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.

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.

8 PHOTOS
5 Less-Known Restaurant Chains You Should Eat At and Invest In
See Gallery
5 Reasons to Play the Dave & Buster's IPO

If investors are hungry for something a little more exciting, thankfully there's no shortage of faster growing publicly traded restaurant chains that are doing just fine.

So sorry, Olive Garden. You may still offer tasty breadsticks, but that's not the kind of rising dough that investors -- and diners -- crave these days.

One of this summer's hottest IPOs was for Noodles & Company (NDLS), a fast casual restaurant chain that specializes in all types of noodles. Olive Garden bashers will find plenty of Italian pastas on the menu, but diners can also be globetrotters by checking out Asian noodle bowls or come closer to home with the classic Americana comfort food of mac and cheese.

Unlike the many table service restaurants facing an alarming number of empty tables, Noodles & Company has delivered positive comps in 29 of the past 30 quarters. Revenue climbed 17 percent to $300.4 million last year, and it's on pace for similar growth through the first half of this year.  

Ignite Restaurant Group (IRG) owns and operates 134 Joe's Crab Shacks and 16 Brick House Tavern + Taps. The operator essentially doubled in size in April when it acquired smaller Olive Garden rival Romano's Macaroni Grill. The 186-unit Italian casual dining chain was once owned by Brinker, and it's a work in progress. Comps were positive at Ignite's two original concepts in its latest quarter, but the same can't be said for Macaroni Grill.

Then again, the sluggish performance at Macaroni Grill also led to an attractive acquisition price. With Macaroni Grill butting pasta bowls with Olive Garden and Joe's Crab Shack fishing against Red Lobster, we can possibly call Ignite a mini Darden. That's a good thing, especially since Ignite has a lot of room for any of its three concepts to grow before it saturates the market.

Casual dining and Mexican don't mix well over time. There's probably a shuttered El Torito, Chi Chi's or Chevy's somewhere near you.

However, Chuy's (CHUY) has raised the bar by creating a lively environment filled with Elvis shrines and customer-submitted dog photos, and it's winning over patrons with its extensive happy hour specials and a bargain-minded menu where nearly every entree costs less than $10.

Chuy's sales surged 23 percent in its latest quarter, and with just 45 locations across twelve states, there are still plenty more places for pooch snapshots and Elvis busts to go up.
As one of the largest franchisees of Buffalo Wild Wings (BWLD), Diversified's (BAGR) largest concept is no stranger to most sports bar enthusiasts. However, the reason that Diversified makes the cut is because it's in the process of rapidly expanding its proprietary Bagger Dave's Legendary Burger Tavern.

There were just 13 of the full-service, ultra-casual restaurant and bar units open by the end of June, but Diversified is hoping to open another six locations later this year. It may soon rival the nearly three dozen Buffalo Wild Wings eateries that it currently watches over. The genius here is that it's probably putting a lot of what it learned at Buffalo Wild Wings into practice at Bagger Dave's.

Revenue soared 61 percent in its latest quarter, propelled almost entirely by new restaurants, but there was still a healthy 7 percent spike in same-store sales during the period. 
Customers looking to trade up from fast food without shelling out more in time and money at a casual dining concept are flocking to fast casual chains that deliver quality ethnic dishes quickly.

Fiesta (FRGI) owns and operates 96 Pollo Tropical restaurants (primarily in South Florida) and 164 Taco Cabana eateries (mostly in Texas). The company also has dozens of franchised locations, especially overseas, as its Latin American-inspired Pollo Tropical rotisserie chicken has proven to be a potent export.

Revenue climbed 9 percent in its latest quarter, fueled by a healthy 6 percent spike in same-restaurant sales at Pollo Tropical.
HIDE CAPTION
SHOW CAPTION
of
SEE ALL
BACK TO SLIDE
Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.