3 Takeaways From Dave & Buster’s Conference Call

Dave & Buster’s (NASDAQ: PLAY) posted earnings results last week that contained only the faintest signs of an end to the restaurant chain’s recent struggles. Sales at existing locations continued to shrink as competition pawned off customers on both the entertainment and the food sides of the business. Yet the company managed a few encouraging wins while announcing a major change in the management team.

Below are a few highlights from the conference call that CEO Steve King and his executive team held with Wall Street analysts to put those disappointing trends into context with their long-term growth targets (all quotes are King’s).

Image source: Getty Images.

Disappointing sales growth

Comparable store sales on a calendar basis declined 4.9% versus the year ago period, a slight improvement on the trends in the first quarter, although clearly not where we wanted to be.

Dave & Buster’s sales performance was weak, with revenue at existing locations dropping 5% to mark just a modest improvement over the prior quarter’s 6% slump. As was the case back in the fourth quarter, the customer traffic declines were broad-based. Sales dipped 4% in the amusement segment, were down 7% with respect to food, and dropped 5% at the bar. Executives cited aggressive competition as a key reason for the shortfalls.

Good store economics

Our new stores continue to generate very strong cash-on-cash returns, even after taking into account the sales impact on the existing system.

The chain opened six new locations in the period to mark its most aggressive expansion pace yet. That figure includes the company’s first smaller-format store that’s just 17,000 square feet, or about half the size of its normal locations.

Management said they were happy with the initial sales volumes at these stores, and nothing about the latest launches has caused a downgrade in Dave & Buster’s broader growth opportunities. Executives still believe the market will support as many as 250 locations across the U.S. and Canada, including between 20 and 40 small-format stores, up from 112 today.

The rebound plan

We need to deliver new gaming content, food improvements, faster service, and effectively communicate these value enhancements to our guests.

Management outlined several strategies aimed at improving sales at existing locations. These include a simpler food menu with faster service and higher-quality burger, chicken, and steak products. The amusements section should see a lift from Dave & Buster’s push into virtual-reality games, including with exclusive titles like Jurassic World VR Expedition.

And on the marketing side, executives believe they’ve been underutilizing digital media, so a shift toward that channel may help the chain better communicate its value to potential customers.

Those initiatives aren’t likely to turn things around quickly for the company. In fact, Dave & Buster’s affirmed a full-year outlook that calls for a second straight year of declining sales at existing locations and roughly zero growth in adjusted earnings. “We consider 2018 to be a year of recalibration as we lay the groundwork for evolving the brand,” King explained.

Wall Street still sent the stock higher in response to the earnings announcement. But that rally likely had more to do with news that King is retiring and that CFO Brian Jenkins is set to take over the CEO position in early August. The leadership change offers an opportunity for Dave & Buster’s to make more aggressive changes that might free itself from a tough stretch that’s included three consecutive years of worsening comparable-store sales trends.

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The author(s) may have a position in any stocks mentioned.

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.

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