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Can High Expenses Affect Dave & Buster's (PLAY) Q3 Earnings?

Dave & Buster's Entertainment, Inc. PLAY is scheduled to report third-quarter fiscal 2018 results on Dec 11, after the closing bell.

The company continues to bank on a unique business model that provides guests with customizable experience across four platforms, “Eat, Drink, Play and Watch.” Apart from great food or beverages, the entertainment business of Dave & Buster’s has been driving growth and is expected to have driven revenues in the fiscal third quarter.

However, a non-franchised business model makes the company susceptible to increased expenses, which are likely to have hurt its bottom line in the to-be-reported quarter.

Nonetheless, backed by a distinctive business strategy, shares of Dave & Buster have gained 27.3% over the past six months, outperforming the industry’s collective growth of 12.1%.

Let us look deeper into factors that are likely to have shaped up the company’s fiscal third quarter.

Top Line Looks Strong

The Zacks Consensus Estimate for Dave & Buster’s sales in the fiscal third quarter is pegged at $274.2 million, suggesting 9.7% growth from the year-ago quarter. In the first six months of fiscal 2018, the company’s revenues increased 11.4% year over year. We expect the trend to have continued in the fiscal third quarter as well.

The company’s top-line growth strategy is to have a solid entertainment business that cushions it from the fluctuating business in the restaurant industry. Notably, amusement and other revenues accounted for 59.2% of total revenues in the second quarter of fiscal 2018 and grew 16.6% year over year. We believe the segment to have performed well in the fiscal third quarter as well.

Another top-line initiative by Dave & Buster's includes menu innovation. In the fourth quarter of fiscal 2017, Dave & Buster’s appointed new vice president of Food and Beverage development in order to improve the speed of service through menu redesign and positive simplification in the kitchen area. In February, the company streamlined its menu and reduced the number of food orders by about 20%, and beverage offerings by 12% to achieve increased efficiency.

Meanwhile, Dave & Buster's continues to pursue a disciplined new store growth strategy in both new and existing markets. Management believes that it can grow the concept to more than 200 units in North America over time. In the second quarter of fiscal 2018, the company opened five stores. In fiscal 2018, it anticipates opening 14-15 stores — including two latest 17-K format stores, a combination of eight stores in new markets for D&B and the remaining located in markets where the brand is already established. With these store openings, it intends to achieve 13-14% annual unit growth rate.

Earnings to Reflect Cost Pressures

Although a higher-margin business model is supposed to boost Dave & Buster’s earnings, high costs of operations remain a drag. Apart from increased labor costs, Dave & Buster’s is seeing high costs from sales-building initiatives and other operations.

In the first six months of 2018, total operating costs increased 13.6% year over year and the trend is likely to have continued in the fiscal third quarter. We believe that these high expenses will, in turn, hurt the company’s fiscal third-quarter earnings. More so because the consensus estimate pegs the quarter’s earnings at 22 cents, suggesting a 24.1% decline from the third quarter of fiscal 2017.

What Does the Zacks Model Unveil?

Our proven model does not show that Dave & Buster’s is likely to beat earnings estimates this quarter. This is because a stock needs to have both — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Dave & Buster’s has an Earnings ESP of 0.00%. Although the company’s Zacks Rank #2 increases the predictive power of ESP, we need to have a positive ESP to be confident about an earnings surprise. You can see the complete list of today’s Zacks #1 Rank stocks here.

Peer Releases

McDonald's MCD reported impressive third-quarter 2018 results, wherein earnings per share of $2.10 surpassed the consensus mark of $1.98 by 6.1% and increased 19% from the year-ago quarter.

Domino's DPZ reported mixed quarterly numbers for third-quarter 2018, wherein earnings $1.95 per share outpaced the consensus mark of $1.73 and increased 53.5% on a year-over-year basis.

Restaurant Brands QSR reported lower-than-expected results in third-quarter 2018. Adjusted earnings of 63 cents per share missed the consensus mark by a couple of cents. However, the reported figure increased 8.6% from the year-ago quarter.

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