In this segment of the MarketFoolery podcast, host Mac Greer, Jason Moser of Million Dollar Portfolio, and David Kretzmann of Hidden Gems Canada check in on restaurant and entertainment chain Dave & Buster's (NASDAQ:PLAY), which delivered a hard report and an ugly outlook.
And the more you put them in context, the worse the results look. It's something of a puzzle why, and management's plan to solve its issues seems far too unfocused.
A full transcript follows the video.
This video was recorded on April 4, 2018.
Mac Greer: Dave & Buster's down big on earnings. Guys, same-store sales down almost 7%.
David Kretzmann: Oof.
Greer: That seems bad. [laughs] Investors aren't too happy about the company's outlook for the full year.
Kretzmann: Yeah, this was a really rough quarter. It's especially rough because, the fourth quarter of 2017 was actually the best quarter for restaurants in the U.S. in over two years. Dave & Buster's, their fourth quarter results in this case actually got progressively worse through the quarter. Their same-store sales were OK in November, got worse in December and got even worse in January, at the same time where restaurants as a whole over that same period were actually improving their results. So, a little bit baffling here.
Just reading through the conference call, management seems so scatterbrained right now. They're like, "We need to improve our food, we need to improve our speed and delivery of the food, we need to improve our amusements, and at the same time, we're going to continue opening new stores." They were clearly caught off guard here. They missed their expectations. They're now expecting the same-store sales to decline for this upcoming fiscal year. So, a rough situation.
Last year, I had seen Dave & Buster's, their numbers as far as same-store sales and revenue and earnings growth had actually been a lot better compared to a lot of other restaurants which were struggling, as we all know. But this is really puzzling to me, that people just aren't going to the stores as much as they were a year ago, and I don't think management knows why. And their strategy to turn that around isn't all that compelling to me.
One thing that they mentioned as far as the amusements go, which makes up about 55% of their business, those games and amusements, they're rolling out a couple virtual reality games this year. I'm thinking, who would go to a Dave & Buster's to put on a VR headset, which totally takes the social aspect out of the experience? So, if you're banking your turnaround hopes on two VR games this year, that's a head scratcher to me.
Greer: So, I'll count you as skeptical.
Kretzmann: I'm skeptical. And another thing is, over the past year, they've actually increased their debt load by over $100 million. This is a company now sitting on over $330 million in debt. People aren't going to the stores like they were, management doesn't really know why. And at the same time, they're opening new stores.
Greer: Tell me more!
Jason Moser: Is the debt to open those stores? What are they doing with that debt?
Kretzmann: Yeah, mainly to open new stores. When they went public a couple years ago, they already had a hefty debt load. If I was management now, I would slow down the new store openings, really focus on improving performance of your existing stores, pay down that debt load. If you're putting up -6% comps when the economy is doing pretty well, restaurants as a whole are doing pretty well, next time a recession comes along, that's going to get way uglier.
Moser: Yeah. I've never been to Dave & Buster's, I don't really know much about it, it sounds like a Chuck-E-Cheese for adults, kind of.
Kretzmann: Pretty much, yeah.
Greer: That's fair. But you can drop a lot of cash in a hurry. I almost think of it as more of a casino.
Moser: To your point there, and that's just it, with Dave & Buster's, about half of their revenue is tied to the actual games and entertainment in the stores. We always talk about with restaurants; the key is traffic. You have a lot of fixed costs in keeping the restaurant open and staffed. So, the more traffic you bring in, the more profitability. Traffic is the key. And it seems to me that with Dave & Buster's, that would be doubly so, because you have a concept that's not just dependent on the food, but it's dependent on the games as well. And I don't know that Dave & Buster's is necessarily known for slinging a bunch of really good food, either. So, to me, the debt load seems to be the icing on the cake there as to, why would you invest in a company like this that doesn't seem like it's being managed very well?
Kretzmann: Yeah. I think the actual concept is appealing in a lot of ways, because you're not overly exposed to food and beverage trends, and you also have that high-margin revenue coming from the games and amusements. But in this case, I really struggle to see where management is going with this. It would be one thing if they acknowledged, "Yeah, we had a bad quarter, here are some ideas why." But at this point, it really seems like a shotgun approach. You can't just say, "We're going to improve everything and hope that leads to more people coming back." It can't be everything that you need to improve.
Kretzmann: Focus on something. It seems like at this point, they're doing a lot of things in a mediocre way, and they're just going to double down on that strategy, at the same time that they're opening new stores. And when you have that level of debt if you're a restaurant or retailer, that really takes away your flexibility when times actually do get tough on a macro level. That's why I'm a little more cautious today. The stock is trading at a pretty reasonable multiple, so it does have that going for it. But, 15X earnings, I think if you're interested in restaurants, there are better-operated restaurants than Dave & Buster's right now.