Shares of Dave & Buster's Entertainment (NASDAQ:PLAY) are up over 16% as of this writing on the back of better-than-expected first-quarter 2018 results reported June 11. That sentence deserves an asterisk, though, as both same-restaurant sales and entertainment sales declined once again. This is in spite of an overall restaurant industry that is beginning to show signs of recovery, which leaves this chain with some questions in need of answers.

What just happened

In 2017, Dave & Buster's reported a fourth consecutive year of revenue growth as it continued to expand its number of locations. Foot traffic fell into decline, though, and management had called for more of the same in 2018. Full-year revenue guidance was for $1.20 billion to $1.24 billion, and comparable-store sales down low to mid-single digits. That transpired to kick off the new year.

Metric

1st-Quarter
2018 Results

Year-Over-Year
% Increase/(Decrease)

Revenue

$332.2 million

9.2%

Operating income

$58.6 million

(8.7%)

Earnings per share

$1.04

6.1%

Same-store sales

(4.9%)

N/A

Data source: Dave & Buster's quarterly earnings report.

Revenue and earnings beat analyst expectations because of six new store openings in the quarter and the company's share repurchase plan. There were 6.7% fewer shares outstanding at the end of the quarter compared to a year ago, and D&B has another $82 million left on its current repurchase plan.

That was the good news that caused the depressed stock to bounce, but concerns remain. Operating income fell 8.7% as less foot traffic led to lower individual store profitability. Breaking down same-store sales by segment, food fell 6.7%, bar sales fell 5%, and amusements fell 4%. What makes that especially worrisome is that restaurant industry comparables have begun to recover. According to industry research group TDn2K, the average restaurant had a comps increase of 0.8% in the last three months.

The company thinks it has a solution

To fix consumers' waning interest in the D&B experience, management has been experimenting with smaller restaurants and moving to open locations in new markets. Oversaturating an area with restaurants is a great way to reduce foot traffic and lower location-specific profits, and D&B may have fallen into this trap in times past, as did the industry overall.

Things are different now, and with a smaller-store concept the company thinks it can move into smaller cities rather than just stick to bigger areas. However, more than just real estate is prompting change, at least as far as management is concerned. The dining experience is being revamped with new-and-improved burgers, chicken, and steaks, and a "quick-casual" option inside stores will be tested later this year. That should allow patrons to eat quickly and get back to playing games. D&B is all about the games, right?

a group of young people playing a type of air hockey at a Dave & Buster's.

Image source: Dave & Buster's.

And to that point, the amusements segment of the business is also undergoing some changes. New technology and allocation of store personnel was mentioned to reduce wait times at the front desk, at the bar, and when buying Power Cards and activating games. That's significant, because the entertainment side of the business continues to outperform the food side, so continuing to improve the best parts of D&B could be a winning strategy.

As for content within the amusements segment, a couple of new virtual reality (VR) experiences D&B are on track to roll out this year. The new Jurrassic World VR Expedition is currently getting deployed and a second VR title will arrive later in the year.

It remains to be seen if all of those initiatives will pay off. In the meantime, even with the first quarter coming in better than expected, full-year guidance remained unchanged, with the expectation for 7% to 11% revenue growth from new store openings but low- to mid-single-digit traffic declines. After the double-digit pop, the company's 12-month trailing price-to-earnings ratio sits at 19.7, with one-year forward P/E at 18.7. That implies a little bottom-line growth, but most of that will likely come from the share repurchase program. Thus, until D&B can figure out how to rekindle consumer interest in existing markets, my optimism about this stock rally will be muted.

Nicholas Rossolillo and his clients own shares of Dave & Buster's Entertainment. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.