Image source: Dave & Buster's.
Shares of Dave & Buster's (PLAY 6.90%) have had a rough week. The stock has fallen in each of the first three trading days of this holiday-shortened week, declining 7% in the process. The "eatertainment" concept stumbled after putting out a disappointing quarter, a rare sight since its return as a public company two years ago.
It may certainly seem problematic to find the 87-unit chain of super-sized restaurants with massive entertainment centers hose down its comps guidance. It's also disappointing to see it reiterate the balance of its outlook for all of fiscal 2016. After the company landed ahead of its earlier projections during the fiscal second quarter on Tuesday, one would expect to see it nudge at least some of its guidance metrics higher.
However, it's important to see the bigger picture at Dave & Buster's. Canaccord analyst Lynne Collier reiterated her bullish rating on the company, along with her $52 price target. She recommends taking advantage of the pullback as a buying opportunity. She's right. Dave & Buster's is faring better than this week's sliding stock suggests. Let's go over a few of the reasons to warm up to the chain.
1. Comps are holding up just fine
We've seen Dave & Buster's shred through comparable-restaurant sales, so it may have been alarming to see comps clock in at a mere 1% uptick. The situation gets even more troublesome when you dig deeper into that performance. We arrive at that 1% as a result of amusements -- an important part of the D&B story since it accounts for a little more than half of its revenue -- rising a hearty 3.5%. That was nearly offset by a 2.2% slide in food and a 1.4% dip at the bar.
Dave & Buster's now sees comps growth of just 2.25% to 3.25% for the entire fiscal year that concludes in late January. That target used to be 3.25% to 4.25%.
This has been a lousy summer for restaurants in general. The scapegoats are everywhere. You can pin the blame on the value gap widening between eating out and staying at home. Food costs have generally declined over the past year, but eateries haven't been able to pass those savings along because they're facing higher labor and operating costs. There's also a glut of fast casual "better burger" and quick-bake gourmet pizza joints popping up all over the country. However, at the end of the day, Dave & Buster's claims that it has now outperformed the industry when it comes to comps -- for 17 consecutive quarters.
More importantly, the 1% uptick this time around followed an 11% spike the year before. That was going to be a hard act to follow, but it also means that two-year comps have soared 12%. That's impressive in any climate, but more so in the present challenging one.
2. Bottom-line beats just keep on coming
Dave & Buster's has once again made mincemeat out of Wall Street's profit targets. It rang in with net income of $0.50 a share. Analysts were banking on earnings of just $0.44 a share. This is a common sight. A big reason why the stock has nearly tripled since going public at $16 in late 2014 is that it keeps hitting the ball out of the park on the bottom line.
| Quarter | EPS | EPS Estimate | Surprise |
| Q3 2014 | ($0.06) | ($0.09) | 33% |
| Q4 2014 | $0.33 | $0.28 | 18% |
| Q1 2015 | $0.46 | $0.37 | 24% |
| Q2 2015 | $0.40 | $0.23 | 74% |
| Q3 2015 | $0.12 | $0.03 | 300% |
| Q4 2015 | $0.53 | $0.43 | 23% |
| Q1 2016 | $0.72 | $0.59 | 22% |
| Q2 2016 | $0.50 | $0.44 | 14% |
Data source: Yahoo! Finance.
One can argue that this week's 14% beat is its weakest level of outperformance. One can also point out that the strong quarter without boosting its net income guidance for all of fiscal 2016 finds analysts lowering their targets for the next two quarters. There are some pressure points here. However, a beat is still a beat.
3. Cool catalysts are in the works
Dave & Buster's isn't sitting still. It's in the process of rolling out RFID bracelets as a premium and stylish alternative to the traditional Power Card to activate games. It's been testing them in five stores this summer, and the technology has proven reliable. The chain is now considering expanding the technology as it ponders rolling it out to more stores.
It has also used its growing store base to land one-of-a-kind gaming experiences. Dave & Buster's talked up its new Star Trek game during this week's earnings call. It features collectible cards from the original Star Trek series. Those cards are switched out over time, giving avid fans of the series -- or the game -- reasons to keep coming back. What's more, Dave & Buster's has a proprietary license for the game.
If Dave & Buster's has this kind of clout with just 87 stores now, imagine how it will be if the high-volume concept hits its goal for 200 locations in North America alone. The market didn't like this week's report, but it's hard to dislike the chain's chances in the long run.
