So how is this being addressed? The answer is even more borrowing. This company has almost no cash and is burning through it on a regular basis due to unfavorable unit economics of Drive Shack units, as well as reduced demand from COVID. Even if you believe $69 million of EBITDA is coming (I’m skeptical), the development cost of getting to this point is astronomical.ĭrive Shack believes it will spend $7 million to $11 million on each Puttery, so if we assume $9 million per unit, 17 units will cost $153 million. At any rate, the company reckons yields will be much higher with Puttery, but we shall see.ĭrive Shack is betting it can have 5 Drive Shacks by the end of next year, in addition to 17 Puttery stores, as seen below.įurther, it believes this combination will produce ~$69 million in EBITDA, which again is based on conjecture only. Keep in mind there aren’t any Puttery stores open, so these are literally just guesses, hopes, and dreams on the part of Drive Shack. Somehow, Drive Shack believes it can effectively determine Puttery’s profitability, as seen below. For a company with a terrible operating history – to be candid – betting on a concept that hasn’t even debuted yet is something I’m a very long way from interested in doing. With the Gen 2.0 units not performing in any sort of acceptable way, investors appear to be bidding up the stock based upon Puttery’s potential. The first two are supposed to open this year with ~17 by the end of next year. The company currently has zero Puttery units, meaning it is just a concept and nothing more. The venues are smaller, which means smaller capital outlays, but also more potential markets where a Gen 2.0 unit won’t fit. The idea is the same as the Gen 2.0 units, but with mini-golf instead of a driving range. Apart from that, the units simply don’t produce enough income to be effective uses of capital enter Puttery.ĭrive Shack is therefore betting the proverbial farm on Puttery, its as yet unproven mini-golf concept. That means it has to borrow in big quantities, which is obviously expensive. That’s an enormous amount of capital to have to outlay, and Drive Shack simply doesn’t have it. It costs about $50 million for Drive Shack to build one of its Gen 2.0 units, of which there are only three at this point. The problem is not that the concept doesn’t work to generate demand it is that it is prohibitively expensive to build and operate. You don’t need to know how to golf to have fun with your companions, you can get good food and drinks while you’re there, and enjoy yourself. I’ve been to Drive Shack, and it’s great from a customer perspective. The conceptĭrive Shack’s concept is great it operates a handful of enormous, outdoor, modern golf facilities that drive revenue from alcohol and food sales, as well as bay rentals. These are not signs of a sustainable rally, and I am still bearish on Drive Shack for these reasons, and the fundamental reasons we’ll discuss below. Second, the PPO, which is my favorite momentum indicator, flashed a sell signal in mid-December and is trending very strongly downward. This indicator isn’t perfect, but it is generally a good gauge of whether institutions are buying a stock, which is needed for it to sustain a move higher. The Accumulation/Distribution line – which measures rally strength via buying during the trading session – has done nothing but go down for the past year. The massive rally that saw the stock nearly triple from November to December has ended in spectacular fashion, and it appears to me the rally was weak. The company is in dire financial straits, it produces losses quarter after quarter, its supposed savior – Puttery – is as yet completely unproven, and we simply don’t know the fate of entertainment venues post-COVID. I said back in August that I thought Drive Shack had a decent chance of not surviving the crisis, and I still believe that. Pure entertainment venues like Drive Shack ( DS) suffered immensely, and while shares have recovered in a big way in recent months, I think Drive Shack’s recent rally is a chance to sell. The initial closures were obvious headwinds, but even after that, increased operating expenses, reduced capacity, and reduced demand were all counted as barriers to normality. Entertainment venues were decimated in 2020.
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