Why Dave & Buster's Entertainment Is a Winning Play

By Motley Fool StaffMarketsFool.com

In this segment from Motley Fool Money, Chris Hill recruitsSimon Erickson and Jeff Fischer to explain the enviable business model thatDave & Buster's(NASDAQ: PLAY)has managed to create. With high margins and a short runway to profitability for each new location, the stock seems poised to continue its impressive run. But will a potential recession in the coming years put a damper on results?

A full transcript follows the video.

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This video was recorded on March 31, 2017.

Chris Hill: Over thepast few years, shares ofDave & Buster'shavedoubled. Fourth quarter profitscame in higher than expected this week, but Simon, the company is loweringexpectations for 2017, andprobably not a bad idea, when you look at what a pretty nice run they've had the last couple years.

Simon Erickson: Jeff,this is a company that's really gaming the system -- I really like the way that our producer, Mac Greer, described this --this is kind of a casino. They're printing moneyright now. They have Amusements,that's about 53% of revenue. These are the games thathave really high margins afteryou put them into the stores. Of course,food and beverages is the other half of the business, and of course,people that are older, that are able to drinkhigh margin ticket items isworking for them, too. Chris, the story for me atDave & Buster's is the unit economics of the new stores they're building out. They now have a total of 92 stores, and they're opening about 11 or 12 a year. But the cash on cash return,which means, if you took the EBITDA that they're making the first year,divide it by the development costs of the stores, it's at 52% right now. That's fantastic,that means they're paying off all of their development costs in 20 months, and that's an excellent business proposition for anyone who wants to buy shares.

Hill: See,my concern witha company like Dave & Buster's is that it really does seem likesuch a discretionary spending type of business. We've been in aneconomic boom here in the U.S. for a bunch of years, and at some point,when the next recession hits,it seems like Dave & Buster's is going to be among the first businesses to be hit.

Erickson: Yeah,that's right. They're kind oftargeting their cash on cash returns of about 35%. When you see that management is expecting that to be about 17% lower than what they're getting, you'redefinitely getting theconsumers that have discretionary income right now. Wemight see that contract a little bitin the next couple of yearsif we have a recession.

Jeff Fischer:Yeah,it's almost like a casino in that regard. It's not where you're going to go when times are tough. That said, I wonder how much themaintenance is going to be in the locations, to keep the games up to date. Any thoughts on that?

Erickson: To be determined. I think a lot of it is the upfront costs they'reputting in there,and they're still getting 52% on them. Very high margin.

Chris Hill has no position in any stocks mentioned. Jeff Fischer has no position in any stocks mentioned. Simon Erickson has no position in any stocks mentioned. The Motley Fool recommends Dave and Buster's Entertainment. The Motley Fool has a disclosure policy.