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1 Wild Stock Price Rally That Will Be Tested on Wednesday

By Demitri Kalogeropoulos - Mar 26, 2021 at 8:45AM

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This restaurant chain is set to report a near 80% sales slide.

The market's overall 70% rally since the pandemic lows set roughly a year ago has powered several crazy stock price moves. But the over 600% stock price surge in Dave & Buster's Entertainment (PLAY -6.33%) has seen since hitting a low of $6.53 on March 17 stands out as a spike that could be setting shareholders up for a big disappointment.

Sure, the restaurant and entertainment chain will see a strong growth rebound once the pandemic threat ends. But it could still be several years before Dave & Buster's starts setting annual sales and profit records again. The harsh reality of that outlook might become a bit clearer to Wall Street when the chain announces its fiscal 2020 fourth-quarter report on Wednesday, March 31.

Let's take a closer look and what investors might encounter next week.

A father and son play an arcade game together.

Image source: Getty Images.

Sales are slumping

After a brutal third-quarter report that showed a 66% year-over-year sales decline through early November, Dave & Buster's warned investors that things were about to get worse. Sales plunged 75% through early January, executives said, as COVID-19 outbreaks over the holidays forced another round of temporary capacity restrictions and store closures. That scenario means Q4 sales could fall over 70% to below $100 million.

Dave & Buster's entertainment focus gives it less flexibility to lean on the pick-up and delivery channels that allowed companies like Chipotle Mexican Grill and McDonald's to quickly return to growth.

Yes, the flip side of that weakness is that the future chain's rebound should be dramatic. "We are confident that our business will bounce back quickly as the threat of COVID begins to subside," CEO Brian Jenkins said in mid-January. But Dave & Buster's wasn't enjoying booming growth before the pandemic. Sales trends were negative and getting worse in the final quarter of 2019, so why would investors expect a stronger growth posture following the pandemic?

Earnings are weak

The profit picture is just as bleak. Dave & Buster's on Wednesday is expected to announce significant net losses for the 2020 year.

Investors can look past that slump due to the extraordinary challenges it faced during COVID-19. But operating income fell in each of the two years preceding the pandemic, too. Those declines came despite several initiatives that management touted as potential wins, including a revamped food menu, smaller store footprints, and a push into higher-priced virtual reality video games.

PLAY Operating Income (TTM) Chart

PLAY Operating Income (TTM) data by YCharts

It's reasonable to assume this profitability challenge will get harder, not easier, in a post-pandemic restaurant industry.

What about store growth?

The sales and cash-flow issues also limit Dave & Buster's options for new store launches. With less than 150 locations across the country, executives could be looking at a huge growth opportunity. But the chain needs healthy customer traffic levels, and strong earnings, from existing stores to support such a move.

Before COVID-19 struck, management had estimated that the U.S. market could sustain at least 230 locations or about 100 more than it operated in late 2019. Thanks to the fluid demand environment, Jenkins and his team likely won't have an update on that long-term potential on Wednesday. The more immediate concern is getting its full current store base operating at something approaching normal capacity.

That achievement should come over the next year, but then comes the hard work of establishing improving annual sales and profit trends. Dave & Buster's struggles before 2020 in those areas imply that investors will be disappointed if they're expecting to see a sustainable rebound take shape over the next few quarters.

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Stocks Mentioned

Dave & Buster's Entertainment, Inc. Stock Quote
Dave & Buster's Entertainment, Inc.
PLAY
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