Dave & Buster's withdraws IPO, cites market conditions

With two recent planned initial public offerings being pulled back, the IPO market in the restaurant industry shows signs of cooling down.

Dallas-based Dave & Buster's Entertainment Inc. on Thursday announced it was not proceeding with its IPO scheduled for Friday, citing “continued volatility for new issuers in the equity market.” That followed CKE Restaurants’ decision in August to postpone its planned IPO.

"While we received significant interest from potential investors, current market conditions are not optimal for an IPO at this time," said Steve King, Dave & Buster’s chief executive, in a statement. A representative said Friday the company would not comment further.

The operator of 60 restaurant-arcade locations originally filed IPO plans in July 2011. In September, the company said it expected an offering of 7.69 million shares to price between $12 and $14 a share, or between $92.2 million and $107.7 million.

Carpinteria, Calif.-based CKE, which operates and franchises 3,263 restaurants under the Carl’s Jr. and Hardee’s brand names, had hoped to raise more than $200 million with an offering of 13.3 million shares of common stock priced between $14 and $16 per share.

“There was a pent-up demand for restaurant IPOs earlier this year,” said John A. Gordon, principal at Pacific Management Consulting Group, on Friday.

Three IPO debuts have been successful: Austin, Texas-based Chuy’s Holdings Inc.; Southlake, Texas-based Del Frisco’s Restaurant Group; and Tampa, Fla.-based Bloomin’ Brands Inc. Less successful was Houston-based Ignite Restaurant Group’s offering, which has become mired in accounting problems.

“With CKE and Dave & Buster’s going down in flames, and the problems with Ignite’s accounting, the market is going to react,” said Gordon. “It is going to cool things off.”

Unless a brand has particular strengths in the market, Gordon said, the likelihood of successful offerings has grown slimmer. “The perceived ‘easy’ IPOs are going to have to go back into the oven,” he said. “The numbers are going to have to look better.”

Dave & Buster’s had swung to a profit of $687,000 in the second quarter ended July 29, from a loss of $3.1 million in the same quarter a year ago. Latest-quarter revenue increased 15 percent to $147.9 million in the second quarter compared with $128.7 million a year ago.

King said in a September conference call with analysts that newer stores in Braintree, Mass.; Nashville, Tenn.; Oklahoma City, Okla.; and Orlando, Fla., helped boost the most recent quarter’s revenues. “I’m especially excited about Oklahoma City,” said King, adding that it's the first of the new 25,000-square-foot format stores.

Prior to the Oklahoma City store, the chain's small-store format had been in the range of 15,000 to 17,000 square feet, he explained. “It’s very clear to us at this point that a 25,000-square-foot store is much more able to accommodate the volume that we see and the peak loads that we see in our business,” King said in the call.

Gordon said he was surprised that Dave & Buster’s in its Securities and Exchange Commission S-1 filings and road show didn’t address international growth.

“There’s only so many 30,000 or 40,000-square-foot sites in the United States that they need,” Gordon said. “When I looked at the [S-1 and other comments and I really feel they made the mistake of talking about growth in the United States. What about international? The United States is so crowded with restaurants. … They need to have great sites.”

In addition, Dave & Buster’s $400 million debt load raised investor eyebrows, Gordon said, adding that the current and prior private-equity owners “had each run a dividend through and added to the debt.”

“These are two IPOs in a row, both private-equity with high debt and fast public-market turnarounds. Maybe it just takes more time to fix these companies up,” Gordon said. “It just seems as if the market sees it as too fast of a flip.

Dave & Buster's owns and operates stores in 25 states and Canada.

Contact Ron Ruggless at [email protected].
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