What happened
Shares of Dave & Buster's (PLAY 5.23%) rose an impressive 19.2% on Tuesday.
The company contains both the namesake Dave & Buster's arcade-themed restaurant and the Main Event, a restaurant concept that features bowling, laser tag, and virtual reality games, which Dave & Buster's acquired this time last year.
Dave & Buster's stock had already jumped last week, after it reported mixed first-quarter results. While the company slightly missed expectations on the top line, it beat expectations for earnings per share, due to the impressive profitability brought on by the realization of merger synergies stemming from the Main Event acquisition last year.
Last week's enthusiasm received a further jolt on Tuesday, as the company held its investor day outlining its longer-term plans. Apparently, investors liked what they heard. When combined with today's lower-than-expected inflation print, shares soared.
NASDAQ: PLAY
Key Data Points
So what
Today, the May Consumer Price Index (CPI) was released, showing a continued deceleration of inflation, at 4% year over year and just 0.1% month over month. That was generally in line or slightly below expectations. While still above the Federal Reserve's 2% inflation target, the print seemed to spur confidence that the Fed would pause its interest rate increases at its meeting this week, and that it may be done with rate increases altogether.
If inflation continues to fall without more rate increases, the economy could achieve a "soft landing," or a decline in inflation without significant job losses. That would be a positive for Dave & Buster's, which is a discretionary purchase that caters to middle-class families likely to be impacted by inflationary pressures.
Yet while many such stocks were up today, not many matched the near-20% surge for Dave & Buster's. That likely stemmed from investors having a bullish takeaway from the company's investor day presentation.
While last quarter's results were well received, today management projected some impressive revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) uplift targets over the medium term, due to several strategic initiatives. These initiatives include marketing optimization, strategic pricing, remodels, technological innovation, and of course, new unit growth and international licensing strategies.
Management believes there is between $635 million and $825 million of EBITDA uplift potential in the future. That compares with just $566 million in credit-adjusted EBITDA over the past four quarters.
Needless to say, investors certainly liked the prospect of a more than doubling of EBITDA over the medium term.
Now what
Dave & Buster's could be an interesting restaurant stock, as it still only trades around 13 times this year's earnings estimates and less than 11 times next year's estimates. Moreover, management seems to be doing a good job reaping synergies from the Main Event acquisition.
Clearly, investors are growing more bullish on the company's growth outlook, and today's lower inflation print is helping. For those looking to play an economic recovery or for investors who believe a "soft landing" can be achieved, it's a name to watch.
