April 08, 2004

Business News

Dave & Buster's getting back in the game
Earnings growth a sign that things are looking better after tough 2003

Dave & Buster's getting back in the game
Earnings growth a sign that things are looking better after tough 2003

08:55 AM CDT on Thursday, April 8, 2004

By KAREN ROBINSON-JACOBS / The Dallas Morning News

Buster Corley, half of the duo who founded the Dave & Buster's restaurant chain, has been in serious need of some good news.

It was just over a year ago that skittish investors, leery of a burdensome debt load and sagging sales at the restaurant-and-entertainment chain, had sheared nearly 40 percent off the company's share price.

The Dallas-based chain faced uprisings from two investor groups one backing a replacement slate of board members and another that sought to force a sale of the company. Growth was halted. Jobs were cut.

"Simply put, 2003 was filled with great challenges," said Mr. Corley, 53, the chief executive of Dave & Buster's Inc. "It was the single most challenging year of my life."

On Wednesday, the company got to deliver a bullish earnings report that was "a whole lot funner" to dish out, said Dave Corriveau, 52, president of the company.

Dave & Buster's reported net income for its fiscal fourth quarter more than doubled to $7 million, or 46 cents a share, from the year-ago period, beating analysts' estimates by a nickel. For the full year, net income was $11 million, or 80 cents a share, compared with a net loss of $1.7 million, or 13 cents, in 2002.

While revenue fell for the year by 2.9 percent, to $362.8 million, the report was seen as a welcome tiding. That, and the company's plans to add branches, drove shares in Dave & Buster's up $2.11, or 14.1 percent, to close at $17.06 on the New York Stock Exchange.

"Much of the heavy lifting has been done," said Bob Labick, senior equity analyst with CJS Securities, who rates the company an "outperform" with a price target of $18. "They've gotten a lot [of the problems] behind them and now they're poised to reap the benefits of an improving economy."

Analysts attribute at least some of the company's past difficulties to the nation's fiscal woes.

The Dave & Buster's concept, launched in 1982 in Dallas, is essentially a casual-dining restaurant attached to a game room for children and adults who want to behave like children. The complex includes pool tables, state-of the-art video games and simulators.

But entertainment-themed venues, more than family-dining or "comfort food" restaurants, depend heavily on customers having disposable income.

"Most of the challenge we faced was on the amusement side," said Mr. Corley. Amusement and game revenue dropped 5.5 percent in 2003, accounting for 47 percent of revenue, the company said.

Even allowing for the economic downturn, the company's share performance was trailing that of its peers, according to Dolphin LP, an investment group that last year held about 9 percent of the company's shares and was a top stakeholder. In advance of the company's annual meeting in June, Dolphin offered a slate of three replacement candidates for the nine-member board.

That battle heated up after Renaissance Capital Group Inc. offered, then withdrew, a shareholder proposal pushing for a sale of the company.

Investors were alarmed in part at the company's debt load, which smothered its ability to grow. The company opened only one outlet in 2002 and none in 2003, compared with four per year in 2000 and 2001.

At about 50,000 square feet each, the stores are massive and cost about $9 million to launch. On average, each store contains 150 games valued at about $2 million.

Bank debt, largely from new store openings, had grown to $68 million by the beginning of the fiscal year, the company said. As sales improved during the year, the company used cash from operations to cut that figure to $54 million, said W.C. Hammett, chief financial officer.

Trimming costs

Also, in response to investor concerns, the company enacted $11 million in cost cuts late in 2002. The cuts took effect largely in 2003 and involved trimming 60 field and corporate jobs, a first for the company, and reducing employee hours, company officials said. Dave & Buster's retains about 6,500 employees, including about 130 workers on the corporate staff.

The company also obtained $30 million in private placement funds that helped it restructure older debt and jump-start its growth program.

One new outlet a 55,000-square-foot complex complete with a rooftop patio overlooking the San Gabriel Mountains near Los Angeles is slated to open in the fall.

The store opening is part of the company's bid to spur sales growth. In the last fiscal year, sales at restaurants open at least 18 months a key measure of chain health trailed the previous year's performance, albeit by decreasing amounts. Same-store sales were off by 7.5 percent at the beginning of the year but trailed the prior year by only 2 percent in the fourth quarter.

The company said it's looking for positive trends in the second half of this year.

And in a bid to draw more hungry video-game players, the company last year switched advertising agencies and launched a new theme: "Recess is calling."

Getting the message

Although the two entrepreneurs want patrons to hear the siren song of recreation, shareholders want to make sure that Dave and Buster continue to hear investors calling.

"I think clearly the company has gotten the message delivered by a lot of shareholders," said Donald T. Netter, senior managing director of Dolphin, based in Stamford, Conn. "There's clearly been a lot of progress, and investors are watching and are hopeful that things will continue in that vein."

Mr. Corriveau is convinced that they will.

"It's not how hard you fall," he said, "but how high you bounce back. Now it's up to us to keep our equilibrium" and follow through on the plans put in place.

Mr. Corriveau said some of the company's greatest accomplishments came in the last year responding to the trials by cutting costs, paying down debt and ultimately appeasing shareholders.

"We've been bruised, but there's no killing us," he said. "We can bounce. And we never give up."

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Posted by Craig at April 8, 2004 08:05 PM