Game On: A Rare Consumer-Orientated Trade
Dave & Buster’s lines up well as a covered call trade. Here's the PLAY.
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My regular readers know I am not optimistic about the prospects for consumer demand in the quarters ahead. The unemployment rate has tick up from a nadir of 3.5% last July to a current 4.1% and job openings are at a three-year low.
The excess savings from Covid stimulus programs that peaked at $2.1 trillion in August of 2021 have been entirely burned off. The personal savings rate sits at half pre-pandemic levels and where it was last seen following the Great Financial Crisis. Credit-card debt is at record highs and delinquency rates on those liabilities are at their highest reading since 2012.
Nevertheless, we are teeing up a consumer-orientated name as a covered call trade idea. We are doing so for numerous reasons, including that the stock has a low P/E and is trading near technical support levels.
The stock and company in question is Dave & Buster’s Entertainment PLAY, a pioneer in the ‘Eatertainment’ space. After a recent significant decline, the stock is right near technical support that has held for some three years.
The last time I initiated a covered call holding in PLAY in the fourth quarter of 2022, the stock was trading near identical levels. That turned out to be a nice profitable trade, so now I am looking to execute a "rinse, wash, and repeat" strategy once again.
The catalysts for the stock's poor performance in 2024 were disappointing first-quarter results and tepid full-year guidance from management. This is hardly unique for consumer-facing concerns this year, it should be noted, as well-known icons such as Starbucks SBUX, Home Depot HD and myriad other firms have had their own struggles with consumer demand this year.
Dave & Buster's currently operates approximately 225 locations in just over 40 states. A relatively new management team is in the process of revamping all locations, a task that should be completed in 2026.
This overhaul also includes a revamped marketing approach, higher game prices, a new food and beverage menu, more domestic locations (to 250 by fiscal year 2025), expansion of its franchise model internationally, and identification of several areas for expense savings.
The goal is to add substantially to annual adjusted EBITDA when these efforts are completed. If leadership gets anywhere close to their stated goals, the impacts will be powerful given the stock has a current market capitalization of approximate $1.4 billion.
Despite some "hiccups" in the first quarter implementing this new strategy, the company was still solidly profitable and threw off nearly $110 million of operational cash flow for the quarter.
The stock just seems too cheap trading at a P/E multiple of 9x on estimated FY 25 EPS and an EV/TTM Adj. EBITDA of 5x, even with my concerns around consumer demand. The stock has also seen some insider purchases in July.
Option Strategy
This is how one can execute a covered call position in PLAY. As a reminder, covered call orders involve buying an equity and simultaneously selling just-out-of-the-money call strikes against the new position.
Using the January $35 call strikes, fashion a covered call order with a net debit in the $30.10 to $30.30 a share range (net stock price - option premium).
This strategy provides downside protection of nearly 17% with upside potential of just north of 15% even if this stock falls a bit from here over the next six months.
At the time of publication, Jensen was long PLAY.
