The past four years haven't been kind to the restaurant industry. Between customers preferring to eat at home and traffic at malls plummeting, the growth immediately following the Great Recession has disappeared.

But pessimism is already priced into many restaurant stocks. As such, even though a shareholder holding since 2015 might shudder at Dave & Buster's (NASDAQ:PLAY) fourth-quarter 2018 results, one who bought more recently will likely be happy. The company's most recent report came in ahead of the company's forecast, and offered relatively positive guidance for the current year.

Three men cheering at a sports bar

Image source: Getty Images.

Dave and Buster's earnings: The raw numbers

Before diving into the weeds, let's take a look at the headline numbers for the company.

Metric Q4 2018 Q4 2017 YOY Change
Revenue $332 million $305 million 9%
EPS $0.75 $0.85 (12%)

Data source: Dave & Buster's IR. YOY = year-over-year.

There are two enormously important caveats to these two numbers.

  1. During last year's fourth quarter, there was an enormous bump thanks to a change in the tax law. That created a one-time windfall, which makes for tough comparisons.
  2. There were 14 weeks in last year's fourth quarter, versus 13 weeks during the current quarter.

If we were to account for those two things, results would have looked like this:

Metric Q4 2018 Q4 2017 YOY Change
Revenue $332 million $287 million 16%
EPS $0.75 $0.66 14%

Data source: Dave & Buster's IR. YOY = year-over-year.

As you can see, that changes the picture quite dramatically.

While it's great to see earnings growing, some might balk at the fact that they aren't growing as fast as revenue here. And gross margins aren't to blame: They expanded 19 basis points to 82.3%, an impressive operating structure for any restaurant.

Instead, pressure came from operating expenses, as management warned it would last quarter. Payroll, benefits, and other operating expenses were the main culprit. It's difficult to make a year-over-year comparison because of the previous year having an extra week. The most helpful metric would be to say that these expenses ate up 53.9% of all revenue in the just-reported quarter, compared to 51.2% last year.

And it's also worth pointing out that earnings per share were helped mightily by share repurchases (more on those below). Had the company ended the previous quarter with the same number of shares as it did a year ago, that adjusted 14% jump would have only been a 7.7% increase. That's the benefit that comes with reducing your share count by just over 6% in a year.

Digging deeper

But by far the biggest news for long-term investors was a reversal of fortunes in comparable-store sales (comps). This is often viewed as the best metric to gauge the health of an underlying business. It compares how much revenue existing stores bring compared to the previous year, while filtering out the effect of new store openings.

Chart showing comps at Dave & Buster's over time

Chart by author. Data source: SEC filings

As you can see, the 2.9% jump in the most recent quarter is the best the company has posted in almost two years. It's also the first time that business at existing locations has grown since the spring of 2017. 

The increases were spurred by a 3.7% increase in walk-in sales at comparable stores. The big driver of gains was the assortment of games offered onsite for kids and adults alike. Comps for that division were up 4.4%, while food and beverage comps jumped a more modest 1.1%.

The company also announced that its board had approved an additional $200 million in share repurchases. This comes on the heels of 2.23 million shares bought back for an average price of roughly $48.40 during the fourth quarter and the first eight weeks of the company's current quarter.

Speaking on the conference call, CEO Brian Jenkins reviewed the company's progress on a few key initiatives:

  • Evolving offerings in amusements: The company released its proprietary Dragonfest virtual reality (VR) game. Because of the strength of the company's VR slate, it has been able to increase prices at many locations. And the company announced it will be coming out with a Men in Black-themed VR game later this year.
  • Food and beverage evolution: With a promise to focus on simplicity, quality, and accessibility, this division showed strength. The company also tested out drive-through options that showed traction. Gross margins improved 25 basis points during the quarter for food and beverages.
  • Effective communication of value and promotions: The company highlighted a number of different promotions -- like unlimited wings and unlimited video -- that drew in more customers during the quarter.

The company also announced it opened three stores during the quarter to bring the total to 121.

Looking ahead

Here are the estimates management provided for the current fiscal year.

Metric Low End High End Assumed Change
Revenue $1.37 billion $1.40 billion 8.3% to 10.7%
Net income $105 million $117 million (10.4%) to (0.2%)
Comps 0% 1.5% N/A
New stores 15 16 12% to 13% from base

Data source: Dave & Buster's IR.

It's worth noting that because the share count is expected to continue declining toward 37 million shares, earnings per share is expected to increase 2.4% to $3.00.