What happened

Shares of Dave & Buster's Entertainment (NASDAQ:PLAY) were falling 9% heading into midday trading after having quadrupled in value over the past three months.

So what

The entertainment-themed restaurant was crushed by the coronavirus pandemic, which forced dine-in restaurants to close. Unlike its restaurant rivals, Dave & Buster's couldn't provide take-out or delivery options, because its business is predicated on in-restaurant entertainment.

Winner's Circle at Dave & Buster's restaurant

Image source: Dave & Buster's Entertainment.

Now what

Dave & Buster's reports first-quarter earnings on Thursday and no one thinks they're going to be anything but bad. Expectations may be so poor, however, that it could surprise to the upside, as it has been reopening its restaurants where allowed.

The chain's stock is still heavily shorted, with 16% of its float sold short, despite the gains its shares have made. A positive earnings surprise could lift shares, possibly fueling a short squeeze where short-sellers race to cover their positions.

Yet Dave & Buster's business wasn't performing up to expectations before the pandemic, and management was trying to effect a turnaround that the COVID-19 pandemic cut short. Now it will need to jump-start those plans again while implementing social distancing guidelines that will necessarily mean reduced customer traffic and sales.

Even with the huge gains Dave & Buster's stock has made, it still trades some 60% below the level it was at before the outbreak. Expect this restaurant stock to exhibit additional volatility in the days and weeks ahead.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.