Poor Dave & Busters Entertainment (NASDAQ:PLAY) can't catch a break. In yet another year in which American consumers have been more than willing to be generous with their eating-out budgets, D&B is suffering. 2018 wasn't good (shares dropped 19%), and after the company's second-quarter report, shares are down another 9% in 2019 to date.

At this point, value investors might be eyeing D&B's 13.5 trailing 12-month price-to-earnings ratio and 12.5 expected one-year forward price-to-earnings ratio. It may look cheap, but this restaurant-bar-arcade trifecta is looking cheap for a reason.

Why the good times could be better

The second-quarter (the three months ended Aug. 4, 2019) headline numbers looked good enough. Total revenues increased 8% to $345 million, and earnings per share grew 7% on the back of continued share repurchases ($137 million was bought back in the last quarter).

However, an additional 13 stores in operation (130 at quarter-end compared with 117 last year) is masking some serious problems. On one hand, it's encouraging to see the company able to open up so many locations to warm consumer reception. But D&B isn't alone in opening new venues. In fact, though growth in eating out is hitting new records in the U.S., restaurant chains are opening stores at a torrid pace in a battle over market share, thinning the traffic (and thus profits) at existing locations.

For a long while, the entertainment side of Dave & Buster's was pulling the restaurant side along, but in the second quarter, it fell at existing stores too. It compounds the foot traffic problem the company was having in 2018, and though the negative trend has moderated a bit from last year's ugly results, it's nowhere near a pretty picture and appears to be getting worse again.

Period

Amusement and Other Comparable Store Sales YOY

Food and Beverage Comparable Store Sales YOY

Combined Comparable Store Sales YOY

Q1 2018

(4%)

(6.1%)

(4.9%)

Q2 2018

(1.2%)

(4.1%)

(2.4%)

Q3 2018

1.5%

(5%)

(1.3%)

Q4 2018

4.4%

1.1%

2.9%

Q1 2019

1.8%

(3.3%)

(0.3%)

Q2 2019

(0.8%)

(3.2%)

(1.8%)

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

More aggressive changes needed

Things are indeed about to get worse. Management downgraded its expectations for the balance of its fiscal year: Total revenue is expected to be $1.34 billion to $1.36 billion (compared with guidance for $1.37 to $1.39 billion before), total comparable-store sales should be down 3.5% to 2% (down 1.5% to up 0.5% prior), and net income should be $91 to $100 million ($103 million to $113 million prior).

The reason for this sudden reversal in management's outlook? The company is getting ready to double down on what it does best, but construction-related activity could put a damper on visitor activity. "Wow walls" -- big-screen LED TVs that create immersive dining areas for sports and other entertainment viewing -- are getting installed in 35 locations early this fall; a new virtual-reality experience based on The Terminator movie series will also be getting deployed later this year; and other store refreshes, tech investments, and menu optimizations are underway, though the details are a little more sparse on those fronts.

A group of people toasting over drinks at a bar.

Image source: Getty Images.

I applaud D&B's top team for making the hard choice to disrupt itself. Sacrificing short-term returns is a tough decision -- Wall Street can be very unforgiving, as is evident by the negative stock action as of late. But store updates might not be the only answer in the long term. There simply are too many options out there competing for consumer dollars and time. Besides the aforementioned hypercompetitive restaurant industry, entertainment is also crowded. Streaming TV is on the rise. Movie theaters are having a go at recapturing traffic with monthly subscription plans. And it's not as if Dave & Buster's is the only name in the arcade business, VR gaming or otherwise.

Add to that the fact that this stock isn't as cheap as it might appear. Price-to-earnings ratios don't tell the whole story. Price to free cash flow (revenue less cash operating expenses and capital expenditures, and not including noncash expenses and benefits like depreciation and amortization) values the stock higher at 15.7 times the last year's worth of free cash generated. It's not an exceptionally high figure for a restaurant operator, but it isn't dirt cheap either -- although it's getting there.

Put simply, a short-term rebound might be in store for this stock, but it's an imperfect business, and it operates in a highly competitive niche of the economy. On the surface, D&B's seems to have all of the ingredients necessary to deliver for shareholders, but enough questions linger in my mind to keep me away at the moment.