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Robert Stephens, CFA
Robert Stephens, CFA
Articles (213) 

Why Dave & Buster’s Could Recover

The company’s strategy is set to stimulate a successful turnaround

July 25, 2019 | About:

Dave & Buster’s (NASDAQ:PLAY) store expansion program could significantly increase its profitability over the long run. The restaurant and video arcade business is aiming to expand into new markets, while also improving its customer experience through investment in its food and beverage offering.

Although the company faces an uncertain operating environment, its forecast for earnings growth and valuation suggest that it has recovery potential after its 14% stock price decline in the last year.

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Food and beverages

Dave & Buster’s improving food and beverage offering could enhance the company’s competitive position. It has cut the size of its menu by 35% and reduced complexity in food preparation processes in the last year. This has lowered wait times for the company’s customers and led to improving feedback from its guests.

The business has re-crafted 75% of its menu in the last year, focusing on better-quality ingredients. This includes its use of fresh juices and purees across its cocktail menu. It plans to give greater prominence to its improved food and beverages offering in future marketing campaigns. This may further differentiate it from sector peers.

Expansion

The company’s financial performance could be catalyzed by its geographic expansion. It plans to open 16 new stores in the current year, with the majority of its new stores expected to be in markets where it does not have an existing presence.

Its new store openings in 2019 are expected to increase the size of its store estate by 12%. This is in-line with the company’s long-term strategy to double the size of its store estate at an annualized growth rate of over 10%.

Although the Dave & