Investors haven't had much to celebrate in Dave & Buster's (NASDAQ:PLAY) last few earnings reports. The restaurant chain's customer traffic is declining, and that challenge weighed enough on the business to push sales into negative territory in each of the last two quarters. That slump is also challenging shareholders' confidence that management has the right rebound strategy in place for today's ultra-competitive industry conditions.
There should be more clarity on that turnaround plan when Dave & Buster's announces third-quarter earnings results on Tuesday, Dec. 10. Below, we'll look at the key metrics to watch in that announcement.
Most investors who follow the restaurant stock expect sales to rise by about 7% in the third quarter, to $296 million. Yet the problem is that all of that growth is likely to come from Dave & Buster's expanding store base rather than its existing restaurants. Sales at established locations, or comps, fell 2% last quarter just as they had in the prior quarter.
That weak comps metric is being driven by falling customer traffic, which is a warning sign about management's rebound strategy. Dave & Buster's has made big changes to both the food and entertainment sides of the business, including adding new seasonal menu options and exclusive virtual reality game titles. Customer traffic data in the report will show whether those initiatives (and the chain's new TV entertainment additions) are gaining traction with diners who have plenty of other restaurant and bar options.
Store growth plans
CEO Brian Jenkins and his team suggested back in September that the company might moderate the launch of new stores. It is on track to open about the same 15 locations in 2019 as in 2018, but those new restaurants are increasingly smaller-footprint layouts.
Any change in management's expansion target would significantly impact sales expectations for next year and for 2021. So investors will be closely watching for the update that executives promised last quarter when they said they're "carefully considering the pace of new unit growth." If comps stay in negative territory, for example, the company might decide to pull back on new growth to focus on existing store remodels over the next few quarters. Investors would likely react harshly to that news, though, since it would mean Dave & Buster's is still struggling to stand out in a competitive food and entertainment landscape.
The chain's updated 2019 outlook made it clear that management sees its current sales struggles extending through the year since both ends of its comps guidance range are negative. But Dave & Buster's could go a long way toward boosting investor confidence if it narrows that range toward the top, which implies a modest 2% comps decrease, rather than the bottom that calls for a 4% slump.
The earnings outlook is more concrete and negative. The company is spending extra cash on its growth strategies and is dealing with inflation in areas like labor and food costs. As a result, net income is projected to fall below $100 million in 2019 compared to a recent high of $121 million in 2017. Dave & Buster's updated outlook this week will signal whether management expects that slump to continue into 2020.