Dave & Buster's Comps Disappoint, but the Business Remains Solid

By Markets Fool.com

Image source: Dave & Buster's.

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It's no secret that the food service industry has seen slowing growth, affecting everything from pizza joints to fast casual chains to sit-down restaurants. The most recent earnings release from Dave & Buster's (NASDAQ: PLAY) shows that the company is not immune from such industry headwinds. After posting 11% comparable-store sales (comps) growth during last year's fiscal second quarter, the company reported comps growth of just 1% this year.

Here is what the overall comps trend has looked like over the past two years.

What's crucial to understand, however, is that management was very clear with investors that such a slowdown would be coming. After a 2015 fiscal year that saw comps come in as high as 11%, management guidance for 2016 was a modest 3.25% to 4.25%. Following this recent earnings release, however, the company was forced to revise that guidance downward by a full percentage point to 2.25% to 3.25%.

The company is still performing well

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In spite of such headwinds, there were lots of positives coming out of the earnings announcement. Operating expenses and costs of goods sold fell across the board as a percentage of revenue:

Expense

% of Revenue in Q2 2015

% of Revenue in Q2 2016

Improvement

Cost of food

26.1%

25.6%

50 basis points

Cost of amusement

12.8%

12.1%

70basis points

Payroll and benefits

23%

22.6%

40basis points

Other store operating expenses

29.5%

29%

50basis points

General and administrative

6.2%

5.6%

60basis points

Depreciation and amortization

9%

8.8%

20basis points

Data source: Dave & Buster's.

Such incremental improvements for each line item help explain why the company was able to increase earnings per share by 25% to $0.50, while revenue grew at a slower pace, up 12.4% to $244 million.

This is certainly welcome news to investors. Dave & Buster's currently operates 86 stores globally with plans to open a total of 10 to 11 new locations in 2016. The new stores already in the company base appear to be performing exceptionally well. "The 20 non-comparable stores contributed $24.7 million to our 12.4% total revenues growth," said CEO Steve King.

Three trends to watch

As we approach the all-important NFL season, there will be three important developments for investors to focus on. The first, obviously, is comps. While the company's results were disappointing for the second quarter, they still outperformed peers based on the Knapp Track index -- for the 17thconsecutive quarter.

Second, the company must continue to improve efficiency and benefit from economies of scale. All told, Dave and Buster's was able to widen gross margin from 5.67% to 8.74% year-over-year -- a remarkable gain.

Finally, the continued migration of revenue to amusement remains an important differentiator for the company. Along with improved efficiency storewide, the outsized growth of income is also due to the fact that amusement is a much higher-margin revenue stream than food.

Trading for 24 times trailing earnings and 36 times free cash flow, Dave & Buster's remains somewhat expensive, but the potential for long-term growth is still very much present.

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Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Dave and 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.