Dave & Buster's Outlook Misses the Mark, but the Stock Is a Buy

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Dave & Buster's Entertainment (NASDAQ: PLAY) recently disappointed investors with its guidance for the months ahead. That was in spite of a strong second quarter that beat expectations and a long track record of outperforming the broader restaurant industry.

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After the stock's decline, however, the company looks like a good value.

A best-in-breed dining experience

Dave & Buster's has a unique niche in the restaurant industry. The company pairs its sports bar-style food with an arcade, billiards, and bowling experience. Think Chuck E. Cheese but geared toward adults.

That may sound hokey, but the business model has been a hit. As younger generations of Americans grow up, they've shown with their purchasing habits that life experiences often trump retail therapy.

The overall restaurant industry has been struggling for nearly two years with negative comparable sales, led by declining foot traffic. But Dave & Buster's has continued to experience positive comps growth.

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While the figures have been trending down in recent quarters, it's worth noting that the company has kept up its growth even during the worst of this so-called "restaurant recession". This last quarter saw revenue and profits increasing 15% and 42%, respectively.

When good isn't good enough

Despite the solid quarter, the stock reversed course as a result of revised guidance for the balance of 2017. Comparable store sales growth for the full year is now expected to fall between 1% and 2%, down from the previous guidance of 2% to 3%.

Revenue guidance remained unchanged at $1.16 to $1.17 billion. Offsetting the decreased comps outlook are new openings, upped from 12 to 14 locations. That would bring the total restaurant count to 106 by year end.

Those are positive developments, especially considering the company's success with building new restaurants and driving traffic to them. Overshadowing that, however, was Hurricane Harvey. Dave & Buster's has three locations in the Houston market that were shuttered for a week, and the region is still grappling with the aftermath of the storm. There are also five locations in Florida that faced Hurricane Irma. That's a significant number of locations facing challenges during an already slow period for the company.

Is the stock a buy?

With all that in mind, Dave & Buster's stock looks like a buy after the recent pullback. Trailing price-to-earnings is at 21, but that number drops to 19 when accounting for expected earnings in the year ahead.

More importantly, I like the consistent free cash flow growth the company has been enjoying from its expanding operations:

It looks like that figure should continue to rise, as the company opens stores in new markets, driving its top line sales. The chain has proven its niche offering can outperform the rest of the industry. As long as that holds, there is good reason to believe that the bottom line will continue to follow suit as well. Long-term buyers have little to worry about from the last report.

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Nicholas Rossolillo owns shares of Dave & Buster's Entertainment. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.