RGA Investment Advisors: Dave & Buster’s ($PLAY) Investment Case – Q2 2024
RGA Investment Advisors provides an in-depth analysis of Dave & Buster’s ($PLAY), a recent addition to their portfolio. This investment represents both a challenge and an opportunity for RGA, as they describe their timing as “both too late and too early.” Initially missing what they perceived as an attractive entry point in the low $30s, RGA initiated a position when the stock pulled back to around $50, believing it offered compelling value. Despite near-term headwinds causing the stock to decline further, RGA remains confident in the long-term potential of PLAY, particularly given its current valuation and the strategic initiatives underway.
Business Overview
- Dave & Buster’s is a leading owner and operator of entertainment and dining venues.
- The company offers a unique “eatertainment” concept, combining food and beverage with games and attractions.
Market Position
- One of the most affordable entertainment offerings for families.
- Positioned to benefit from potential economic relief for low-income consumers.
Competitive Advantages
- Strategic Ownership: Largest owner is Hill Path Capital, with expertise in lodging, entertainment, and gaming.
- New Management: Installed team with successful turnaround experience from Main Event concept.
- Value Proposition: Attractive entertainment option for families, especially in a recovering economy.
Growth Runway Management targets $1 billion in EBITDA by 2026, driven by six strategic levers:
- Marketing Optimization: Shift from linear TV to digital advertising and loyalty programs.
- Strategic Games Pricing: Implementing sophisticated pricing models based on location and time.
- Improved F&B: Simplifying menu and addressing lower attach rates.
- Special Events: Restaffing events locally to drive profitability.
- Box Expansion: Mid-single-digit annual growth in new locations.
- Share Repurchases: Aggressive buyback policy, with 17.2% reduction in shares outstanding since 2022 peak.
Market Dynamics and Opportunities
- Current challenges include retrenchment of low-income consumers due to macro factors.
- Potential tailwinds from lower oil prices and anticipated interest rate cuts.
- Significant upside potential as investment initiatives complete and free cash flow converges with EBITDA.
Valuation and Expected Returns
- Currently trading at a mid-single-digit EBITDA multiple.
- RGA views the valuation and opportunity as very compelling, despite recent price volatility.
- Expectations for strong returns as the company progresses towards its $1 billion EBITDA goal.
Other Key Points from RGA’s Q2 2024 Commentary
- Reflection on the dominance of Large Cap stocks, particularly the “Magnificent 7” and Nvidia’s influence.
- Discussion of small cap underperformance relative to large caps.
- Updates on other positions, including Sartorius and a repurchase of Vail Resorts (MTN).
Click here for the full pro investor letter.
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