Restaurant, sports bar, and arcade chain Dave & Buster's Entertainment (NASDAQ: PLAY) got clobbered after reporting on its first quarter of 2019. It wasn't that results were terrible; on the contrary, the company notched respectable top- and bottom-line growth compared with the year prior. However, the issue is how it achieved that growth. Consumers are receiving new store openings with some enthusiasm, but D&B still hasn't differentiated itself enough to create real needle-moving growth.
A few numbers for context
D&B did notch near 10% total sales growth during the quarter, with amusements -- the arcade games part of the business -- leading the charge once again. However, food and labor costs rose faster, which meant earnings per share grew at a slower rate than the top line.
|Metric||3 Months Ended May 5, 2019||12 Months Ended Feb. 4, 2018||Gain YOY|
|Revenue||$364 million||$332 million||9.5%|
|Operating expenses||$306 million||$274 million||11.7%|
|Earnings per share||$1.13||$1.04||9%|
|Total number of stores||127||112||13%|
Data source: Dave & Busters Entertainment. YOY = year over year.
Most of those sales gains came from the 15 extra stores D&B had in operation compared with the year prior. Removing those from the equation reveals that this is a restaurant chain with some challenges. That shows up in the company's earnings before interest, tax, depreciation, and amortization (EBITDA), a better measure of D&B's profitability. EBITDA was up only 3.2% during the first quarter of the year, much lower than the pace of revenue growth.
Image source: Getty Images.
Good, but not nearly good enough
A major reason for D&B's struggles has to do with comparable-store sales -- a combination of foot traffic and average dollars spent by guests. New location openings are doing well, but existing ones are a mixed bag. Amusements continue to rise, but food and beverage sales are dragging down what would otherwise be robust existing location performance.
|Metric||3 Months Ended May 5, 2019||12 Months Ended Feb. 4, 2018||Gain YOY||Comparable-Store Sales||Q1 2019 YOY Increase (Decrease)|
|Revenue||$364 million||$332 million||9.5%||Amusement and other||1.8%|
|Operating expenses||$306 million||$274 million||11.7%||Food and beverage||(3.3%)|
|Earnings per share||$1.13||$1.04||9%||Combined comparable sales||(0.3%)|
|Total number of stores||127||112||13%|
Data source: Dave & Buster's Entertainment.
The combined 0.3% decline was better than the steep 4.9% drop in the same period a year ago, but it's clear that the business model could use some adjusting. The restaurant industry has been suffering from falling foot traffic for years now due to over-expansion, and D&B is facing the same problem. Food and drink is clearly the real problem child here.
Management has admitted that eating is not the main reason guests go to their local D&B. Menu items have been axed and other recipes simplified the last handful of years, but more can be done. Gaming and other entertainment now accounts for 60% of revenue, with dining increasingly becoming more of a side-show as time goes on.
Granted, management did acknowledge that the first quarter can be a volatile one because of the variable timing of the Easter holiday. Weather can also be a factor. Both of those metrics went against D&B this go-around, but to be fair the issues that are cropping up are becoming a trend, not just a one-off anomaly.
New and proprietary games are being added, including a small but steadily expanding library of virtual reality content, and guests are responding favorably. D&B has said it is committed to continuing to expand in this department. But restaurant competition is eating the chain's lunch. It's time for some drastic action and experimentation. Management had mentioned in the past it was doing things like testing out a food truck-style dining experience in some locations and speeding up food prep to get guests out of the dining room and into the arcade. Put simply, it's high-time to double down on what's working best and dream up some new ideas for what's not working.
The saving grace is that shares took a more than 20% haircut after the first quarter report. Paired with bottom-line gains, anemic as they were, D&B look like a pretty affordable stock. The company trades at just 13.3 times trailing 12-month price to earnings, and only 11.8 times forward earnings. This good-times chain has some work to do, but it could be time to place bets on a rebound.
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