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Is Dave & Buster's Entertainment Out of the Woods After a Positive Q4 2018?

Nicholas Rossolillo, The Motley Fool

Dave & Buster's Entertainment (NASDAQ: PLAY) recently reported results for its fourth quarter of 2018, ending a forgettable fiscal year for the company -- albeit on a high note. Same-store sales (a combination of foot traffic and average guest spending) fell sharply for most of 2018, but notched an increase during the final quarter. With new store openings in the works and consumer interest in the arcade, sports bar, and restaurant chain on the rebound, 2019 could be a much better year for the stock.

2018 by the numbers

It wasn't all bad at Dave & Buster's. Revenue did grow by 11%, and earnings did manage a 3% increase even though operating expenses outpaced sales growth. Those increases were driven by 15 new stores that opened during the year, getting the chain to the halfway point of its long-term target of about 230 to 250 total locations.

Metric

12 Months Ended Feb. 3, 2019

12 Months Ended Feb. 4, 2018

Gain YOY

Revenue

$1.27 billion

$1.14 billion

11%

Operating expenses

$1.10 billion

$974 million

13%

Earnings per share

$2.93

$2.84

3%

Total number of stores

121

106

14%

YOY = year over year. Data source: Dave & Buster's Entertainment.

Most of the restaurant industry rebounded in 2018, riding the coattails of a generous American consumer. Spending increased 5.3%, according to the U.S. Census Bureau, and same-store sales began to rise for many restaurants.

Not so for Dave & Buster's; comps struggled for most of the year, getting dragged down especially by the food and drink half of the business. Foot traffic and spending trended lower for most of the year, explaining the sluggish earnings growth.

Comparable Store Sales

Q1 2018

Q2 2018

Q3 2018

Q4 2018

Amusement and other (loss)

(4%)

(1.2%)

1.50%

4.4%

Food and beverage

(6.1%)

(4.1%)

(5%)

1.1%

Combined comps

(4.9%)

(2.4%)

(1.3%)

2.9%

Data source: Dave & Buster's Entertainment.

Note that the outlook changed during the fourth quarter, and comps even came in higher than anticipated. The combined comps estimate that management gave ahead of the fourth-quarter release was for 1.8% to 2.5%. The 2.9% actual comps increase was a big turnaround from the 5.9% drop suffered in the fourth quarter a year ago.

A new age for arcades?

The fourth-quarter turnaround shows that Dave & Buster's new strategy is working. The company has been slimming down its menu, focusing more on drinks (the real profit generator for the restaurant segment), and running food promotions and ad campaigns to get people in the door.

A group of young adults in a bar drinking cocktails.

Image source: Getty Images.

What's more important is the fact that the entertainment side of the business is undergoing change. Dave & Buster's made a foray into virtual reality (VR) last year with the release of Jurassic World VR Expedition. In less than a year's time, there are now three VR titles at Dave & Buster's, with a fourth one on the way this spring -- based on the upcoming Men in Black: International movie coming out this summer. Management says building out a portfolio of exclusive games and updating its arcade with new titles is a key priority.

Paired with another 15 to 16 new store openings and as much as 1.5% comps growth, the chain expects total sales to grow 8% in 2019. With comps no longer in retreat, the earnings metric should perform better than last year, too. Shares are still over 20% off their all-time highs set over the summer of 2017, but a rally could be ahead if the business continues to show signs of new life as the year progresses.

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Nicholas Rossolillo and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.