Dave & Buster's Entertainment (NASDAQ:PLAY) hasn't had much good news for investors in 2019, and that disappointing streak continued with its recent third-quarter earnings results. The restaurant and entertainment specialist reported another period of declining sales at existing locations and falling profitability. While the trends didn't seriously threaten management's long-term outlook, they were weak enough to force an adjustment to Dave & Buster's expansion strategy for 2020.
Executives described that shifting strategy in a conference call with Wall Street analysts, and below we'll look at some highlights from that presentation.
Getting stores back on track
We are progressing well on our first priority of revitalizing our existing stores.
-- CEO Brian Jenkins
The restaurant stock stumbled on the core growth metric of customer traffic, with comparable-store sales falling 4% to mark the chain's worst showing in over a year. Management cited increased competition across its markets, and this competitive push hurt both the food and entertainment sides of the business.
On the bright side, Jenkins and his team are encouraged by recent store upgrades like the 43-foot LED TV screen "wow walls" they've installed in 35 locations to date. This initiative, plus refreshed menu options and new live activities around sporting events, should support higher customer traffic and increased spending on food and beverages, they say. The early results match those expectations, but investors will be watching to see if the store upgrades help end Dave & Buster's market share slide following two years of declining comps.
We are efficiently redesigning our store layouts by reducing the back-of-house and kitchen areas, while optimizing the sports viewing in arcade areas to provide the best overall guest experience.
Dave & Buster's main response to shifting industry dynamics has been to adjust the size of its stores. By launching a higher proportion of its smaller locations, the chain has lowered costs while adding flexibility to enter more types of markets.
Success here is showing up in the chain's cash returns on a per-store basis, which remain attractive despite weak sales growth trends. It also plays a key role in management affirming its long-term outlook of operating between 230 and 250 locations, up from the 136 it plans to have in business by the end of this year.
Changes are brewing
We will manage the pace of new store growth in order to maximize returns and to enable our teams to focus their efforts on advancing our store revitalization efforts. Although we will not give detailed 2020 guidance until our next earnings call, I will tell you that we expect new store unit growth to be slightly lower in 2020 as compared to the 2019 plans.
Dave & Buster's lowered its comp growth guidance for a second time this year and now sees sales at existing stores falling by a bit more than 3%. Net income will again land below $100 million in 2019 after peaking at over $120 million in 2017.
Looking forward, investors will want to watch the chain's store expansion pace because changes to those plans will impact the sales outlook. Right now, management is signaling a slight slowdown in 2020 as they focus more on raising comps at existing locations. Yet another poor customer traffic showing in the fourth quarter might force the company to take a more aggressive rebound path.