Dave & Buster's Gets More Profitable as It Emphasizes Gaming

Investors have been hoping that a management shakeup and new turnaround plan would get things rolling again at Dave & Buster's (NASDAQ: PLAY). Yet the restaurant/entertainment chain had a deep hole to climb out of after sales missed expectations in the fiscal first quarter.

The good news is that trends improved over the past few months -- enough to produce an upgrade to the 2018 outlook on both the top and bottom lines.

By the numbers

Sales rose 14% overall, but only because the company added 17 new locations to its store base in the past year, pushing its total to 117. Revenue at existing stores continued declining, yet the 2.4% drop represented a solid improvement over the prior quarter's 5% dip.

Management was disappointed by the severity of last quarter's fall but was pleasantly surprised this time around. "We delivered meaningful sequential improvement in comparable store sales," CEO Brian Jenkins said in a press release. "We are pleased with the guest response to our proprietary VR platform and look forward to building on this momentum," Jenkins explained.

Looking deeper into the results, Dave & Buster's endured a 1.2% drop in its food and beverage business and a 4% decline on the entertainment side thanks mainly to lower customer traffic.

Profitability improved thanks to the combination of two favorable trends. First, the sales mix shifted toward amusement revenue, which carries a far higher profit margin than food sales. That's likely a result of the company's shift toward a new operating footprint that allocates more room toward the entertainment side of the business at the expense of restaurant space. Dave & Buster's cut administrative expenses, too, and that helped push operating income up to $46 million, or 14.4% of sales, from $39 million, or 13.9% of sales.

Store growth and outlook

Dave & Buster's added five locations to its base during the quarter, including its first in the state of Utah. That kept the company on track to open between 14 and 15 new stores during the year, skewing mainly toward new markets. Executives said they're happy with the economics of the new, slightly smaller stores. "Our new stores are tracking well," Jenkins explained, "and we remain well positioned to capitalize on the long-term opportunity to more than double our store base in the U.S. and Canada."

Specifically, the chain believes it can reach 220 locations, or more, compared to the current 117 store footprint. Sure, investors would feel more confident about that optimistic forecast if the company could show consistently positive sales growth in its current stores. But Dave & Buster's took a small step in that direction by raising its 2018 comp outlook.

That forecast now calls for a decrease in the low single-digits rather than ranging as high as a mid-single-digit slump. Within that metric, shareholders should keep an eye on customer traffic trends over the next few quarters to see if they respond positively to the branding, marketing, entertainment, and menu improvements that the chain is currently rolling out.

Meanwhile, it's encouraging to see profitability march higher as Dave & Buster's shifts more toward an amusement and entertainment focus. This change is offsetting much of the earnings sting from falling customer traffic as the company leans on its competitive advantages to stand out in a crowded market.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.