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Any one have some insight on what the announcement today means i.e., that they are going to repurchase stock on the market? I don't understand the motivation for this, or what it means for the stock price or for the future.
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It means that they MIGHT buy back up to 1.9% of their stock. Presumably it means that they have no better use for their cash on hand than to buy back their own stock at these (or perhaps lower) prices.

I believe that the motivation is supposed to be that the board believes that the recent erosion in share price is the result of a short term panic and that the shares will soon be back over twenty where they belong.

I have this nagging suspicion that the real motivation is that the company has a lot of irritated shareholders who have seen their stake in DAB cut in half overnight. They have no substantial good news (like a rise in same store sales) to report. So they issue this press release in a cheap attempt to boost investor confidence, and hopefully get the share price back up.

Now, I have no evidence that would support my cynical interpretation of this story. It's probably just my bitterness coming up. For the mean time I am holding on to my DAB shares and am even considering the idea of buying more at these prices. But I want to make sure that the company can afford to finance their expansion plans before I do.

Now, it has been asserted on this board that the stores just cost too much to get started. They cost so much to open that they can't make enough money (at 7% profit margin) to support themselves and the aggressive expansion plans. What does it cost to open a Dave and Busters? What does it cost to open a DAB II? Anyone?



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rbbeatie,

as one cynic to another, I agree that the buy back news was a sterile shot at getting the stock to start back up. Hell, I hope it works.

At least we ended up even today.




Bob
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Normally a certain amount of cynical attachment is a good things but lets talk about this logically. 1st of all what is this all about "this Motley Fool". It's a guide to how the average Joe can get in on the big game just like the people who have nothing else to do all week long but watch their fortunes wax and wain through the process. Dave and Busters announced that there was going to be a miss on the 2nd quarter profits. Okay, everybody corportation that I know of has had a bad quarter and yes sometime two in a row but that generally does not make a $100,000,000 fold it tent and go home. I am in this for the long run 3-10 years. I do not day trade and I rarely pull out after even a year unless the stock has loss more then half it's value. People use to think I was crazy for buying AAPL stock. Many are now kicking themselves for not doing what I have done. DAB had a bad quarter and they admit they may have problems on the 3rd quarter. But what if things in California do get better. Say thier managerial changes do work and profits are back to where they should be, do you think the stock will jump back to where it was, no way, the wisemen of Wall Street might end up with to much egg on thier face so that won't happen at least not right away. It takes only 1 little jumpy thing to destoy confidence and months if not years of steady hard work to get it back. Let the knee jerkers sell thier stock and run. Who needs them. Remember no stores are closed, no change in the plans for expansion at this time. Just some changes in who running things in California. Walmart did a buy back of their stock and so did Burlington Northern Sante Fe. Both stocks went up. It also give management a little incentive to makek things work better. As for the price of a new store. About 10 million to build with 1 to 1.5 million to open for the 1st day of business. DAB II stores run about 1/2 to 3/4 that amount from what I understand. One of the biggest cost is the land.. They do a pretty extensive survey to see where the people are at.. So far they have been pretty good at getting the hot spot!
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CW said:
"One of the biggest cost is the land."

Sorry, D&B has not purchased "land" since the opening of the Atlanta location in 1992. Every location since then has been a long-term lease arrangement. The only land D&B owns is at the original location, the Houston property, as mentioned in Atlanta, and the Corporate office property.

This move helped shave $2-3 million off of initial opening costs after the Atlanta opening. They can make no improvements here. It all comes down to negotiating favorable lease arrangements.

As far as the repurchase - it seems like the typical cheesy(albeit required) managment response to situations such as these. Kinda' like lending money, interest free, to upper management to purchase shares in order to display some level of insider confidence. These are both "tools" to entice shareholders to retain their belief in management. I would like to know where these dollars will come from to fund this repurchase. Again, D&B's net for 1998 was about $13.5 million. At current levels a full repurchase of the authorized amount would cost in excess of $2.8 million. Are they really prepared to spend approximately 20% of last years net to repurchase shares??? Keep in mind also, that the bank account for D&B has never maintained large levels of cash surplus' outside of the IPO. Their cash is consistantly turning over and ROC is very low. Certainly they do not plan to borrow againist their line of credit to make this move. That would negate any postive effects of the repurchase and take away resources from the main vehicle (i.e.-debt) required to fuel expansion that is critical to the company's growth. Finally, remember - this is an authorization. It does not mean a single share will be repurchased.

