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Here's Why Investors Should Retain Dave & Buster's (PLAY) Stock

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Dave & Buster's Entertainment, Inc. (PLAY - Free Report) continues to benefit from excellent operational execution, store expansion, digitalization and efforts to drive organic growth. However, coronavirus and high costs remain concerns. Let’s delve deeper.

Growth Drivers

Dave & Buster's continues to perform well on the back of the unique customizable experience that it offers across its four platforms, “Eat, Drink, Play and Watch.” Apart from great food or beverages, the company’s entertainment business has been driving growth. Third-quarter fiscal 2021 amusement and other revenues, which accounted for 66.1% of the total revenues, jumped 197.3% year over year to $210.2 million. The upside was primarily driven by reduction in discounting and a shift toward higher denomination Power Cards. In fact, it has been crucial to the company’s success.

Dave & Buster's continues to pursue a disciplined new store growth strategy in both new and existing markets, given the broad appeal of its brand. Management believes that it can grow the concept to more than 200 units in North America over time. In addition to growth potential that exists in North America, management is optimistic regarding the brand’s significant appeal in certain international markets. The company opened six new stores in fiscal 2020. In second-quarter fiscal 2021, the company opened one new store. During fiscal 2021, the company had opened four new stores and relocated one existing location.

In an effort to drive organic growth, Dave & Buster's intends to broaden its entertainment offering by including more immersive sports viewing experiences, adding fantasy sports and permitting in-sports betting options. The company plans to explore sports betting partnerships to bring sports racing and daily fantasy sports to Dave & Buster's stores, subject to regulatory permissions. It is also working on an entertainment programming function focused on creating compelling content-based events to drive broader reach and boost visit frequency. Thus, with the help of a centralized programming team, Dave & Buster's intends to enhance the live sports experience in lieu of becoming a premier sport watching destination. The company also stated that it intends to give its stores a fresh look in order to drive organic growth.

Additionally, the Zacks Rank #3 (Hold) company believes that it can drive traffic by enhancing in-store and out-of-store customer experience via digital and mobile strategic initiatives, and deployment of better technology. Therefore, the company intends to leverage its growing loyalty database and continue to invest in other mobile applications to build customer connections and drive frequent customer visitation.

In the past year, shares of the company have increased 39.7%, compared with the industry’s growth of 15.3%.

Zacks Investment ResearchImage Source: Zacks Investment Research

Concerns

The coronavirus pandemic negatively impacted the company’s operations during third-quarter fiscal 2021. Although the stores have reopened after the coronavirus-led shutdown, traffic is still below the pre-outbreak level. The company stated that fourth-quarter revenues will be affected by the weak Special Events business relative to 2019 and from a calendar shift in its major holiday periods. The Omicron variant of coronavirus might hurt traffic and sales in the upcoming period.

Rise in labor and commodity costs continues to hurt the company. The industry players expect to witness higher cost due to labor and supply chain shortages for the rest of 2021. The company has been witnessing labor challenges in a handful of markets. At the end of third-quarter 2021, total operating expenses were $293.5 million, up from $165 million in the prior-year quarter.

Key Restaurants Picks

Some better-ranked stocks in the same space include Papa John's International, Inc. (PZZA - Free Report) , Noodles & Company (NDLS - Free Report) and McDonald's Corporation (MCD - Free Report) .

Papa John's currently carries a Zacks Rank #2 (Buy). The company benefits from its off-premise business model. Sales at off-premise business model have exceeded pre-pandemic levels. We believe that a boost in customer count and targeted off-premise marketing are likely to drive the channel’s performance in the upcoming periods.

Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2021 earnings is likely to witness growth of 142.9%. PZZA stock has gained 55.1% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Noodles & Company carries a Zacks Rank #2. Robust comparable restaurant sales growth and increase in average unit volumes are favoring the company. In third-quarter 2021, average unit volumes climbed 16% year over year.

The Zacks Consensus Estimate for Noodles & Company’s current financial year sales and earnings per share (EPS) suggests growth of 22.5% and 196.6%, respectively, from the year-ago period’s levels. NDLS stock has returned 28.1% in the past year.

McDonald’s carries a Zacks Rank #2. A robust drive-thru presence and investments in delivery and digitization in the past few years have helped the company in countering the pandemic. The company has a trailing four-quarter earnings surprise of 6.8%, on average.

The Zacks Consensus Estimate for McDonald's current financial year sales and EPS suggests growth of 20.9% and 54.9%, respectively, from the year-ago period’s levels. MCD stock has appreciated 24.6% in the past year.

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