Investors had concerns heading into the first-quarter report of Dave & Buster's Entertainment (PLAY 6.49%), but the chain just eased many of those worries. Sales trends strengthened through the selling period that ended in early May, according to its quarterly filing, as guests returned to its restaurant, arcade, and corporate-event offerings.
Executives said that the positive momentum continued into the start of the second quarter as well, which implies a brightening earnings outlook for the business. With that backdrop in mind, let's look at whether the stock seems compelling following the latest earnings report.
Revenue landed at $451 million through early May. That spike translates into a 70% increase compared to last year, when many restaurants were temporarily closed due to COVID-19 restrictions, and a 24% boost compared to the same period in 2019.
The scale of that rebound shows that Dave & Buster's is benefiting from some of the pent-up demand that management has been predicting in its industry following nearly two full years of pandemic-related pressures. "We are pleased to report another quarter of outstanding financial results," interim CEO Kevin Sheehan said in a press release.
Customer traffic was up across the board, but the rebound was especially pronounced in Dave & Buster's amusement segment. That's great news for the business, since that unit delivers higher profitability and is less exposed to cost pressures like labor and price inflation. The chain is still waiting for its events segment to return to pre-pandemic levels, but demand is moving in the right direction there, too.
Dave & Buster's wasn't immune to rising prices, which are hurting all its peers. But adjusted operating profit still improved to $99 million, or 21.9% of revenue, compared to $57 million, or 15.9% of revenue, in 2019.
That profitability surge was supported by cost cuts, higher prices, and that broader demand shift toward the amusement segment. "We are benefiting from a higher mix of amusements and a leaner operating model," chief financial officer Michael Quartieri said in a press release.
One factor to watch is whether that improvement reverses itself over the coming quarters, especially as demand becomes more balanced between Dave & Buster's restaurant and arcade game segments.
Dave & Buster's will also lose some of its profit tailwind as its party-event division continues ramping back up toward normal traffic trends. And the chain is exposed to any general economic slowdown that might come from a recession. It's likely that some of its demand spike in recent weeks is just a temporary impact from the easing of pandemic restrictions.
But for now, the restaurant stock is enjoying its best traffic levels yet, which gives it a valuable platform to launch new virtual reality games and limited-time menu offerings over the summer season.
While that demand spike won't last forever, Dave & Buster's slimmer operating model should allow profit margins to stabilize at a higher level than shareholders saw before the pandemic struck. As a result, you might want to keep this chain on your watch list and look for signs that sustainable sales growth is taking hold.