Dave & Buster’s Entertainment Inc (NASDAQ:PLAY) shareholders just can’t catch a break. Despite reporting a fourth straight year of record-breaking results, PLAY stock sold off in Wednesday’s session following the release fourth-quarter numbers that fell short of expectations. Its full-year forecast wasn’t exactly thrilling either.
Is this an opportunity to buy Dave and Busters stock, particularly in light of its forward-looking price-to-earnings ratio of less than 13? The fundamental case clearly holds water, but in light of the stock’s bearish momentum that just picked up steam, maybe now’s not the right time to step into PLAY stock — unless you’re absolutely able to commit to it for the long haul.
The good news is what’s working and not working for the company has become rather well defined. The bad news is, it’s not clear the company’s going to be able to do anything to fix what’s not working.
Dave & Busters Earnings Recap
Headed into Tuesday’s post-close earnings report for its fiscal fourth quarter, high costs were a concern. Indirect rival restaurants Papa John’s Int’l, Inc. (NASDAQ:PZZA) and Jack in the Box Inc. (NASDAQ:JACK) had already reported cost-related troubles for the same quarter, and no restaurateur is immune to such cost increases.
As it turns out, though, rising costs weren’t a huge problem for Dave & Buster’s Entertainment last quarter. Instead, the company had other problems.
For the period ending in early February, Dave and Busters turned revenue of $304.9 million into an operating profit of 61 cents per share. The top line came up just a hair shy of the $305 million analysts were expecting, and was up 12.9% year over year. The bottom line for PLAY stock was also better than the 59 cents per share experts were expecting, though it was still down from the year-ago figure of 63 cents per share.
Costs for food and beverages as a percent of revenue grew slightly, from 24.7% to 26.0%, while payroll and benefits costs fell from 23.0% of sales of 22.7%. The costs of amusements (like video games and entertainment) fell from 11.6% to 11.2% of revenue, though “other store operating expenses” grew from 27.0% to 28.5%.
All told, total operating costs grew from 83.5% for the quarter ending in late January of 2017 to 86.1% of sales for the quarter ending in early February of this year.
But that wasn’t the worst news. Same-store sales fell 5.9%, versus the 5.1% drop the pros were modeling.
CEO Steve King conceded “recent sales trends in our comparable stores have been disappointing and we are working diligently to re-build momentum by evolving the brand.”
The 4% loss PLAY stock took on Wednesday, though, translates into a 40% pullback from its mid-2017 high, suggesting the market doesn’t expect that evolution or rebuilding to pan out anytime soon.
Looking Ahead for PLAY Stock
Of course, shareholders had good reason to entertain doubts. The company also offered full-year revenue guidance of between $1.2 billion and $1.24 billion, versus the analyst consensus of $1.28 billion. Perhaps worse, the company believes same-store sales will continue to fall this year in the low- to mid-single digits.
And there’s the rub.
From a logic-driven point of view, Dave and Busters stock looks and feels like a no-brainer pick. With the economy firing on all cylinders, strong employment and bigger paychecks, diversions like Dave and Busters seem to be in their element.
There’s a lot of psychology to digest here, however, that supersedes the usual fundamental arguments for owning PLAY stock. Namely, the company is competing with strong year-ago results, and is trying to attract consumers that, for some reason, are looking for any other sort of entertainment. As Raymond James analyst Brian Vaccaro noted last week, Dave and Busters is offering “less compelling amusement content.”
Vaccaro didn’t describe in detail what kind of content is more compelling than what Dave & Busters has on its menu, though he did mention at-home online gaming was a possibility.
The company doesn’t appear to know exactly what it’s losing out to either. The new, smaller-footprint stores in the works aren’t guaranteed to be any more of a draw than the typical big ones have been of late. Whatever the case, King knows the shocking same-store sales lull is anything but the way it should be.
This is one name that’s tough to own until it’s crystal clear Dave and Busters is attracting a bigger crowd again. That starts with figuring out exactly why consumers are losing interest in the first place.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.