Dave & Buster's Amusement Business Strong, Industry Woes Stay

On Oct 2, we issued an updated research report on Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) .

Last month, the company posted better-than-expected second-quarter fiscal 2017 results wherein both the bottom and top line surpassed the Zacks Consensus Estimate.

Notably, shares of Dave & Buster’s have gained 29.4% in the past year, compared with the industry’s growth of 8.5%. Furthermore, the company’s earnings surpassed the Zacks Consensus Estimate in each of the last 12 quarters, with the trailing four-quarter average earnings surprise coming in at 34.36%.

Although the company is certainly not immune to the macroeconomic environment, we expect it to sustain the momentum going forward backed by a unique business style and various sales-building initiatives.

Key Growth Drivers

Dave & Buster’s continues to perform well on the back of the unique customizable experience that it offers across its four platforms namely Eat, Drink, Play and Watch. The company’s distinctive model also generates favorable store economics and strong return.

In fact, apart from great food or beverages this Texas-based restaurant chain’s entertainment business has been driving growth. Evidently, amusement and other revenues accounted for 57.7% of the company’s total revenue in the latest reported quarter, which is one of the main reasons of its success. Also, the shift toward increased focus on amusement is driving Dave & Buster’s earnings, given its higher-margin business.

Notably, this unique model sets it apart and we expect the company’s entertainment business to carry the growth story forward.

Additionally, Dave & Buster’s consistent efforts to build sales and improve margins through various initiatives bode well. Continual focus on menu innovation, advertising, launch of new games and the new Fun American New Gourmet and beverage options is thus expected to boost its top and bottom line in the long run. This restaurant chain is also preparing to test digital initiatives such as pay at the table and handheld ordering technologies that should improve the speed of service, besides overall guest satisfaction.

Meanwhile, 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. To this end, in fiscal 2017 (ending Feb 4, 2018) the company intends to open a total of 14 new stores across the small and large store formats. In fact, management believes it can grow the concept to over 200 units in North America over time. We expect the company’s continuous expansion plans to add immensely to the top line and boost its overall performance as well.

Risks

Higher labor costs due to the implementation of Affordable Care Act, commonly known as Obamacare, continue to have an adverse impact on margins of restaurant operators like Darden Restaurants Inc. (NYSE:DRI) , Brinker International Inc. (NYSE:EAT) , Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) and many others, including Dave & Buster's that have more company-owned units and laborers.

Furthermore, 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 on the franchisee, the company is solely responsible for the expenses of operating the business.

Also, pre-opening costs of outlets given the company’s unit expansion plans, and expenses related to sales initiatives are adding to the costs and are likely to hurt profits.

In the meantime, a decelerating comps growth rate given the continued challenging sales environment in the U.S restaurant space is a cause of concern and may keep the top line under pressure.

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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