Investors weren't expecting much good news from Dave & Buster's Entertainment (NASDAQ:PLAY) in its first-quarter earnings report. The selling period included six full weeks during which all of its restaurants and entertainment venues were closed in accordance with COVID-19 containment mandates. The chain had announced aggressive savings moves in the early days of the pandemic, but losses were almost guaranteed due to its high base of fixed costs.

Last week, Dave & Buster's revealed the scope of the COVID-19 hit to its business, which has harmed its financial standing thanks to brutal drops in both revenue and earnings. CEO Brian Jenkins and his team detailed those challenges in a conference call with analysts, and below are a few highlights from that presentation.

A woman plays an arcade game.

Image source: Getty Images.

A defensive footing

Out of necessity, much of our efforts over the past three months were defensive in nature.
-- Jenkins

The mandated temporary closure of its entire revenue base left Dave & Buster's in a weak financial position that demanded action to protect the solvency of the business. Executives listed a few of these necessary moves, which included suspending dividend and stock repurchase spending, renegotiating debt covenants and rent payments, and slashing capital spending.

Management also tapped its revolving credit line and raised new capital through stock issuances. The moves allowed Dave & Buster's to end the quarter with plenty of financial flexibility, as cash on the books landed at $157 million compared to $25 million a year ago despite the fact that operating income margin flipped to a 27% loss from an 11% gain a year ago. "We've significantly extended our liquidity horizon," Jenkins said.

Climbing back toward profitability

Based on a scaled-down operating model, a store must have the initial potential to generate between 10% to 20% of its 2019 revenues in order to generate a variable profit.
-- Jenkins

Dave & Buster's has already started the process of slowly reopening stores, starting with 28 of 137 locations in early June. Management expects to have 48 restaurants operating by mid-June.

This first wave of reopenings will have a compressed menu and reduced operating hours and capacity, in keeping with the CDC's latest health guidance. But management is expecting these stores to generate significant revenue, profits, and cash flow. "Given the size of our stores," Jenkins said, "we are still in a really good position to generate revenue, even with capacity limitations and social distancing."

The reopening so far

Our projected reopening schedule anticipates having about 90 to 95 stores opened by the end of July, and all stores reopened by September, barring any delays due to COVID-19 resurgence or changes in state or local guidelines.
-- Jenkins

In the week before its earnings report, Dave & Buster's reopened locations were running at just 37% of their pre-COVID-19 sales volumes. The chain's worst-performing stores in that group are at just 18%, while the best are slightly over 50%.

Still, management is pleased to see the trend moving in the right direction, with sales averages down by 54% compared to an 83% drop in the five weeks since it started opening any locations.

Those metrics suggest Dave & Buster's will be able to meet its debt promises and its commitment to repay missed rent to landlords through fiscal 2021. That success likely takes further painful debt and stock issuances off the table. But investors still don't have a good idea about when the chain might return to overall profitability or sales growth.

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