Dave & Buster's (NASDAQ:PLAY) was arguably hurt by the COVID-19 pandemic more than many other restaurants, because as an entertainment-focused chain, the communal nature of its atmosphere didn't jibe well with today's social distancing norms.

While the advent of a vaccine for coronavirus does hold out hope for a recovery, Dave & Buster's was an ailing restaurant before the outbreak began, as increased competition in the so-called "eatertainment" industry caused same-store sales to decline.

That attracted several activist investors to its stock, one of which it recently appointed to its board of directors. Yet in a post-pandemic, socially distanced world, can even an activist investor turn Dave & Buster's around? 

Dave & Buster's arcade

Image source: Dave & Buster's.

A tasty target

It was just one year ago that buyout firm KKR (NYSE:KKR) announced it had established a substantial position in Dave & Buster's, one that now equals almost 12% of the restaurant's outstanding stock.

Hill Path Capital also took a large stake in the chain, one that stood at over 9% at the end of September, and with whom Dave & Buster's kicked off 2021 by agreeing to appoint Hill Path partner James Chambers to the board of directors where he will serve on the audit, finance, and compensation committees.

They all have some heavy lifting to do to change Dave & Buster's direction.

Reopening restaurants is key

In a recent business update, the restaurant chain said it suffered a relapse of declining performance in the fourth quarter. Rising cases of coronavirus caused sales to fall once more, as the company was required to close more restaurants.

Comparable sales plunged 75% over the first nine weeks of the quarter, as it only had about 65% of its 139 locations open, compared with 75% at the start of the period. However, Dave & Buster's thinks it can get over 100 restaurants open by the end of the current quarter.

CEO Brian Jenkins said in a statement: "After a strong recovery through the end of the third quarter, we experienced a temporary setback with the recent COVID resurgence." 

He was hopeful, though, that the restaurant had turned the corner once more, noting: "Early January sales trends are improving, and we have resumed store reopenings as certain local jurisdictions have lifted operating restrictions."

Yet the eatertainment chain was burning through about $3.7 million in cash per week. It has approximately $12 million in cash and equivalents in the bank, and $277 million available to it under a revolving credit agreement, meaning it seems to have enough money to see it through the crisis. It wasn't all that long ago, though, that it was threatening bankruptcy if it didn't get concessions from its lenders.

Reentering a difficult market

The market thinks it can win. Shares of Dave & Buster's are up over 630% from their March lows and have rallied 13% since the start of this year, even with its disappointing earnings preview.

The problem is that the same competitive forces that were present before the pandemic hit still exist today -- or will exist when a sense of normalcy returns. These businesses will be chasing fewer dollars that consumers are willing to spend at eatertainment venues, compared to other restaurants and entertainment outlets.

To its credit, Dave & Buster's is implementing operational changes to survive, including a slimmed-down menu and adding tablets, mobile ordering options, and self-order kiosks, while also exploring the newest restaurant fad of operating a ghost kitchen to keep its kitchens operating at peak efficiency.

Yet virtually the entire restaurant industry is considering ghost kitchens, or preparing food for delivery only. Chili's parent Brinker International (NYSE:EAT), for example, created the It's Just Wings chicken wing ghost kitchen concept solely to keep the kitchens of its main restaurants cooking.

No clear vision

Neither Hill Path Capital nor KKR have revealed what, if anything, they'd like to see Dave & Buster's do differently. While cost-cutting and keeping its restaurants efficient will help, that may not be enough for a restaurant industry that's been starved of opportunity for nearly a year.

Consumers will want to get out and play again, including at Dave & Buster's, but without a comprehensive plan for changing the course it was on prior to the pandemic, investors are flying blind. The chain may get a temporary bounce from its activist investors, but the eatertainment restaurant chain needs to reveal how it plans to recover lost ground that it could hold before calamity struck.

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.