Dave & Buster's Stock Plays to Win

By Markets Fool.com

Image source: Dave & Buster's.

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There are a lot more tokens trickling intoDave & Buster's coffers these days. The growing chain of restaurants with massive arcades posted another quarter of strong financial results after Tuesday's market close.

Revenue rose 13% since the prior year's fiscal fourth quarter to hit $234.2 million. It's the weakest year-over-year top-line growth since Dave & Buster's returned as a public company two years ago. This doesn't mean it's a bad thing. Analysts were holding out for only 11% growth for the quarter that closed at the end of January.

Another period of double-digit growth was fueled by the potent combination of positive comparable-store sales (up 6% since the prior year's holiday quarter) and expansion (10 new units opened last year, pushing the Dave & Buster's empire to 81 locations).

Dave & Buster's is unique in that it generates only half of its revenue -- 49.8% in its latest quarter and 48.3% for the entire year -- from the sale of food and beverages. The balance comes from its high-end arcade and the other diversions located inside its mammoth buildings, and that's important since the fun side packs healthier margins than the food side. Knowing this makes it encouraging to see that amusements outpaced the bar and restaurant sales for the quarter, up 16% vs. 10%. It's something that makes this already scalable model even cooler as we work our way down the income statement.

Dave & Buster's operating profit climbed 36% to $38.1 million in the fourth quarter as its operating margin expanded by 280 basis points to hit 16.3%. Adjusted earnings soared 62%, clocking in at $0.53 a share. Wall Street pros were forecasting an adjusted profit of just $0.43 a share. It wasn't even close, but that's pretty much how things have gone for Dave & Buster's since its IPO in late 2014.

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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%

Data source: Yahoo! Finance.

The purveyors of fun haven't just beat analyst profit targets each and every quarter: Dave & Buster's has blasted through those estimates with at least double-digit percentage beats. The market naturally likes companies that consistently clear the bar, explaining why this chain that went public at $16 in Oct. 2014 has gone on to see its shares skyrocket 145% as of yesterday's close.

Guidance isn't as exciting. It sees revenue growing 12% to 14% this year, powered by a modest 2% to 4% uptick in comps and the opening of nine or 10 new locations. Analysts were already perched at the midpoint of that range. Earnings should clock in between $1.70 a share and $1.85 a share, and that's actually just ahead of market forecasts. Growth may be slowing on both ends of the income statement, but we've seen what Dave & Buster's does to its initial outlooks. It boosted its guidance with every passing quarter through 2015, and momentum is in its corner to keep doing so as 2016 plays out.

We're still early in the concept's growth cycle. The company will have 90 locations open by year's end, so it's not even halfway through its goal of 200 units in North America. Then there's the overseas potential of the concept, and we'll get a taste of that next year when the first store that's part of an international licensing deal opens in the Middle East. There's still upside here for the concept, company guidance, and inevitably the stock price. It's a game Dave & Buster's has proven it knows how to play well.

The article Dave & Buster's Stock Plays to Win originally appeared on Fool.com.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.