What Dave & Buster's Wants Investors to Know

The outlook just got cloudier for Dave & Buster's (NASDAQ: PLAY) business.

The restaurant and entertainment hub had been showing encouraging signs of a growth rebound following two years of declines. However, the chain this month posted disappointing operating metrics that suggest its turnaround strategy might need more time to play out than investors had hoped.

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In a conference call with Wall Street analysts, CEO Brian Jenkins and his team explained what went right -- and wrong -- for the business in the fiscal first quarter. Executives also detailed their reasoning for lowering the 2019 demand outlook while continuing to open stores at a record pace.

Let's look at a few investor takeaways from that presentation.

Why the shortfall

Dave & Buster's in late March posted its first comparable-store sales increase since 2017. Management noted at the time that comps remained strong through the first few weeks of fiscal 2019. However, demand turned lower in the following weeks so that comps surprisingly slipped back into negative territory. Executives said the calendar shift around the Easter holiday played a role in the disruption, but that competition also harmed growth trends.

Dave & Buster's managed higher sales in the amusements section, but those gains came entirely from rising prices as customer traffic continued to decline. "Comparable store sales were below expectations," Jenkins noted.

Food challenges

The accelerating food demand that Dave & Buster's reported last quarter proved short-lived. Its restaurant segment shrank by more than 3% at the start of fiscal 2019, with food down 2.8% and bar sales lower by less than 0.5%.

Management highlighted several encouraging trends in this division, which accounts for about 40% of the business. Dave & Buster's has simplified the menu to speed up service and improve quality. Guests are noticing the changes, executives said, leading to higher customer satisfaction scores.

However, it appears that rebounding food demand will take more time to engineer than executives had hoped. In the meantime, the company is still rolling out initiatives aimed at enhancing the guest experience, while also "working with urgency" to control costs.

What's working

By adding new virtual reality (VR) titles in the Marvel and Star Wars franchises, Dave & Buster's took another step toward building a deep catalog of exclusive simulation games. This strategy deepens customer connections with the chain, takes advantage of its large sales base, and also raises profitability since guests have demonstrated a willingness to pay a premium for quality VR experiences.

Dave & Buster's main challenge is to use that early success to build a more loyal fan base around its entertainment business. At the same time, the company needs to convince more of these gamers to try out its upgraded food menu.

The problem is that competitors are following a roughly similar strategy, and right now it's not clear that Dave & Buster's is delivering a strong enough guest experience to protect its market share. Shareholders have to hope that improvements in both the restaurant and entertainment sides of the business will solve that problem over the next few quarters.

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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.