THE HEDGEYE EDGE
When we presented our SHORT thesis a little over one year ago, we had admittedly underestimated the Company’s ability to buttress itself from competitive intrusion. One facet of our thesis that still gives us confidence on this call is our belief that the Company’s discretionary games business will slow. Like other companies in the Casual Dining space, PLAY has seen beverage and foods comps slow dramatically, leaving its amusement business as the lone portion of the business posting respectable comps.
As we spoke about in our more recent Black Book presentation (August 2017), PLAY is not completely immune to the slowdown in the restaurants space, as system-wide same-store sales has seen a sequential deceleration since 3Q16, and we continue to believe that consensus’ projected reacceleration is unwarranted. More notably, on a two-year average basis, system-wide same-store sales has trended downward since 3Q15 and this trend continued more recently when PLAY reported 2Q17 earnings (SSS of +1.1% vs Consensus +2.6%).
Further, management was forced to revise guidance; among the revisions were same-store sales of +1%-2% (vs prior guidance of 2%-3%) and EBITDA of $270M-$276M (vs prior guidance of $276M-$282M) – we believe these revised estimates may have another step down as the business faces increasing competitive pressure.
INTERMEDIATE TERM (TREND)
PLAY’s dine-in business hinges on occasion-driven traffic, and spells trouble for the business. With traffic trends across the restaurants space hard to come by and the continued proliferation of food delivery, we believe that PLAY’s sports-centric occasion-driven dine-in business will be pressures as the convenience offered by delivery can sway consumers to enjoy the occasion in the comfort of their home.
LONG TERM (TAIL)
Turning to competition and how it will affect the PLAY business in the long term, on their 2Q17 earnings call, management talked about how significant of an impact competition and cannibalization had on sales figures in 2Q.
According to the Company, competition from other amusement-centric restaurants, namely TopGolf and Main Event, was modestly above their expectations. During the quarter, Main Event and TopGolf opened 5 units and 2 units respectively, and it is worth noting that of the combined 7 unit openings, 6 of them were in PLAY markets. Going back in time for a moment, when we first broached the idea of shorting PLAY in September 2016, one of our main points was that competitive intruders were attacking PLAY from all angles.
Evidently, we were a bit too early with regard to this observation, but it is now clear that our suspicions were correct. With such competitors not letting up anytime soon, PLAY can expect to be pressured for the foreseeable future.