1 Reason To Worry About Dave & Buster's After the Latest Report

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The restaurant recession just claimed another victim.

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Dave & Buster's (NASDAQ: PLAY) comparable sales fell into the red for the first time ever since the eatertainment chain went public in 2014. Overall comparable sales decreased 1.3% in the third quarter as amusements moved up 1.1%, though comps on the restaurant side of the business dipped 4.2%. Nevertheless, the stock initially rose after the report came out as the arcade-and-dining chain beat earnings estimates and announced a new small-store format.

Let's take a closer look at the implications of the recent comparable sales decline.

A steady decline

Over the last year, Dave & Buster's comparable sales have steadily decelerated as the "restaurant recession" plaguing much of the industry seemed to finally catch up with it. The chart below shows its performance on the key metric over the last five quarters.

Quarter Comparable sales
Q3 2016 5.9%
Q4 2016 3.2%
Q1 2017 2.2%
Q2 2017 1.1%
Q3 2017 (1.3%)

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As you can see, not only did comparable sales go negative over the time period, but the trend itself is alarming -- sales at established stores have slowed for five quarters in a row. Unless management acts to change up the menu or make changes to give food & beverage sales a boost, it looks like comparable sales will continue to erode. While higher-margin amusements, which make up the majority of sales, offer a buffer against flagging restaurant performance, that's not enough if overall comparable sales are falling.

In recent report, management also failed to note that it topped the casual dining benchmark in comparable sales growth after 21 straight quarters of doing so, a sign that it's falling behind the competition. Other casual dining chains that have already seen comparable sales slip have been busy making changes to bring customers back in the door. For example, BJ's Restaurants (NASDAQ: BJRI) has introduced a new slow-roasted menu, featuring items like prime rib, as well as improvements to service with tabletop tablets and a delivery partnership with DoorDash, moves that several other restaurant chains have also made.

DineEquity's(NYSE: DIN) Applebee's, after announcing it would close more than 100 restaurants in August, is now looking to bounce back by offering $1 Long Island iced teas all December long, a move designed to draw the young adults that are a key part of Dave & Buster's customer base.

What Dave & Buster's has to do

It's time for D&B to respond. On its recent earnings call, CEO Steve King said that it had researched ways to drive food sales in the recent quarter and found that the vast majority of its guests preferred full-service dining, but wanted service to be faster. Management also found that young adults preferred a menu that was shareable and snackable, and said that the company was testing a pared-down menu at some of its locations. To improve speed of service, management is redesigning the menu and simplifying the kitchen, and is also reinforcing the company's value proposition with an ad campaign touting the company's Eat and Play Combo promotion.

With more than half of its revenue coming from amusements, Dave & Buster's will always have a unique traffic driver that separates it from rival casual dining chains, but food and beverage is a key component of its business and it can't afford to give up 4% of those sales each quarter, especially when the company plans to more than double its number of locations across the country. 

The winter months are Dave & Buster's busiest time of year as cold weather sends people in search of indoor entertainment, so it's key that the company executes on its new food and beverage strategy. Keep an eye on food and beverage comps when D&B delivers its next earnings report. If the company can't show improvement from the 4.2% slide this time around, the stock could be in trouble.

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Jeremy Bowman owns shares of Dave & Buster's Entertainment. The Motley Fool recommends BJ's Restaurants and Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.