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The Metric Dave & Buster's Wants to Be Judged Against

By Demitri Kalogeropoulos – Sep 18, 2019 at 9:08AM

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Management's No. 1 priority is engineering a return to sales growth.

Dave & Buster's (PLAY 0.97%) is still shrinking. The restaurant chain recently reduced its sales and profit outlook for the second straight quarter following a growth rebound in the fourth quarter of 2018.

That bounce was encouraging, but the following two reports show that the business isn't yet on a path toward consistent sales gains, and that fact is likely to push earnings lower for the third straight fiscal year.

Investors understandably had some burning questions about Dave & Buster's rebound plans and its wider growth ambitions, which CEO Brian Jenkins and his executive team sought to answer in a conference call following the earnings report. Below are a few highlights from that presentation.

A young woman plays an arcade game.

Image source: Getty Images.

Getting back to growth

Our No. 1 priority is store revitalization to reignite comparable-store sales growth.
-- Jenkins

Investor optimism rose in early 2019 when Dave & Buster's announced a return to comparable-store sales growth, but it turns out that the boost was just a temporary reprieve in a longer streak of declines. With the latest 2% drop, comps have now fallen in seven of the last eight quarters, dragged lower by reduced customer traffic in both the food and amusement sides of the business.

Management said a popular virtual reality (VR) game launch last year made for a tougher comparison this period, and the company also faced additional competition that's clearly eating away at its market share. Dave & Buster's has already responded by upping its game on food and new exclusive gaming titles, but now executives are turning to more structural upgrades.

Specifically, they're adding 50-foot LED screens to enhance the dining and sports-watching experience. The plan is to have these "Wow Walls" in place at about one-third of Dave & Buster's locations in time for spiking football viewership beginning in late October.

Stores are still great investments

Realizing less than a three-year payback on a stand-alone business represents a compelling opportunity for opening new stores.
-- Jenkins

The restaurant stock continues to see lots of potential for new store growth, especially with its new flexible, smaller-footprint layout. Dave & Buster's is still on track to add as many as 16 locations this year, up from last year's 15 openings and the 14 it added in fiscal 2017. As support for this accelerated rollout, management cited strong returns for the latest crop of stores, which are achieving breakeven between their second and third years of operation.

That said, the company left the door open for a slower expansion pace ahead as it refocuses on upgrading existing locations. "We are carefully considering the pace of new unit growth," Jenkins explained. "Consistent with our top priority of revitalizing our existing stores, we are preserving our optionality on new store openings in the back half of 2020 and in 2021."

Looking ahead

The midpoint of our revised guidance assumes no near-term improvement from current trends, and the upper end of our guidance assumes modest impact of initiatives starting in Q4.

Executives said their decision to lower the outlook for a second time this year was "not taken lightly." They have a few initiatives in the works that could begin driving higher traffic over the next few months, including the new TV displays, limited-time food offerings, and the chain's fifth exclusive VR title. Yet while these moves have a lot of potential, it's clear that Dave & Buster's faces an uphill battle when it comes to winning back market share in an increasingly competitive industry niche.

That core challenge convinced management to predict no improvement over the recent sluggish sales trends for the remainder of 2019. The most likely rebound scenario, then, includes the chain returning to modest comps growth in 2020 following three straight years of declines.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.

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