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Why Dave & Buster's Thinks Higher Profits Are Here to Stay

By Demitri Kalogeropoulos - Jun 16, 2021 at 11:30AM

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The management team had some bullish comments for investors after a strong start to fiscal 2021.

Despite a huge run-up in the stock of Dave & Buster's (PLAY -0.16%) this past year, investors found reasons to celebrate the company's latest earnings report. Sure, the chain isn't yet back to setting sales records after COVID-19 shutdowns sent customer traffic plummeting last year. But that full rebound is in sight, and so is potentially higher profitability from here on out.

In a conference call with Wall Street analysts, CEO Brian Jenkins and his team detailed that possible earnings boost while expressing caution about cost spikes over the short term. Let's look at a few highlights from that presentation as it relates to investors' hopes for big gains from this popular stock.

A young man playing an arcade game.

Image source: Getty Images.

The rebound is real

Some investors were worried that Dave & Buster's stock price rally had gotten ahead of the business. But this report helped calm some of those fears. Sales beat even the upgraded forecast that executives had issued back in April, with revenue rising over 60%. It helped that stores in key markets like New York and California were back near full capacity as consumers looked for entertainment options outside of their homes.

"The reopening of our store base coupled with stimulus payments, expanding vaccinations, and excellent operational execution drove significant revenue recovery," Jenkins said in the call. He highlighted the fact that comparable-store sales were down just 12% in the month of April compared to 40% at the start of the first quarter. Roughly half the store base is nearing peak 2019 sales volumes, and those positive trends continued into the first full month of the second quarter as well.

Getting back in the black

A year ago, things looked bleak for this business. It had just posted a $61 million operating loss compared to $58 million of profit in 2019. The company hasn't fully recovered its earnings strength, but it took a big step in that direction through early May.

Operating income landed at $47 million, or 14% of sales, compared to 16% of sales in 2019. Dave & Buster's managed labor and operating costs while being careful not to overextend in its food service segment. "We've achieved a dramatic turnaround in profitability," CFO Scott Bowman said, "driven by our lean operating model and the extraordinary efforts by our entire operations and support teams."

Looking ahead

The good news rolled into the early part of the second quarter, with sales trending just 4% below their 2019 levels in May. That success has management feeling good about its chances of returning to overall growth sometime this year.

The executives are committed to a sustainably higher profit margin, too, thanks to changes they made to staffing levels and efficiency gains in other parts of the business. They've slimmed down the restaurant menu, for example, while adding premium drinks and food options.

These adjustments are likely to lift operating margin in 2021 and beyond, but the big question is whether Dave & Buster's can achieve faster sales growth than the modest comps decline the company reported in 2019 before the pandemic struck. The path to that success depends on customer satisfaction, which is tied to high-quality food and service in the restaurant segment plus ample entertainment throughout the amusement and bar areas.

It's too early to tell whether Dave & Buster's has all those ingredients in place right now. But the early indications are encouraging because they show that shoppers are willing to give the chain a chance to win back their business now that the COVID threat is waning.

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Busters Entertainment. The Motley Fool has a disclosure policy.

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