The Big Takeaways From Dave & Buster's Earnings

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Coming into this week's report, investors were optimistic that Dave & Buster's (NASDAQ: PLAY) would show continued progress in its business turnaround. Sales growth trends took a big step toward positive territory last quarter, after all, and the company paired that good news with a nice bump in profitability.

On Tuesday, the restaurant and entertainment chain posted another improvement in its growth pace for the fiscal third quarter. However, Dave & Buster's still struggled with falling customer traffic and declining food sales. Its profit margins took a step lower, too.

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Let's take a closer look at the results.

Sluggish growth

Comparable-store sales, or sales at existing locations, slipped at a 1.3% rate to mark an improvement over last quarter's 2.4% decrease and the 5% slump that it posted at the start of fiscal 2018. New VR video-game launches helped spur guest spending on the entertainment side of the business, which expanded slightly. But those gains weren't enough to overcome a big drop in the food segment. That division contracted by 5%.

In a conference call with Wall Street analysts, executives noted a few drivers behind that drop, including competition from rivals, cannibalization from the existing store base, and reduced availability of the chain's all-you-can-eat chicken wing promotion.

On the bright side, Dave & Buster's opened 17 new stores over the preceding 12 months, and that expanding base allowed overall revenue to climb 13% despite the modest drop in comparable-store sales.

Profit pinch

While its sales shift toward more profitable amusement spending continued during the quarter, Dave & Buster's still posted weaker margins. Costs rose in categories including wages and game maintenance. As a result, operating income fell to $15 million, or 5.5% of sales, from $20 million, or 8% of sales, a year earlier.

Management wasn't too concerned about that profit slump, saying in the earnings call that much of it had to do with temporary accounting charges. They said the company's adjusted earnings metric, which rose 11%, painted a more accurate picture of the period's profit generation. Dave & Buster's newest crop of stores, meanwhile, were among its most efficient yet in terms of cash return on initial investment.

Looking ahead

CEO Brian Jenkins and his management team affirmed their core sales growth guidance and still expect comps to drop by around 3% in 2018 to mark the company's second straight year of falling traffic at its established stores. Comps fell by less than 1% last year after climbing by 3.3% in 2016 and jumping 9% in 2015.

Those days of near double-digit comps growth appear to be far behind Dave & Buster's, and given the recent traffic trends, it's not clear whether the chain can even return to positive territory in fiscal 2019. However, the company still sees an opportunity to roughly double its store base over the long term, which should keep sales and earnings marching higher.

After launching a record 15 locations this year, executives plan to add between 15 and 16 new stores in 2019. "We continue to be the leader in the combined dining and entertainment space," Jenkins told investors, "and have the opportunity and resources to consistently grow [store locations] by more than 10% annually while generating strong returns."

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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.