Every arcade-raised kid has spent a pocketful of tokens on a game that never gets mastered, and that seems to be what Dave & Buster's Entertainment (NASDAQ:PLAY) is doing these days with its business. The chain of big-box entertainment centers that blend casual dining with a high-tech video arcade is struggling, sending its stock within pennies of a three-year low on Wednesday after posting another disappointing financial report. 

Negative comps, a decline in net income, and hosing down its full-year guidance for the second time in as many quarters are not sitting well with investors, who are choosing other eateries to satisfy their appetite for restaurant stocks. One potential silver lining is that profitability improved on a per-share basis, but that's a facade created by its aggressive share buybacks.

Dave & Buster's points out that it has returned more than $200 million to investors through the end of the second quarter with stock repurchases and dividends, but the stock chart is getting the last laugh. You can't brag about eating your own cooking when that same appetite would've been so much better at today's lower price points. 

Patrons playing games at Dave & Buster's Million Dollar Arcade.

Image source: Dave & Buster's.

Let's play a game

Dave & Buster's may have posted an 8% increase in revenue and a 7% uptick in earnings per share, but there's more to the two stories at opposite ends of the income statement. Yes, the chain grew its top line by 8% to $344.6 million, but that was with 11% more stores open now than it had a year earlier. Comps at the 130-unit chain actually declined 1.8% for the quarter. Negative store-level trends are a problem, as comps have declined in seven of the past eight quarters. 

The 7% rise in net income per share -- going from $0.84 to $0.90 -- is also not as applause-worthy as it sounds. Net income actually declined from $33.8 million to $32.4 million over the past year. The secret to this trick is that net income is being divided by fewer shares outstanding as a result of the buybacks.

Dave & Buster's spent $149.1 million to repurchase 3.1 million shares in fiscal 2018, but that same money could wipe out more than 3.6 million shares if spent today. 

The rules of the buyback game should be fairly straightforward at Dave & Buster's:

  • Don't buy back stock when comps continue trending negative, something that the chain expects to get worse during the latter half of this fiscal year.
  • Don't repurchase your shares when you're pruning back guidance -- again -- and telling investors that the outlook is getting worse given the competitive landscape of the industry, and that turnaround initiatives are taking longer to pan out.
  • Don't go shopping for your own stock when your track record of doing so has been lousy.

Dave & Buster's makes a living knowing how games work. It just needs to get better at playing its own game. But after fumbling seven of the past eight quarters, it remains to be seen if it has enough change left over to see its own changes through.