Dave & Buster's (NASDAQ:PLAY) didn't give investors many reasons for optimism in its early June earnings report. The restaurant and entertainment specialist revealed falling market share despite upgrades to its food menu and video game offerings while posting reduced profitability.

On Tuesday, the company revealed that these negative trends had an even greater impact on sales and earnings during the summer months, leading to a second straight reduction in the chain's 2019 outlook. Let's dive into the latest report.

A mother and daughter playing skee ball.

Image source: Getty Images.

Losing ground

Sales rose 8% to $344.6 million, but those gains were only due to a rising store base. Revenue at the chain's existing locations declined 1.8% to mark a second straight quarter of negative results. Dave & Buster's saw notable customer traffic losses, with visits falling 2%.

The company had posted an encouraging return to comps growth two quarters back. Yet the negative results over the past several months confirm that this jump was an outlier. Comps have now declined in seven of the last eight quarters.

The entertainment side of the business was a relative bright spot, as exclusive virtual reality titles and rising prices helped keep sales roughly steady. The food segment, on the other hand, slipped 3.2% as the company failed to generate excitement around its new menu items.

Costs are rising

Management tried to hold the line on expenses in response to the weakening sales trends. However, that plan proved to be a challenge for the restaurant stock.

Higher food and beverage costs offset a slight drop in spending on amusement products. Labor and operating expenses rose, meanwhile, under the weight of reduced customer traffic. Overall, operating income landed at $46.2 million, or 13.4% of sales, compared to 14.4% of sales a year earlier. Higher interest expenses further etched away at bottom-line profitability, leading to a net profit margin of 9.4% of sales compared to 10.6% last year.

Nevertheless, management was happy to see earnings reach a new seasonal high. "We continue to deliver strong revenue and earnings per share growth," CEO Brian Jenkins said in a press release.

The way forward

The good news is executives aren't blind to the growth struggles that are putting pressure on the company's results. To that end, they outlined a few initiatives that they believe will immediately begin improving comps even as more rivals enter Dave & Buster's niche. These include store upgrades, like the installation of a wall of LED television displays aimed at lifting the sports-viewing experience. New exclusive virtual reality titles are on the way, too, and the chain sees room to cut a further $15 million from its cost base.

These projects will keep investors focused on the key metrics of comparable-store sales and operating margin, both of which have been trending lower for more than a year. Management doesn't believe a rebound is imminent, though. Instead, they lowered their growth outlook and are now targeting comps declines of 2% to 3.5% for fiscal 2019. That range stood at between negative 0.5% and positive 1.5% three months ago and was between flat and up to 1.5% at the start of the fiscal year.

Net income is also set to fall to below $100 million for the year compared to $117 million in 2018 and $121 million in 2017. Given the tough selling environment, it could be a few years before Dave & Buster's can return to that record annual earnings haul.