Dave & Buster's Entertainment (NASDAQ:PLAY) has enjoyed tremendous growth in the last few years. Annual revenue shot up to $1 billion in fiscal 2016, compared to $608 million four years earlier. The stock has fallen out of favor recently, though, thanks to slowing demand for its amusement and restaurant attractions. The fourth-quarter growth slump caught management by surprise and, if it continues, it might threaten the company's long-term plans to double its store base from here.
With that bigger-picture trend in mind, let's look at what investors can expect from the amusement chain's report due out on Tuesday, April 3.
Sales are dropping
Thanks to a midquarter update, we already know that revenue growth was weak during the period. In early January, the company warned that comparable-store sales had fallen at a 5% pace over the holidays to mark a worsening of the prior quarter's 1% dip. "We expected sales to improve during our seasonally strong weeks in December," CEO Steve King said at the time, "but instead trends softened further."
Investors will find out this week whether the comps drop was confined to the food and beverage side of the business like it was in the previous quarter. More importantly, King and his team should explain why they believe sales growth took a surprisingly negative turn. The third-quarter slump, after all, was pegged on weather-related challenges including hurricanes and California wildfires. If the latest results show market share losses instead, then Dave & Buster's will need to outline a plan for getting growth back on track.
New store economics
King and his team are on pace to open 14 new stores for the full fiscal year compared to 11 in the prior year. A few of these locations are much smaller than its traditional store setups, though. At between 15,000 and 20,000 square feet, this new format is about half the size of its large-format locations and is well below what Dave & Buster's used to call its "smaller" store footprint of between 25,000 and 30,000 square feet.
The company will also provide updates on the economics of its newest locations, which should show whether management is struggling to find good locations at the right prices. Executives said in early December they were pleased with the early results of the 2017 crop of stores, but we'll find out this week whether they approximated the stellar 54% cash return rate that Dave & Buster's enjoyed with its 2016 openings.
Dave & Buster's lowered its 2017 outlook in early January without making any update to its 2018 forecast. As of early December, that prediction stood at low-double-digit sales growth and low-double-digit gains in adjusted earnings. However, management might lower both of these targets on Tuesday to reflect the worsening demand trends they saw over the holiday period.
Investors will be closely following the company's comps prediction for 2018 given that this core metric likely dipped into slightly negative territory last year compared to a 9% increase in 2016. If Dave & Buster's sees another year of only modest comps gains ahead, then executives might want to take a critical look at their growth plan, which calls for the store base to pass 220 locations and more than double its current 101-store footprint.
This footprint might need to shift toward smaller-format stores that aren't so exposed to customer traffic declines like the one Dave & Buster's has been enduring over the past several months. But any strategic shift will depend on the chain's outlook for 2018.