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Editor's Note: Dave & Buster's (PLAY) has been on our Restaurants team's short list for some time now. The stock is down almost -23% today after missing 1Q19 earnings estimates and lowering full-year guidance. Below is an institutional research note on PLAY published today by our Restaurants team – led by Sector Head Howard Penney. For access to our Restaurants institutional research email sales@hedgeye.com.

Dave & Buster’s (PLAY) is on the Hedgeye Restaurants Best Ideas list as a SHORT

For the better part of 12-months we have been perplexed at the Street’s story telling around VR and the benefits it would bring to PLAY.  The company cited this year's Easter calendar shift, Food & Beverage and competitive headwinds as the reasons for the sales miss.  Although, the price increase on VR also hurt traffic. 

After yesterday’s earnings release and listening to the earnings call, the company has a lot of work to do before sales trends turn positive.  Here are a few key quotes from the call:

Competitive pressures - “we expect increased competition over the balance of the year as we continue to see aggressive entry into our markets.”

HEDGEYE – Until they slow growth the problems will not end for this company.

Food & Beverage – “we expect it will take some time to build awareness of our new food offering to enhance our F&B attachment rate.”

HEDGEYE – They need to invest behind food.  Discounting will not solve the problems.  F&B 2-year SSS trends decelerated 90bps to -4.7%.

Easter – “And a lot of it has to do with the combination of the timing of the Easter and spring break and the associated weather at that time. And as it turned out for us, we had an earlier colder spring break time period in 2018 followed by later an unfortunately better weather, normal weather, and sometimes it can go the other way. If it's a rainy spring break and April showers, so to speak, we can have big weeks. So it just didn't fall the other way. I'm not saying that's the whole thing for the quarter, but it was a headwind for us.”

HEDGEYE – The perfect storm?  No, a concept that is struggling and lots of excuses. 

VR – “I don't think that amusements alone can drive the whole business here.”

HEDGEYE – I don’t think management was saying that 12-months ago! The comps in amusements were 1.8% (part of that is due to price) or -1.1% on a 2-year stack, deceleration of 120bps sequentially. 

Why We Said Short Dave & Buster's Ahead Of Today's Selloff | $PLAY - PLAY CHART 1

CASH FLOW & BALANCE SHEET PROBLEMS

In our view, the company is compounding its top-line problems by taking on increased financial risk.  In 1Q19, between aggressive unit growth, share repurchases and the dividend the PLAY burned nearly $50 million in cash.  This makes the fourth straight quarter where the company is borrowing money to fund its current strategy.  In 1Q19, long-term debt ended the quarter at $427.7 million up $49.3 million year-over year.  Add to that $1.07 billion in operating lease liabilities and you have a highly leveraged company.