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Competition Keeps Getting in Dave & Buster's Way

Dave & Buster's (NASDAQ: PLAY) recently announced earnings results that did little to change the investing picture that has taken shape over the last few quarters. The restaurant stock is still struggling in a competitive landscape, and those challenges hurt sales growth and customer traffic. Annual earnings, meanwhile, are on pace to decline for a second straight year despite the chain's growing store base.

Those negative trends are countered by good news on the financial front, and by the fact that operating trends aren't deteriorating as much as investors had feared. With that big picture in mind, let's take a look at the third-quarter results.

Image source: Getty Images.

Sales are falling

Sales edged just past management's target, reaching $299 million compared to the $296 million executives had predicted. Yet for the second consecutive quarter, that growth came more from Dave & Buster's growing store base than from customer traffic at existing locations. In fact, comparable-store sales fell 4% compared to the 2% decline the company noted in each of the two prior quarters. That slump was roughly evenly split between reduced demand in the food and beverage segment and in the gaming division.

An additional 16 stores in the base was enough to offset that slump and push overall revenue higher, and management called that a significant win. "We delivered 6% revenue growth," CEO Brian Jenkins said in a press release, "driven by new store performance."

Spending more cash

As expected, Dave & Buster's spent more cash in several areas of the business, including food, labor, and store launches. The company also shelled out on investments aimed at raising guest satisfaction. It rolled out 43-foot walls of flat-screen TVs to 35 stores in the period, for example, in a bid to attract more sports viewing.

These projects will ideally increase customer traffic and food and beverage spending. But for now, investors are only seeing the costs of the program reflected on the books. Adjusted earnings fell 1% to $43 million despite the 6% revenue increase.

Slower growth ahead

Jenkins and his team issued an updated financial outlook that didn't change much compared to its September forecast. That's good news, because it implies that management has a good handle on industry trends, even if investors will have to endure a second straight year of falling profit and declining comps.

The bigger picture got less clear with this report, though, since management announced plans to "manage the pace of new store growth to maximize returns and focus on advancing our store revitalizing efforts." The upshot of that initiative is a likely reduction in the store launch pace next year following two consecutive years of around 16 additions.

It's hard to argue with the call to prioritize improving the existing store base before expanding aggressively into new markets. Yet shareholders today aren't seeing concrete evidence that Dave & Buster's can break through the competitive landscape, either through food menu tweaks or with exclusive new video games.

A slower expansion rate will amplify that sales pressure in exchange for giving management more resources to direct toward its existing locations. However, investors looking to buy this stock might want to wait until customer traffic trends break back into positive territory before betting on a sustainable turnaround.

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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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