Dave & Buster'sĀ (NASDAQ:PLAY) will announce its first-quarter results after the market closes on Monday, June 11. The report should attract plenty of investor attention since it's the restaurant chain's first earnings update following a difficult fiscal 2017. While Dave & Buster's growing store base helped it set records on both its top and bottom lines last year, sales shrank at its existing locations, and profitability declined.

The updated numbers and commentary that CEO Steve King and his team provide might tell investors a lot about whether that business downtrend was a temporary swing or part of a bigger competitive problem.

A mother and daughter playing arcade games.

Image source: Getty Images.

Growth at existing stores

Comparable-store sales, or sales at restaurants that have been open at least 18 months, are a key tool that management uses to judge the performance of the business. By stripping out the effect of new store openings, comps describe growth at an average location that's only driven by changes in customer traffic trends or shifts in spending per customer visit.

The comps figure slipped into negative territory last year, and its 1% decline represented Dave & Buster's first annual decrease since the company went public in 2014. The negative impact of reduced customer traffic wasn't felt across the business, though. Spending in the amusement segment rose even as food and beverage sales sank.

We'll get updates on each of these trends this week, along with an early update on management's rebound initiatives. But investors are bracing for generally bad news. Dave & Buster's official outlook calls for comps to fall in the low to mid-single-digits for the year, which would represent a further deceleration from 2017's disappointing result.

Expanding the base

Restaurant operators have been rapidly opening new locations around the country for years, and all of that added supply is contributing to the weak customer traffic trends across the industry. Yet Dave & Buster's still believes it has room to aggressively expand its own store footprint. It launched 14 new stores last year, compared to 11 in the prior year, and executives plan to open as many as 15 in 2018.

The pressure will be higher on these new locations to deliver healthy returns since the growth outlook is negative for its current restaurant base. "Our primary growth vehicle and the biggest driver of value," King explained to investors in early April, "continues to be opening stores that offer excellent returns."

Shareholders will get their first look at how well Dave & Buster's new smaller store footprint is doing this week. The company launched its first 17,000 square-foot location during the quarter, and management believes the new format, which is a dramatic reduction from its 30,000 to 45,000 square foot full-sized stores, could help the business in two key ways. First, it will open up smaller markets to Dave & Buster's locations. And second, by shifting the focus toward amusement and away from dining, the format could attract faster sales growth at lower costs.

Looking ahead

Executives believe the smaller stores won't be quite as quick to pay off as its standard-sized ones, but they're still optimistic that they'll produce impressive cash returns and operating margins over time. Look for detailed updates on each of these metrics in Dave & Buster's report on Monday. The success, or failure, in its new store formats will go a long way toward determining whether management affirms its restaurant growth outlook or decides to scale back its expansion pace and focus on improving thoseĀ weakening results at existing locations.