What's Behind Dave & Buster's (PLAY) Continued Bull Run?

So far in 2016, same-store sales growth has been rather dull in the U.S. restaurant space, given the difficult sales environment. Despite economic growth, somewhat lower energy prices, and higher income, consumers have increased their spending only modestly on dining out, which has resulted in low consumption over the last few months. The situation has turned worse, thanks to higher health care costs and tightened credit availability in the U.S.

Moreover, unfavorable currency, a cooling Chinese economy and a tightening labor market have compounded the woes for restaurateurs. Traffic has been weak as well.

Thus, though the U.S. restaurant industry is going through its worst year since the end of the recession, Texas-based, Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) , that began trading in Oct 2014, is apparently immune to the present conditions.

We note that the company’s shares have outperformed the broader Zacks categorized Retail-Food & Restaurant industry year to date. While the stock has gained 15%, the broader market has witnessed a gain of 0.5% in the same time period.

In fact, shares of the company rallied 12.5% in afterhours trading on Dec 6, after the company reported better-than-expected third-quarter 2016 results.

The company's adjusted earnings per share (EPS) of 25 cents beat the Zacks Consensus Estimate of 13 cents by 92.3% and increased over 100% year over year on the back of a higher top line. Sales of $228.7 million surpassed the Zacks Consensus Estimate of $216.7 million by 5.5% and were up 18.6% on a year-over-year basis. Notably, the company also raised its outlook for fiscal 2016.

Interestingly, the company has exceeded earnings expectations in each of the nine quarters it has reported so far and has an average positive earnings surprise of 89.73% for the trailing four quarters.

In fact, we note that since the launch of its IPO, shares of the company have gained nearly 178%. So, what is really propelling this multi-year stretch of outperformance?

Factors Driving the Stock

A Distinct Business Style

The company 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. In fact, in the latest reported quarter, amusement and other revenues accounted for nearly 56% of the company’s total revenues, and is thus one of the major reasons for its success over competitors. This is because increased dependence on gaming has provided the company with some protection from the pressures facing the broader restaurant industry of late.

It is in fact this unique model that sets it apart and we expect the company’s entertainment business to carry the growth story forward.

Strategic Initiatives

Dave & Buster’s consistent efforts to build sales and improve margins through various initiatives have also been driving growth. In this regard, continual opening of stores, menu innovation, launch of new games, and the Fun American New Gourmet and beverage options have aided the company to boost its top and bottom lines.

Our Take

So far, Dave & Buster’s has had a phenomenal run. Although the company is certainly not immune to the macroeconomic environment, we expect it to sustain the momentum going forward on the back of a unique business style and various sales-building initiatives.

For fiscal 2016, sales and EPS are likely to improve 14.1% and 27.1%, respectively, further underlining its potential.

Zacks Rank & Stocks to Consider

Dave & Buster’s currently has a Zacks Rank #3 ((Hold). Better-ranked stocks in this sector include Papa John's International Inc. (NASDAQ:PZZA) , McDonald's Corp. (NYSE:MCD) and The Wendy's Company (NASDAQ:WEN) . All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Papa John’s 2016 earnings moved up 2.4% over the last 60 days. For the full year, EPS is expected to improve 19.9%.

The Zacks Consensus Estimate for McDonald's 2016 earnings climbed 2.3% over the last 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 6.16%.

Wendy’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 28.38%. Further, for 2016, EPS is expected to grow 23.6%.

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