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Dave & Buster's Banks on Unique Business Model, Costs Ail

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Dave & Buster's Entertainment, Inc.’s (PLAY - Free Report) unique business model, rigorous sales-building initiatives and relentless expansion plans are encouraging. However, high cost of operations and the company’s limited international presence raise concerns.

In the first quarter of fiscal 2018, the company reported better-than-expected results, wherein both the top and bottom lines increased year over year. Results were aided by solid revenues generated from the Food and Beverage, as well as the Amusement and Other segments.

Dave & Buster’s continues to perform well on the back of unique customizable experience that it offers across four platforms, “Eat, Drink, Play and Watch”. Backed by this exclusive experience, shares of the company have gained 22.8% in the past three months, outperforming the industry’s growth of 3.8%.

Distinct Business Model Favors Revenues

Dave & Buster’s exclusive business model focuses on entertainment business, alongside food and beverage offerings. This dual model helps the company generate favorable store economics and strong return.

In the first quarter of fiscal 2018, amusement and other revenues accounted for 57.9% of total revenues, proving a major reason for its success. In fact, the segment’s revenues grew 10.4% year over year. This is because, increased dependence on gaming has cushioned the company from the headwinds of consumer-discretionary spending that characterizes the restaurant industry, and is in turn driving market share and comps. Also, the shift toward increased focus on amusement is driving Dave & Buster’s earnings, given its higher-margin business. In fact, this unique model sets it apart and we expect the company’s entertainment business to carry the growth story forward.

Rapid Store Openings Bode Well

Dave & Buster's continues to pursue a disciplined store-growth strategy in both new and existing markets, given the broad appeal of its brand. Management believes that it can roll out the concept to more than 200 units in North America over time. In the first quarter of 2018, the company opened 6 stores. Also, out of the 112 stores it currently operates, 26 stores are new. So far this year, the company already opened nine stores and has five under construction. It plans to further ride on new store growth in 2019 and early 2020.

In fiscal 2018, the company anticipates to open 14-15 new stores, including two latest 17-K format stores, a combination of eight stores in the new markets for D&B, with the remaining located in markets where the brand is already established. With these new store openings, it intends to achieve a 13-14% annual unit growth rate.

Meanwhile, in addition to North America’s growth potential, management is positive about the brand’s significant appeal in certain international markets. Notably, the company’s first international opening outside Canada is anticipated in 2018.

High Costs Amid a Competitive Industry Hurt Dave & Buster’s

Higher labor costs due to increased wages and those incurred due to implementation of the Affordable Care Act are expected to continue keeping profits under pressure. This means that restaurant operators such as Dave & Buster’s that has numerous company-owned units and laborers will have to continue shouldering increased labor costs, which in turn will hurt margins.

Further, the non-franchised model makes the company susceptible to increased expenses. Since all the restaurants are owned and operated by Dave & Buster’s, instead of signing franchise agreements and putting the burden of costs onto the franchisee, the company is solely responsible for the expenses of operating the business.

Moreover, the retail restaurant space is highly competitive, as numerous restaurant operators are adopting advanced and prudent strategies to increase their sales. Amid such stiff competition, Dave & Buster’s is missing out on international presence that other restaurant chains like McDonald's (MCD - Free Report) , Domino’s (DPZ - Free Report) and Yum! Brands (YUM - Free Report) are aggressively pursuing.

We believe that the company needs to expand its presence beyond the United States in order to offset the impact of cut-throat competition in the saturated domestic market.

Currently, Dave & Buster’s carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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