Dave & Buster's Entertainment (PLAY -1.19%) is still reeling from the impact of COVID-19 restrictions, which threaten to keep hurting the business well into 2021. That was the main takeaway from the "eatertainment" specialist's recent second-quarter earnings report. Sales plunged 85% and net losses ballooned.
In a conference call with Wall Street analysts last week, CEO Brian Jenkins and his team highlighted a few encouraging signs regarding customer traffic in newly reopened stores. Executives also see potential in changes they're testing around the restaurant and TV viewing sides of the business. However, it's clear from the latest results that Dave & Buster's isn't likely to approach normal operating conditions until the COVID-19 threat is gone.
Let's take a closer look.
Pandemic challenges aren't going away
Customers have a strong appetite for our resilient brand, and are anxious to inject fun back into their life ... [and], absent COVID resurgence, our stores are on a clear maturation curve, showing sequential comp sales improvement as each week passes.
Executives said the weekly traffic data painted a brighter picture than an investor would get from the full-quarter revenue trend that revealed a brutal 87% drop in comparable-store sales. Sales volumes started the quarter at just 11% of their normal level and climbed to as high as 76% in recent weeks among a small group of Dave & Buster's reopened stores.
While those metrics show a rebound, they were also lifted by a one-time shift in the timing of the back-to-school season. Meanwhile, some of the chain's highest-volume stores, representing about 25% of sales and spread through parts of New York and California, remain closed and may not reopen until late December, management estimates.
Inching back toward profitability
We are also ... continuing to refine our lean operating model. We believe those efforts have lowered our near-term EBITDA breakeven sales index benchmark to the 50% to 55% range compared to the 60% index we initially communicated back in June.
The combination of aggressive cost cuts and rebounding sales has Dave & Buster's making solid progress toward returning to a profitable operating model. Adjusted losses landed at $46 million and represented a bigger hit than the $26 million loss the chain posted in Q1. Yet those outflows moderated through the period, with losses in July falling to under $9 million.
Management believes stores can return to initial profitability once they reach of sales volumes off at least 50% of the pre-COVID level. That's a fairly low bar to meet and could come as early as the current quarter. Investors shouldn't read too much into those efficiency improvements, though, since many will disappear as Dave & Buster's brings back full kitchen and waitstaff rosters as customer traffic returns.
Wait and see on expansion
There are 11 stores that are early in the stages of permitting and construction, which will remain on hold pending further analysis and visibility into the ramp up of our existing stores.
-- CFO Scott Bowman
Dave & Buster's doesn't have enough visibility into the business to resume issuing any kind of short-term outlook beyond predicting steadily rebounding traffic as COVID-19 restrictions fade. That rebound process could last well over a year, though, especially since 27 stores representing one-quarter of sales are still temporarily closed.
The pace of the rebound at these reopened locations will dictate how quickly the chain returns to its prior goal of steadily expanding its store base. Dave & Buster's is still set to launch five more locations by the end of the year. But 11 other stores that had been in the pipeline are now on hold until executives have a better idea of the business's resilience through the restaurant and entertainment industry's current recession.