Dave & Buster's Strategic Efforts Bode Well, Costs Woes Linger

Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) unique business model, various sales boosting initiatives and continual expansion plans bode well.

However, high costs of operations and limited international presence are hurting the company’s profitability. Additionally, the company trimmed its fiscal 2019 guidance. Year to date, shares of Dave & Buster’s have lost 7.2% against the industry’s 19.3% growth.

Factors Likely to Drive Growth

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. Meanwhile, in addition to growth potential that exists in North America, management is optimistic about the brand’s significant appeal in certain international markets.

Dave & Buster’s launched four new stores in Concord, CA; Huntsville, AL; McDonough, GA; and Wichita, KS, during the fiscal third quarter. Also, it has already opened a store in Canton, OH, during the fiscal fourth quarter and one more store in Shenandoah, TX. The company expects to open 16 stores, representing 12% unit growth in fiscal 2019.

Furthermore, the company continues to evolve its amusement business on the back of new and riveting content — including games based on some of the world’s finest movie properties.

Additionally, the company 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 intends to strengthen its growing loyalty database by investing in other mobile applications for building customer connections and driving frequent customer visitation.

Hurdles

Despite reporting better-than-expected results in the third quarter, the company trimmed its fiscal 2019 guidance. It expects total revenues of $1.347-$1.354 billion compared with $1.338-$1.359 billion projected earlier. Comps are anticipated to be in the range of -3% to -2.5% compared with prior guided range of down 3.5% to 2%.

Moreover, apart from increased labor wages, Dave & Buster’s is affected by the high costs of operations. The company’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 into the franchise, the company is solely responsible for expenses of operating business. In the third quarter, total operating costs increased 89% year over year.

Dave & Buster’s, which shares space with Dunkin' Brands Group, Inc. (NASDAQ:DNKN) , currently carries a Zacks Rank #3 (Hold).

Key Picks

Other better-ranked stocks that warrant a look in the same space include Chuy's Holdings, Inc. (NASDAQ:CHUY) and Chipotle Mexican Grill, Inc. (NYSE:CMG) . While Chuy’s sports a Zacks Rank #1 (Strong Buy), Chipotle carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chuy’s and Chipotle have an impressive long-term earnings growth rate of 17.5%, 19.7%, respectively.

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