Dave & Buster's (NASDAQ: PLAY) FQ1 results and outlook for the year affirm that its CEO change and Back-to-Basics strategy were the right move. The critical detail is that this heavily shorted market is amid a short-covering rally and rebound that will result in a complete price reversal and new uptrend.

The reason is that internal metrics show sequential improvements throughout the Q1 period, and the optimistic guidance forecasts improvements to continue, including improving free cash flow. Free cash flow is a critical factor for this retail stock as it allows the company to invest in its growth while aggressively repurchasing shares. 

The company bought back $23.9 million worth of shares in Q1. That amounts to 2.9% of the float and brings the year-over-year (YOY) total to about 15%. That is an incredible amount of shareholder leverage, and buybacks are likely to continue at a robust pace this year. The company has sufficient capital remaining under the current authorization to continue at the Q1 pace for another four quarters, and the board will likely approve an increase by the time it is used. 

The only red flag is the debt, which is about 10x the equity. However, this is mitigated by the company's overall balance sheet health, ample liquidity, and a 3.1x adjusted net leverage ratio, which is well within the company’s credit agreements.

The bottom line is that Dave & Buster's business is in the early stages of a significant rebound, and the cash flow supports a robust capital return program that is building leverage for investors. 

In this scenario, the potential for share price increases is substantial, driving short-sellers out of the market. Although short interest decreased significantly in May, it remained sufficiently high, at roughly 20%, to ensure that short-covering will aid the stock price rally in June. 

Dave & Buster’s Isn’t Playing Around With its Turnaround

The FQ1 results weren’t spectacular, with revenue declining and margins contracting, but the 3.5% revenue contraction was less than expected, and the costs related to the turnaround are yielding results. The comp figures reveal the impact of turnaround efforts, down 8.3% for the quarter; however, the trend improved sequentially each week of the period and is on the verge of an inflection.

At the pace of decline revealed by the Q1 release, comps are expected to turn positive in the first few weeks of the current quarter, leading to full-year expansion by year-end. 

The margin news is unfavorable, with the margin contracting and worse than the consensus forecast reported by MarketBeat. However, the costs are tied to turnaround efforts, including the unwind of what Board Chairman and interim CEO Kevin Sheehan described as “obvious mistakes.” The critical detail is that those costs will diminish quickly, and improving comps will improve operating leverage as the year progresses, reflected in management’s expressed confidence in the rebound. 

And the analysts are responding favorably to the news. The first revisions tracked by MarketBeat include price target increases that reverse the trend. The revisions align with the consensus, forecasting a 35% upside relative to the pre-release close.

A move to that level would take the market above a critical resistance target, setting the stage for a complete technical reversal. The market could rise to the $45 mark or higher in that scenario. 

Institutional Will Make the Difference in the PLAY Rebound Recovery

The institutions own over 90% of PLAY stock and provided a headwind for action, selling on balance in Q1 and Q2 this year. If that trend persists, PLAY stock will likely struggle to move higher in Q3. However, if they revert to buying, which is likely, PLAY’s price action could quickly rise to the consensus level and then continue moving higher through the year’s end. 

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