2018 was a wild year for Dave and Buster's Entertainment (NASDAQ:PLAY). The stock had an up-and-down round trip that resulted in a 19% decline as the restaurant, bar, and arcade venue struggled to attract a bigger audience, even though consumer spending was up big during the year. Management recently released preliminary guidance for its fourth quarter, though, and shares are on the mend due to the positive comments it contained. Nevertheless, investors may want to tread lightly here.

Snapping the losing streak

During the third quarter of 2018, D&B's recorded a fifth-straight decline in comparable store sales, which combines foot traffic and average guest spending. The restaurant side continues to be the biggest drag on results. Though a new menu debuted earlier this year with fewer and higher-quality options, slim supply of all-you-can-eat chicken wings and cannibalization of patrons from new D&B locations opening in existing markets were responsible for a 1.3% comparable store decline.

Comparable Store Sales

Q1 2018

Q2 2018

Q3 2018

Q4 2018 Preliminary

Amusement and other

(4%)

(1.2%)

1.50%

N/A

Food and beverage

(6.1%)

(4.1%)

(5%)

N/A

Combined comparable sales

(4.9%)

(2.4%)

(1.3%)

1.8% to 2.5%

Data source: Dave & Buster's Entertainment.

However, the company's preliminary fourth quarter 2018 results are showing early signs that things might be back on track. Comparable sales are expected to increase anywhere from 1.8% to 2.5%, although it remains to be seen if the restaurant side has turned a corner or it's the arcade segment that's responsible for keeping business afloat.

The expectation for 15 to 16 new store openings in 2019 was also reiterated, which has been the sole growth driver over the last year. Rising comparable sales at existing locations added back into the mix could be a big boost for sales and profits. Management's strategy to keep sales headed higher include more menu tweaking and adding new arcade content -- especially virtual reality experiences like Jurassic World VR Expedition, released last summer.

A group of people toasting with drinks at a bar.

Image source: Getty Images.

Arcade disruption ahead

Dave & Buster's has a tough road ahead, though. The American restaurant industry continues to suffer from declining foot traffic due to over-expansion. That could continue to drag on the entertainment chain's profits if it can't outbid rivals for hungry diners' consideration.

Additionally, new arcade-like concepts are popping up. On one end are classic-style arcades, which D&B plans on outpacing with its expensive technology-enhanced titles. On the premium end of the spectrum, that same technology is creating a new industry in video game entertainment, and D&B isn't alone in putting it to use. One such company, called The Void -- a fully immersive virtual reality experience company -- is adding new locations in cities across the U.S. The Void's investors include Disney (NYSE:DIS), which has endowed the start-up with content rights to Star Wars and Wreck It Ralph.

While gaming has been the best performing half of the D&B equation, it's worth keeping an eye on in 2019, as even that segment has suffered as of late. Plus the main growth driver is still new store openings, an expensive activity that hasn't delivered blockbuster returns yet because existing ones haven't been performing well. Given the current situation, the stocks price to free cash flow (money left over after basic operations and capital expenditures are paid for) looks expensive, currently sitting at 31.2.

Based on preliminary fourth quarter 2018 results, D&B's may be about to turn a corner and start improving its profitability metrics; but until that happens, the company's premium valuation and ample competition makes the stock too rich for my taste. I need to see evidence that foot traffic is back on the rise at the entertainment chain before I'm interested.

Check out the latest Dave & Buster's earnings call transcript.