So over the last couple of months I’ve had my eye on Dave and Busters stock (PLAY) – which closed at $16.04 today Oct. 7th (exactly 6 months ago it was at $14.68 so it really hasn’t been doing much. I vacillate between the idea that once a vaccine/new president/stimulus is announced that all of these economic recovery stocks are going to fly… however I believe that this virus is going to keep popping up in hotspots and we will see continued business and school shutdowns that will continue to cripple restaurants and the travel related industry well into 2021. I think that once there is a vaccine, not everyone will get it and I also think that people have a different way of looking at the world now and they are being more risk averse in the activities that they choose to engage in in general. Are people going to be ok with touching all of the same videogames and basketballs that others have touched? Although I can appreciate a good ringpop and a plastic bracelet after spending $100 in an hour there, I think Covid might put the nail in the D&B coffin.
I think an easier strategy when looking at bankrupt companies is to look at their peers… because they must all be experiencing a similar level of contraction as well. So that’s how I’ve stumbled onto PLAY, as we’ve watched Chuck E Cheese and Ruby Tuesday file for bankruptcy recently. Now if I were a betting woman (and I am) I’d bet that Dave and Busters probably goes bust. no pun intended. It may take another 6 months but I can see it happening. Or maybe it doubles.. who knows.. More importantly, how can I trade this? As a gamble I would buy puts on this that expire in January $2021 with a $10.00 strike. $16 to $10 is a pretty big move, especially when you consider that it has recently been upgraded by a couple of analysts recently, but if anything were certain in life we’d all be rich. I’d love to hear any thoughts on this. Check out this report:
DaveBuster’sEntertainmentInc_Oct_04_2020_PLAY
Joscelyn
Under-inflated basketballs, screaming children, and cardboard-like pizza? I stand with Jos. I’m short. I think COVID will change people’s behavior and agree with her thought to look to comps as a way to get a sense of PLAY’s ultimate fate. There are other indicators within the most recent 10-Q. Management recently took an impairment charge to reflect its latest expectation regarding the company’s (in)ability to generate cash flow from its properties, which, are all leased. The company has very few tangible assets (the “right of use” operating leases are not assets, but are rather a function of what I consider to be a very silly recently-adopted accounting rule). When thinking about how to play this name, there really aren’t any tangible assets worth recovering. Jos is right to look to the equity. I love options given the optionality they give investors (pun intended). The only thing I would add to Jos’ trade is this – I’d buy puts (we can question the strike later), but on the other side I’d short calls to generate premium income that perfectly offets the cost of the puts. Expressing a bearish view in this fashion doesn’t cost me anything and positions me to benefit from the anticipated decline in PLAY’s equity price.
I don’t think D&B should be analyzed through the lens of it being a restaurant, or existing in the restaurant industry. It’s an entertainment company and therefore should not be compared to the likes of Ruby Tuesday. Using this lens, I think the story is much worse for D&B. The restaurant industry will recover – we’ve already seen how it has adapted and evolved with expanded outdoor seating, QR codes that have replaced physical menus, expanded delivery/pick-up options, etc.
A place like D&B is going to have a much harder time innovating and adapting. Like Joscelyn said, the idea of touching video games/basketballs that have touched literally thousands of hands is going to be unappealing for a lot of people for a very long time. I can imagine being in a crowded restaurant at some point in the near future. I can’t imagine being in a closed, dark, crowded arcade hall, possibly ever again. And unfortunately for D&B, the dark, crowded, high-touch experience is part of its brand and its appeal.
To understand D&B’s fate I think we’re better-suited to compare it to companies in the movie theatre industry. Will movie theaters ever recover? Or has COVID simply hit the fast-forward button on the movie theatre industry’s slow death? I’m afraid that it’s the latter, and that D&B and its peers will suffer a similar fate.