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).
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.
10 stocks we like better than Walmart
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, the Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of June 4, 2018
The author(s) may have a position in any stocks mentioned.