I went shopping this week, picking up shares of Dave & Buster’s Entertainment (PLAY 3.02%) and Lovesac (LOVE 8.59%) just before the two companies would go on to report fresh quarterly results. I also unloaded Latch (LTCH 2.96%), taking a loss on a stock I once had high hopes for.
Why did I initiate positions in an “eatertainment” arcade operator and a maker of beanbag chairs? Why would I bail on a company behind high-tech access in the rental market when it’s trading for less than its net cash position? Pull up a chair. I have three stories to tell.
Dave & Buster’s Entertainment
I’ve been following Dave & Buster’s for years, and I’m also a fan of the concept. I’m a kid at heart, so why wouldn’t I gravitate to what is essentially a Chuck E. Cheese for adults? Dave & Buster’s has a huge arcade with all the latest high-end video games, but it also has a popular casual dining restaurant, sports bar, and even conference rooms for booked corporate social events. In short, it’s more than just a restaurant stock.
The market wasn’t impressed by its financial update on Wednesday afternoon, but I see a lot to like. Revenue rose 24% to reach $468.4 million for the fiscal second quarter that concluded at the end of July, well ahead of the $432.9 million analysts were targeting. Sure, the top-line results were inflated by the acquisition of smaller rival Main Event at the end of June — giving it nearly five weeks of incremental revenue from a concept it didn’t own a year earlier. However, even if you subtract the acquisition, you find healthy year-over-year organic growth of 10% — and 21% ahead of where it was in its last pre-pandemic fiscal second quarter in 2019.
Consumers are hungry for escapism, and Dave & Buster’s has been a beacon of indoor — and in this scorching hot summer, highly desirable air-conditioned — entertainment. Comps rose 9.6% at Dave & Buster’s relative to where it was in 2019. It’s an even juicier 29.7% surge in comps at Main Event in those three years. The current quarter is going even better. The three-year comps at Dave & Buster’s and Main Event for the fiscal third quarter are up 17.6% and 42.3%, respectively.
Things aren’t going so well on the bottom line, as rising costs and the Main Event acquisition are gnawing away at margins and earnings. However, Deutsche Bank analyst Brian Mullan still bumped his price target on the shares up from $37 to $48 on Friday following the report. He has a neutral rating on Dave & Buster’s but is encouraged by the positive sales trends early in the new quarter.
Another company that checked in with better-than-expected sales growth was Lovesac. The maker of high-end beanbag chairs and modular sectionals delivered a 45% year-over-year surge in revenue for its fiscal second quarter. Its earlier guidance called for just 25% to 30% in net sales gains. Net income and margins declined, but Lovesac still beat Wall Street estimates on both ends of the income statement.
Furniture may seem cyclical, but Lovesac has rattled off 17 consecutive quarters of net sales growth north of 25%. Though, the streak could be in jeopardy. Lovesac sees sales growth decelerating to 15% growth in the current quarter. However, we saw how it set the bar low last time, only to clear it with passing colors.
Lovesac’s strong growth and differentiated product lines can’t be ignored, and that’s before we get to its ridiculously cheap valuation. If you think Dave & Buster’s is cheap at 12 times this fiscal year’s projected earnings and 10 times next year’s multiple, Lovesac is fetching less than 10 times trailing earnings and just seven times next year’s analyst profit target.
Let’s close with the stock I sold. The appeal to Latch is easy to grasp. It provides a cloud-based platform for renters in apartment buildings to use an app to let folks in when they’re not there. Whether it’s a housekeeper, crucial delivery, or visiting relative, it’s convenient to have an app that can open your place when you’re not there.
It’s also a win for landlords. They can show vacant units without being there, and it’s simple to digitally rekey a place when someone moves out. Renters in Latch-equipped buildings pay a premium to use the service that also plays nice with intercoms and other smart home features.
Latch is growing faster than the two stocks I bought this past week. Revenue more than doubled last year. However, it has fallen short of its more ambitious initial growth projections. The company is also far from turning a profit. It has a negative enterprise value of $60 million, meaning its net cash position is more than its market cap. This would be a dinner bell if Latch weren’t bleeding cash, and right now, that’s not the only uncertainty with the company. It disclosed last month that it wouldn’t be able to file its second quarter on time, and it found possible irregularities with its previous financial reporting and key performance metrics. The upside is high if it can overcome these obstacles, but it has a lot to prove right now.