The pandemic devastated Dave & Buster's Entertainment (PLAY -1.09%) when it took hold of the economy in March 2020. Management took action by temporarily closing all of its locations, putting hourly store employees on furlough, and suspending its dividends and share repurchases. 

But in the recent first quarter of 2021, things looked much better for the owner of high-energy entertainment and dining venues. The company's recovery has officially begun. 

father and son playing arcade game

Image source: Getty Images.

A positive first quarter 

During the 13-week period that ended May 2, Dave & Buster's revenue jumped 66% to total $265.3 million. Mind you, this is compared to the first quarter of 2020, when the drastic measures I previously mentioned were put in place as a response to the pandemic. Regardless, all of the company's locations are back open, with the exception of the two in Canada, which management expects will reopen late in the second quarter. 

Same-store sales (or comps) have steadily improved in each month of the quarter compared to the same period in 2019, which provides a better comparison because it was before the pandemic. In February, March, and April, comps were down 59%, 31%, and 12%, respectively. This demonstrates an improving recovery, showing that consumers are getting comfortable venturing back out. 

"Our brand is back, we have a solid financial foundation, and we are ready to move full speed ahead into summer," said CEO Brian Jenkins in the earnings release. Further supporting his confidence is management's expectation for second-quarter sales to come in between $335 million and $350 million, essentially on par with second-quarter 2019 revenue of $345 million. 

The current quarter is important for Dave & Buster's recovery for three reasons. First, there is pent-up demand as people have been stuck inside for more than a year and have extra savings to spend. Second, the company's digital-heavy branding and marketing push will continue to emphasize Dave & Buster's as a place for exciting entertainment. 

And third, the introduction of new games, new food, and new drinks are aimed at enticing customers to visit more frequently. To bolster this effort, a new loyalty program is expected in the third quarter. Rewards programs drive consumer behavior in powerful ways when executed correctly, so shareholders will want to pay attention.

Things to think about 

Although Dave & Buster's first-quarter numbers demonstrate a step in the right direction, investors need to consider some major concerns before buying shares. 

The company's financial position is not great. Dave & Buster's current market capitalization of $1.8 billion compares to $550 million of notes payable and just $20 million in cash. We can feel confident that the country is slowly moving past the pandemic, but the business is still very sensitive to the whims of the overall economy. 

On the recent earnings call, management mentioned that higher commodity, labor, and marketing costs will pressure margins this quarter. While this supply-side issue is prevalent for nearly every business out there, it's unknown just how long the inflationary cost environment will last. If Dave & Buster's can't periodically raise prices, it's profitability will suffer. 

Another big question relates to the company's long-term prospects. In each of the three fiscal years before the pandemic struck (2017, 2018, and 2019), comps fell from the prior year. This is a red flag for any retail business. Dave & Buster's needs to prove that it can grow revenue without relying heavily on store openings. 

The stock is up a mighty 206% over the past 12 months, signaling that the optimism surrounding the company's pandemic recovery may already be priced in. It's probably best for investors to pass on this game.