Dueling Fools
Dave & Busted
The Bear Rebuttal
By
Rick waxes eloquent about the continuing growth possibilities here. I could cite chapter and verse to him about sector sisters Rainforest Cafe and Planet Hollywood never returning to growth after their first earnings warnings, but let me explain why sustained earnings growth just won't be happening in this specific case.
Dave & Buster's has had, as long as I can remember, nearly universal support from the Wall Street analyst sector in the form of unanimous "strong buy" ratings. As recently as three months ago, out of the 10 brokers covering Dave & Buster's, nine maintained a "strong buy" rating, and the stingy one, simply a "buy." You couldn't have found a company that had better support from the analyst community. Yet virtually all of them immediately jumped away from D&B after it issued that one earnings warning that Rick doesn't seem so concerned about.
Why did those Wall Streeters maintain such high ratings? Why didn't they see how shaky the foundation was here? Simply put, because Dave & Buster's was an awfully good and steady client of the investment banking side of the business. It paid for analysts to keep those strong buy ratings. After all, in order to fund its growth, within the last three years D&B has found itself dependent on Wall Street's bankers to put together both a secondary equity offering and a major debt offering -- and Wall Street was therefore more than willing to overlook the fact that D&B wasn't really operating with a particularly successful business model.
Now look at what's happening. Virtually no analyst is maintaining a positive rating on the company despite the seemingly more attractive share price. Why? Because it is probably no longer tenable for D&B to raise more capital. A further secondary offering is clearly out of the question given the stock price, and even another bond offering, which would seem to be necessary in the very near future if I'm reading the balance sheet correctly (only $3 million in cash on hand), doesn't seem particularly viable given the current operating difficulties.
You may be asking yourself, "What operating difficulties? Aren't there still earnings there?" Well, maybe -- but possibly not for too much longer. Consider these words from the earnings warning press release: "Our historical performance and the continued positive cash flow from all of our stores demonstrate the Dave & Buster's business model is sound."
Notice the dog that doesn't bark here. Why is the company's co-founder referring to positive cash flow here instead of profitability at each unit? If I'm not very much mistaken, it's because not all the units are still profitable -- it is necessary to exclude the unit depreciation and amortization costs and refer only to cash flow to make it sound as if everything is still sunshine and rainbows. That's a terrible sign, especially for a company that doesn't seem to have enough cash on its balance sheet to continue funding any buildout of its extraordinarily expensive establishments.
The last words to this Wall Street-funded growth story should be ones familiar to any D&B videoholic who has run out of time and money:
Game Over.
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