As far as my investment position:

I will watch this one for 3-4 months as it bounces around from $9-14 a share like a hot potato and then look for an entry point. I do belive there is value and opportunity in this situation. I also beleive that nothing positive, of any substance, will happen until the "cloud" of the 3rd quarter earnings impact has lifted. Call me silly.
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Thanks for Input. I bought this around a yrar ago at 26. Based on my wife visiting the Atlanta location. Am unhappy with the response from management. Also bought a few years ago RXSD, when we became distributors in RSI. Real unhappy with them too, especially when the info came out in LA paper that one of their products analyzed low in the essential ingredient. They should hav countered strongly with other evidence, but instead they kind of put their head in the sand. Companies that look foolish in their public statements usually manage poorly, in my experience.
So, I am not overjoyed at the response from D&B. Will hang in for a few more quarters, to see if they can make a quick turnaround, but suspect I am making a mistake by not puttung my money elsewhere. Got out of RXSD at a loss, put it in CISCO and AXP, and made the loss back plus profit in a few weeks.
If you do the analysis that the FOOL does, I suspect the numbers show we should be out of this stock.
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Now, it has been asserted on this board that the stores just cost too much to get started. They cost so much to open that they can't make enough money (at 7% profit margin) to support themselves and the aggressive expansion plans. What does it cost to open a Dave and Busters? What does it cost to open a DAB II? Anyone?

As the author of that assertion, I would like to point out that the stores do support themselves (i.e. they do make a profit), but that the profit is not a very good one given the amount of money invested in a store. It costs around $10million for a big store and I think about $5million for a DAB II (not sure about the DAB II). The point is that at around $750,000 of annual profit per big store, the rate of return is hardly better than that of a treasury bill. In other words, D&B might as well not bother opening stores at all, instead they might just as well by T-Bills. Certainly T-Bills are not affected by the weather :)

Yrs,
StrikeItLucky




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<< As the author of that assertion, I would like to point out that the stores do support themselves (i.e.
they do make a profit), but that the profit is not a very good one given the amount of money
invested in a store. It costs around $10million for a big store and I think about $5million for a DAB
II (not sure about the DAB II). The point is that at around $750,000 of annual profit per big store,
the rate of return is hardly better than that of a treasury bill.>>

Sorry, I didn't mean to imply that you were saying that the stores can't support themselves. I understood you to mean that the stores couldn't support both their opening costs and the planned expansion of the chain.

Have a question: at $750,000 profit per year with an initial investment of $10Million that's a return on investment of 7.5%. Do T-bills really make that much now a days? If we assume that it costs $5Million to open a DAB II then that's a 15% return. That's looking better, but I wonder how far the DAB II can be pushed as compared to the original model.

Every time I've been to a DAB it's been pretty full. Lots of people standing around the popular games waiting for a chance to play and the dining area pretty full. It seems that there must be a hard upper limit on how fast they can move people through the dining area. It seems that there must also be a similar upper limit on how fast they can extract money from the gamer's cards.
If there are N machines, an average game costs X dollars and lasts T minutes then they can't get any more money out of the gamers than ((24*60/T)*X*N) dollars per day. If we assume an eight hour day instead of 24 hours, an average game time of 5 minutes , an average cost per game of 50 cents and 300 games per store that comes to $14,400 per day. That's $432K per month, $1.3Million per quarter. $5.2Million per year. Obviously a grotesque simplification, but... Anyone have a better model? Does anyone have a model for the restaurant industry? What is the upper limit for "Food & Beverage" revenue from each unit.
Just what those upper limits are, I don't know. Anyone care to hazard a guess to the upper limit on the potential revenues of each restaurant?
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rbbeatie - In response to games model and restaurant model -

You are right about your games model being simplistic but a good model is difficult. Since DAB uses a debit card pricing for each game is flexible. Games cost less for VIP's and parties get unlimited play for a specific time frame for a fixed price. Each game is also priced differently and the cost goes down when you purchase a debit card of higher value (ie $20 or more)

I also have been to several locations and most do not have 300 games more likely 150 to 225. The end result of your calculation is most likely right with most locations doing 4.8M to 5.2M in game sales. DAB's own financials report almost 50% revenue coming from games.

A model for the restaurant industry is just as impossible to create. Most projections I have done and seen done rely on sales patterns of existing stores or operations modified by the number of seats availble. More seats mean more throughput at peak times and thus more (theoretically) revenue. This has to be balanced with the higher investment cost for the space.

The upper limit of Food & Beverage sales will vary by the size of each location.

Here's a fact for you: Worry more about the game side and the bar. Food cost is typically 30-38% for a dining establishment of this type with liqour cost being about 18-20% and the cost of operating the games is much lower than that. Food keeps them coming, liquor makes them happy and games make the profit!

As for DAB II, It should be more profitable (percentage wise) than the larger scale model and fits into more markets than could support the larger facilities.


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Yo railroad, I'm only gonna say this once. You DO NOT BUY YOUR OWN STOCK BACK IF YOU CAN'T FINANCE GROWTH INTERNALLY. I've been to the Chicago location and the Cincinatti location and they are a lot of fun. But there is no way in hell that this stock buyback is anything but a gimick, its your money.
Good-Luck
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I'm no expert but try a per square foot approach. That is how retail sales are monitered. Here the vast size of these operations works against them. The floor area of the resteruant I was at in Chicago was split between video games, returant, bar, pool and some other lesser known 'bar games'. Increasing profitability means increasing sales per squar foot by finding the most profitable existing areas and expanding those at the expense of other less profitable areas, (ie. more video/less pool) without sacrificing the overall mix, ambiance, etc. Is this what DB 2 is doing?
Best
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