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Why Dave & Buster's Has Upside Potential

Dave & Buster's Entertainment Inc. (NASDAQ:PLAY) has recovery potential following its 54% decline over the past year.

The restaurant and entertainment business is investing in its mobile app, seeking to reduce costs and is expanding its number of locations.

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Mobile app

The company launched its new mobile app in the third quarter of 2019. The app enables Dave & Buster's to communicate more effectively with its customers through text messages, which could encourage them to visit its restaurants more frequently.

The new app contributed to an increase in its number of loyalty members in the third quarter, bringing the total to 1.4 million, and generated an additional $14 million in revenue.

The company plans to add greater functionality to its mobile app in 2020. For example, its customers will be able to pay for their food and beverages at their table through the mobile app, which could increase the amount of time Dave & Buster's staff members have to serve its customers and may improve the dining experience.

Investment strategy

Dave & Buster's is redesigning the layout of its existing stores to provide more space for its most profitable segments. For example, it is reducing the size of its kitchen areas and dedicating more space to its sports viewing areas and arcades.

In addition, it is planning to increase the number of locations to 250 over the long term from its current figure of 136 restaurants. This could increase the size of its potential customer base and catalyze its financial performance.

Competitive advantage

The business conducted extensive customer research in 2019 to improve its menu and games offering. Based on its findings, it plans to offer games that provide greater social interaction and introduce more unique menu items that could help to differentiate it from sector peers and improve its competitive advantage.

The company is also installing new technology within its restaurants. For example, in the third quarter, it rolled out large TV screens in 35 of its stores to show live sports. These cahnges could enhance its appeal in comparison to local competitors, increasing its visitor numbers.

Potential threats

Dave & Buster's recent financial performance has been disappointing. In the third quarter, its sales declined 4.1% from the year-ago period. Its performance was negatively impacted by weakness in its amusements segment as well as increasing competition. It expects this trend to continue, which could cause investor sentiment toward the stock to weaken.

In response, the company is aiming to become more efficient. In the third quarter, it reduced a number of costs across its restaurants and in its head office, which is expected to yield $15 million in annual savings in 2020. Dave & Buster's also plans to reinvest its cost savings in areas such as marketing.

In addition, Dave & Buster's anticipates its sales performance will improve in 2020 due to exceptionally unfavourable weather conditions reducing third-quarter sales by 1.2 percentage points.

Outlook

Market analysts forecast the business will record a 6% increase in earnings per share in fiscal 2021. The forward price-earnings ratio of 7.6 suggests Dave & Buster's offers capital growth potential in the long run.

Disclosure: The author has no positions in any stocks mentioned.

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This article first appeared on GuruFocus.