Beer, Wings And Fighting Robots Works For Dave & Buster's

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Probably no other restaurant chain can boast life-size fighting robots. But Dave & Buster's ( PLAY ) newest attraction - a scaled-up version of the classic Mattel game "Rock 'Em, Sock 'Em Robots" that features the battling Red Rocker and Blue Bomber standing more than 5 feet tall - promises post-dining mechanical combat with dessert.

Such is the appeal of Dave & Buster's. Even as labor pressures and shifting consumer tastes weigh on the dining industry, the hybrid arcade-restaurant/bar has prospered by mixing games into the eating and drinking experience.

"Entertainment matters and it matters in a big way," said Piper Jaffray analyst Nicole Miller Regan, who says consumers these days are looking for something outside of traditional retail. It's a mindset, she said, "where they maybe don't want something material; they want an experience."

[ibdchart symbol="PLAY" type="daily" size="threequarter" position="leftchart" ]Even so, she says, "you still have to eat."

Millennial Quest

Chasing millennials - Dave & Buster's core customer base - has been a headache for brick-and-mortar retailers. Mall stores in particular have been feeling the pinch, in no small part because younger shoppers are not only gravitating toward experience-based purchases but taking more of their spending online.

Part of Dave & Buster's strategy in recent years has involved the remodeling of existing locations to position it as a go-to spot during football season. Pool tables were replaced with a sports-focused TV arena, and the menu was revamped, Miller Regan said.

The more contemporary setup gives the place "more of a kind of hip, current nightspot kind of feel," said Jefferies analyst Andy Barish.

The focus on sports-watching - the "watch" part of the company's "Eat, Drink, Play & Watch Sports" slogan - has helped to boost its October-ended third quarter, typically the most sluggish quarter of the year. It is still the company's softest period, but "is getting to be less of a weak quarter than it was," Dave & Buster's Chief Executive Stephen King said on the company's most-recent earnings call.

Easily Topping Views

In early December, the company easily topped third-quarter profit views by almost a dime with double-digit growth to earnings of 25 cents a share on $228.7 million in revenue. Same-store sales at outlets open more than a year rose 5.9%. Management raised full-year outlook to $998 million to $1.003 billion in sales and 3.1% to 3.6% in same-store sales growth, both above consensus.

As rising payroll expenses remain a concern for the broader restaurant business, labor costs as a percentage of sales are far lower for Dave & Buster's than others in its peer group, say experts.

"Dave & Buster's has less exposure to (labor headwinds) than a typical restaurant because the entertainment side is less labor intensive," William Blair analyst Sharon Zackfia told Investor's Business Daily.

The full-service restaurant's labor costs as a percentage of sales is around 23%, she said, which makes it look "more like a fast-casual company."

In fast-casual, labor as a percentage of sales typically clocks in around 22% to 23%, while that ratio at full-service sit-down restaurants would typically be upwards of 30%. For contrast, the Cheesecake Factory's labor costs as a fraction of sales is about 33%, she said.

Growth Obstacles

Dave & Buster's appears to be savvy about the obstacles to growth faced by the restaurant side of the company. King emphasized recently the company's strategy to "lead with entertainment."

"Once guests are in stores, we want to sell them the complete experience including our (food and beverage) offering, but we consciously are not doing anything that would shift revenue to food and beverage at the expense of amusement sales," he said on the December call.

"It's got some of the highest margins in the restaurant industry," said Zackfia. "Entertainment provides the foot traffic."

Fun and games are said to be helping insulate Dave & Buster's from some of the headwinds its pure-play restaurant peers face, but it is still a dining establishment in a highly competitive industry.

And Zackfia sees restaurant-level margins coming down "a little bit" in 2017.

Positive Outlook

Analysts are largely positive on the store growth prospects at Dave & Buster's, which has more than 90 locations. Management expects to have opened 11 new Dave & Buster's by the end of fiscal 2016, which concludes at the end of January. For fiscal 2017, it sees 11 to 12 new sites, which would mark 12% to 13% unit growth.

Shares have been trading in a tight range since leaping nearly 19% on Dec. 7 and breaking out of a period of consolidation following the company's beat-and-raise quarter. Shares have been trading sideways since hitting a record 58 intraday on Dec. 8. Dave & Buster's rose 1.2% to 56.80 on the stock market today .

IBD'S TAKE:Dave & Buster's has traded in a tight range since jumping on earnings Dec. 7. It now is second in IBD's retail and restaurants group, behind only Jack In The Box ( JACK ). Jack In The Box currently is on the IBD Leaderboard .

About a third of the company's locations are in malls, a third are standalone sites, and another third are in or near lifestyle centers, said Jefferies' analyst Barish. With the lackluster performance of department stores in recent years, will we see more Dave & Buster's move into malls any time soon?

"They're not averse to it," said Barish, but the company isn't necessarily actively seeking it out, either.

Should it decide to move into an old Macy's ( M ) or Sears ( SHLD ), however, management believes it has the pick of the litter on the path toward an ultimate target of a couple hundred stores in the U.S. and Canada.

Real Estate Options

Dave & Buster's popularity gives it real estate options, said King on the December call, "and gives us confidence that our long-term goal of 200 stores in North America has been in our reach, between well known big-box retailers and department stores announcing closings, and mall owners emphasizing entertainment" and dining in their redevelopment plans.

And it may well continue to play to the "Mario Kart"-playing, beer-drinking "Rock 'Em Sock 'Em"-loving millennials in all of us.

As CEO King said early last year on the company's fourth-quarter 2014 call, "the ability to customize that (Dave & Buster's) experience so everyone who walks through our doors can feel like they're 25 again is really what sets us apart."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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