Why Did Dave & Buster's Entertainment, Inc. Shares Jump 20% in December?

By Daniel B. Kline Markets Fool.com

Dave & Buster's has put up some very solid numbers. Image source: Dave & Buster's.

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In a difficult market for restaurants, Dave & Buster's (NASDAQ: PLAY) has found a formula that works. The company had a very strong quarter that pushed its stock to big gains in December.

What happened

Dave & Buster's saw its Q3 revenue rise by almost 19% to $228.7 million, up from from $192.8 million. In addition, the company reported a comparable-store sales increase of 5.9%, which was down from an 8.8% gain in Q3 2015.

Those numbers were viewed positively by investors. Shares opened December at $46.93 and closed the year at $56.30, a just under 20% gain, according to data from S&P Global Market Intelligence.

Image source: YCharts.com.

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So what

The restaurant/arcade chain not only had a good quarter, it has been on a roll. CFO Brian Jenkins explained just how deep its success has run in his comments in the earnings release.

"Once again, we set new records for third-quarter revenue, net income, and adjusted EBITDA," Jenkins said. "We have also now delivered 25 consecutive quarters of adjusted EBITDA growth on a trailing 12 months basis, representing a compound annual growth rate of 20% and margin expansion of 1,100 basis points over that same time period."

The CFO also noted that the chain's Q3 margin improvement represented its best performance of the year. He said that happened because the company has been working on its operating costs and shifting its sales mix to the higher margin amusement category.

Now what

Dave & Buster's has a fairly unique position in the restaurant business. Its mix of food, games, and drinks offers the ability to hold customers for longer while they spend more money.

The company had a strong Q3 and the chain plans to open or have opened 11 new stores in 2016, up from its original prediction of nine. It also plans on 11 or 12 new store openings for 2017.

In addition, the chain has upped its Q4 revenue projections from $998 million to $1.003 billion (versus $983 million to $995 million previously). The company also expects a Q4 comparable store sales increase of 2.5% to 4.5% along with higher than originally projected profits.

Basically, Dave & Buster's has found a formula that works. Now it simply needs to grow its location count while continuing to execute on its model.

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Daniel Kline has no position in any stocks mentioned. He enjoys video games, but is bad at them. The Motley Fool recommends Dave and Buster's Entertainment. The Motley Fool has a disclosure policy.