Dave & Buster's Recovery Hits A Snag Dave & Buster's (NASDAQ: PLAY) recovery is well underway but there is a snag that we think will cap gains in the near term at least. While the recovery is...

Dave & Buster's Moves Higher But We're Not Buying It

Dave & Buster's (NASDAQ: PLAY) recovery is well underway but there is a snag that we think will cap gains in the near term at least. While the recovery is well underway, it is not quite as strong as it could have been and that should cause a reset in prices if only one that is short-lived. The good news is that the company outlook remains positive and is supported by strengthening comps at existing stores and the addition of new stores. This should drive revenue to above the pre-COVID level as soon as the Q1 2022 period. In our view, Dave & Buster's is setting up for a correction but it is one that will lead to a buying opportunity and not a long-lasting implosion of share prices.

Dave & Buster's Slips On Weak Earnings

Dave & Buster's price action is up in the wake of the Q4 results but that was not the market's initial reaction. The initial reaction was a 5% decline in price action that suggests there is some underlying weakness in the market for this stock. The top-line results are good, the $343.1 million in net revenue is up 193.7% from last year, but they missed the Marketbeat.com consensus by 660 basis points and are down in the 2-year stack which is the comparison that really counts. On a two-year basis, revenue is down 1.2% on a 2.6% decline in comps.

Moving down the report, the results are equally mixed with net income up on a 2-year basis but GAAP earnings are down and missed the consensus. The net income of $25.7 million is up by $0.07 million but GAAP earnings are only $0.52 due to increased share count and missed by a dime. As for guidance, the company says business is picking up and that the first 8 weeks of Q1 are positive in the 2-year comparison. The bad news is that business is up only 5.4% on a comp basis while many other businesses, including some restaurants, surpassed their pre-COVID revenues several quarters ago. Notably, walk-in traffic is up 9.1% versus 2019 while the special events business is still hurting and down 42%. We don't see that changing much over the next quarter or two.

Bulls And Bears Fight Over Dave & Buster's

While the analyst activity has been very light in this stock over the past year, and there have been no commentaries released since the earnings report, the analysts are biased toward the upside. The consensus of 10 analysts is a weak Buy with a price target that assumes about 15% of upside for the stock with shares tickling a new high. That sentiment is echoed by the institutions as well, they've been purchasing the stock with regularity netting more than 5% of the market cap over the past year.

The short-sellers, however, have also been interested in this stock and are part of the recent volatility. Short selling has the short interest up around 12% and amply high enough to drive a short-covering rally or short-squeeze should the catalysts arise. Based on the results and outlook, we don't think the bears are going to give up easily, however, and they might even be using the post-release spike in prices to reposition for another downturn.

The Technical Outlook: Dave & Buster's Meets Resistance

Price action in Dave & Buster's went on a wild ride in the wake of the Q4 report. First down 5% and then up 5% the stock appears to be trapped between the bulls and the bears. The balance of power is tilted in favor of the bulls right now so we are expecting to see a test of the $50 level if it can get that high. Until then, we're watching resistance at the $46 level and it appears to be strong. If the market can not get above $46 this stock will most likely remain range-bound until the outlook brightens and there is a chance it could move down to set new lows as well.