How Dave & Buster's Could Disappoint Investors This Week

Consumers are now spending on dining and entertainment after missing out on those experiences in earlier phases of the pandemic. But that positive sales environment hasn’t yet translated into solid growth for Dave & Buster’s (PLAY +21.61%).

Investors are bracing for another period of declining sales when the restaurant and arcade specialist reports results for fiscal Q1, which ended in late April, in a few days. Let’s take a closer look at a few concerns heading into the announcement, set for June 7.

Image source: Getty Images.

Sales trends

Sales trends weren’t impressive in Dave & Buster’s previous report. Comparable-store sales declined 3% in Q4 compared to the year-ago period and fell 7% compared with the same period in 2019. McDonald’s, by comparison, enjoyed an 8% comps boost in its fiscal fourth quarter and noted a 13% increase on a two-year basis .

Expectations are muted for the current quarter at Dave & Buster’s, too. While management said back in March that a rebound in its event segment was spurring a rebound, growth might still look sluggish.

Executives estimated that comps were up roughly 5% at the start of Q1 as compared to the same period in 2019. Investors will want to watch customer traffic in both the restaurant and arcade segments for signs that Dave & Buster’s is finally seeing some of the demand rebound that investors have been hoping for as the pandemic threat winds down.

Margin success

The news has been better on the earnings front. Despite rising expenses, Dave & Buster’s adjusted operating profit, which strips out unusual costs associated with closing and reopening stores, has been up significantly compared to pre-pandemic days.

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NASDAQ: PLAY

Dave & Busters Entertainment

Today’s Change

(21.61%) $2.34

Current Price

$13.17

Key Data Points

Market Cap

$376M

Day’s Range

$11.51 - $13.25

52wk Range

$9.61 - $35.53

Volume

824K

Avg Vol

1.3M

Gross Margin

14.20%

Some of that profitability increase will be temporary, as it reflects the benefit of sales trending toward its amusement business, which requires less labor to maintain. And inflation has accelerated in recent months, too. That’s why investors will be watching Dave & Buster’s adjusted earnings margin for confirmation that it is still setting records as management works to make the business more efficient in a slow-growth scenario.

The new outlook

The big question is whether the restaurant chain sees brighter things for the rest of the year. Several tailwinds should lift the business, including the rebound in its events business and higher demand for amusement services. On the downside, Dave & Busters might struggle with staffing issues, and customers might balk at its price increases.

Watch the chain’s updated outlook for 2022 to see if these challenges are being handled well. For context, Darden Restaurants said in late March that it is expecting 2022 growth of around 10% compared to the pre-pandemic period.

Dave & Buster’s stock has outperformed Darden’s, and the wider market so far in 2022, because investors are expecting a bigger profit and demand rebound. Investors are betting that concrete signs of that recovery will start showing up in this week’s report.