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Sept. 18, 2020, 3:36 p.m. EDT

Dave & Buster’s stock plunges 26% on bankruptcy fears, but analysts say it’s investor ‘overreaction’

Tonya Garcia

Dave & Buster’s Inc. shares plunged 26.1% in Thursday trading after investors grew nervous about the possibility of the entertainment company filing for bankruptcy, but shares rebounded in Friday premarket trading with two analyst groups upgrading the shares.

Dave & Buster’s (NAS:PLAY) included “going concern” language in a 10-Q filing dated September 10.

Between March 14 and March 20, all 137 Dave & Buster’s locations were closed due to the coronavirus pandemic.

Dave & Buster’s initially furloughed nearly all of its employees and, as of August 2, had reached 92 rent relief agreements, which includes rent deferrals. As of September 4, 52 locations were closed, according to the filing.

On September 10 , the company reported an 85% decline in second-quarter revenue, to $50.8 million.

“These developments have caused a material adverse impact on the company’s revenues, results of operations and cash flows, including the company’s ability to meet its obligations when due,” the filing said.

“These conditions raise substantial doubt about the company’s ability to continue as a going concern for a period of one year from the date of the financial statement are issued.”

Truist Securities analysts say the stock plunge is a “severe overreaction, citing the identical language from a previous 10-Q. The stock dip presents a “buying opportunity.”

” We continue to assume that Dave & Buster’s lenders will again grant covenant relief, especially given visibility into recovering EBITDA at that time as the company emerges from COVID crisis,” analysts wrote.

Truist rates Dave & Buster’s stock buy with a $22 price target.

By Friday, Dave & Buster’s shares had rebounded 15.1%.

“The company’s covenants have also been suspended until its 4Q financial results are required to be delivered,” wrote Raymond James analysts in a note. “Outside of a hard lockdown/closures due to COVID, we are optimistic that the company’s profitability will have returned to solidly positive territory by then (with all units reopened), and that its lenders would be willing to amend its covenant definition.”

Raymond James upgraded Dave & Buster’s stock to outperform from market perform, with a $20 target price.

” We actually have greater confidence following the F2Q earnings report and our subsequent conversation with management that the company has cracked the code for achieving profitability at lower sales volumes, which is a critical step toward negotiating a new or amended credit facility, wrote Stifel analysts.

Stifel also upgraded Dave & Buster’s shares, moving its rating to buy from hold. Analysts raised their target price to $20 from $18.

Stifel says Dave & Buster’s has made adjustments at locations that have reopened, and those locations are showing improved results. For instance, the menu has been cut to the 15 most popular items from 40 options.

“In our opinion, shares will appreciate as the company demonstrates it can achieve profitability at lower sales volumes, reopen all of its stores by the end of December, and successfully restructure or amend its credit facility without the need for additional equity,” Stifel said.

Dave & Buster’s stock has sunk nearly 65% for the year to date while the S&P 500 index (S&P:SPX) has gained 3.9% for the period.

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