5 Reasons to Play the Dave & Buster's IPO

Dave And Busters In Braintree
Aram Boghosian/The Boston Globe/Getty Images

The next hot restaurant initial public offering could be a company that wouldn't mind playing games with you. Dave & Buster's -- the chain of gargantuan restaurants with enclosed arcades and game rooms -- filed to go public earlier this month. If everything goes as planned, it will begin trading later this year under the ticker symbol PLAY on the Nasdaq exchange.

There's more to Dave & Buster's than a D&B logo on the outside and a group of adults reliving their childhood at the video game arcade on the inside. Let's go over several of the reasons you may want to consider buying into the upcoming IPO.

1. Dave & Buster's Is Growing Quickly

One thing to watch for in assessing eatery IPOs is to make sure that they're not going public as an exit strategy. Investors were burned last year by chasing the once-hot IPOs of sandwich baker Potbelly (PBPB) and pasta tosser Noodles & Co. (NDLS) while store-level popularity was actually peaking.

Growth is accelerating at Dave & Buster's. Revenue may have inched just 5 percent higher last year, but sales have soared nearly 17 percent through the first half of this fiscal year.

2. It's Been Here Before

This isn't the first time that Dave & Buster's will be a publicly traded company. Investors were able to bet on the company's success until it was taken private by Wellspring Capital Management in 2006. It was then sold to Oak Hill Capital Partners four years later in a $570 million transaction, and now that firm is taking it public.

This may not seem like much of a selling point. Some will argue that it reveals a tendency to quit. However, it can also be viewed as a company that is already used to the market's quarterly expectations, with the experience to navigate through Wall Street's fickle tastemakers.

3. Dave & Buster's Offers Diversity From Volatile Food Prices

One of the biggest potential setbacks for a restaurant operator is the volatility of food prices. Costs of key menu components go up and down, and sometimes even market darlings have a hard time passing along increases to their customers.

Dave & Buster's is lucky in that regard. Food sales made up just 33.6 percent of the company's revenue. A little more than half of its revenue comes from the amusements and other diversions that it makes available throughout its buildings, with the remaining 15.2 percent coming from beverages. This obviously comes in handy relative to traditional operators whenever chicken, pork and dairy prices spike. In fact, food and beverage costs swallowed up just 12.2 percent of Dave & Buster's revenue last year.

4. Comps Remain Positive

Another thing for restaurant IPO investors to watch is comparable-restaurant sales. Some companies are hitting the market just as their popularity is starting to peak. That's not the case here. Dave & Buster's has come through with increases of 1 percent, 3 percent and 2.2 percent through the past three years. And there's a 5.2 percent gain through the first six months of the fiscal year.

5. Dave & Buster's Is Starting to Think Small

One knock on Dave & Buster's is that it may be getting too big. With 69 locations, where will the future D&B's go? Even major cities really can't handle more than one or two locations without seemingly cannibalizing sales.

%VIRTUAL-WSSCourseInline-799%Well, Dave & Buster's has responded by opening smaller locations in smaller markets. It's eyeing sites with 25,000 to 35,000 square feet, well below its current average of 47,000 square feet. They may generate less revenue, but they are also cheaper to build out and run. The return on investment remains the same for the small and large properties.

Given the scalable nature of this model -- and that it's one in which operating profits have been growing faster than revenue -- Dave & Buster's could be worthy of its PLAY ticker symbol.

Motley Fool contributor Rick Munarriz and the Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.

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