected (or worth waiting for)."

Bartlett cut his stock price target by 36% to $35 from $56.

Benchmark analysts agreed.

Morris's departure "adds an additional friction to executing the second half of PLAY's strategic plan," analysts Mike Hickey and Todd M. Brooks wrote in a note to clients. Benchmark has a hold rating on the stock.

Dave & Buster's, known for its massive arcades and sports bars, had a net loss of $32.7 million, or 84 cents a share, for the quarter, wider than the loss of $5.2 million, or 12 cents a share, posted in the year-earlier period.

Adjusted for one-time items, the loss per share came to 45 cents, while FactSet expected a 40-cent loss.

Revenue fell 3% to $453 million, below the $464 million FactSet consensus. Same-store sales fell 7.7%, while FactSet expected a 6.4% decline.

Kevin Sheehan, chair of the board and interim CEO while the company searches for a successor for Morris, said bad weather, a fiscal calendar mismatch, disruption at stores undergoing remodeling and certain unusual items in the year-ago period all impacted the numbers.

Raymond James said visibility into the company's outlook "remains below average" with same-store sales "meaningfully negative" for a seventh straight quarter.

The company's balance sheet and free cash flow metrics remain pressured with free cash flow negative due to new units and remodels.

"We suspect the stock's low valuation (2025 EV/EBITDA mid'5s) should provide some downside support assuming comps can stabilize into 2025," wrote analyst Brian M. Vaccaro, who has a market perform rating on the stock.

Truist's Bartlett echoed that thought.

"While PLAY's valuation is not demanding, we now prefer to remain on the sidelines until there is evidence of its turnaround," he wrote.

Read also: Bowlero's stock is a buy after strong boost in foot traffic in February, says Jefferies

-Ciara Linnane

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December 11, 2024 08:16 ET (13:16 GMT)

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