Dave & Buster's Entertainment, Inc. (PLAY - Free Report) continues to perform well on the back of the unique customizable experience that it offers across four platforms, “Eat, Drink, Play and Watch.” The company’s distinctive model also generates favorable store economics and strong return. However, its limited international presence and high costs of operations remain concerns.
Nevertheless, shares of Dave & Buster's have gained 27.5% in the past year, outperforming the industry’s 18.5% rally. We are further encouraged by the company’s better-than-expected earnings in the fourth quarter of fiscal 2018. In fact, it posted better-than-expected earnings in each of the trailing four quarters. In the fiscal fourth quarter, earnings increased year over year on higher comps and unit growth.
Let us delve deeper into factors that shape the company’s present performance.
Strong Entertainment Business Encourages
Apart from great food or beverages, Dave & Buster’s entertainment business has been driving growth. Notably, amusement and other revenues accounted for 55.5% of total revenues in the fourth quarter of fiscal 2018. In fact, it is a major reason for the company’s success. Further, the segment’s revenues grew 10.7% year over year.
This is because increased dependence on gaming has cushioned the company from 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. It is, in fact, this inclusion of entertainment that sets it apart.
Expansion & Other Top-Line-Building Initiatives
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 grow the concept to more than 200 units in North America over time. It launched three stores during the fiscal fourth quarter in Milford, CT; Birmingham, AL; and Corpus Christi, TX. The company also opened the second 17K format store, taking the year’s store opening count to 15.
In fiscal 2019, management expects to open 15-16 stores in new locations, with 12% unit growth. Meanwhile, in addition to the growth potential that exists in North America, it is positive about the brand’s significant appeal in certain international markets.
Coming to sales-building efforts, in the fourth quarter of fiscal 2017, Dave & Buster’s appointed new vice president of Food and Beverage development to improve the speed of service through menu redesign and positive simplification in the kitchen area. In February 2018, the company streamlined its menu, and reduced the number of food orders by about 20% and beverage offerings by 12% to achieve increased efficiency. This year, the menu size was reduced by another 15%. Currently, the company’s menu comprises approximately 40 food items and over 20 different handcrafted cocktails.
Meanwhile, the company continues to evolve its amusement strategy on the back of new and riveting content, including games based on some of the world’s finest movie properties. Additionally, Dave & Buster's believes that it can drive traffic by enhancing in-store and out-of-store customer experience via digital and mobile initiatives as well as through employing better technology. The company thus intends to leverage its growing loyalty database as well as continue to invest in other mobile applications to build customer connections and drive frequent customer visitation.
Dave & Buster’s non-franchised model makes it 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 on the franchise, it is solely responsible for expenses of operating the business. In fiscal 2018, total operating costs increased 13.4% year over year.
Further, Dave & Buster’s restaurants are located in the United States and Canada, and it has no exposure in international markets. While several other fast-casual restaurateurs like McDonald’s (MCD - Free Report) , Domino’s (DPZ - Free Report) and Yum! Brands (YUM - Free Report) are capitalizing on the emerging market potential, Dave & Buster’s seems to be slow on this front. We believe that the company needs to expand presence beyond the United States to offset the impact of cut-throat competition in the saturated domestic market.
Dave & Buster’s currently 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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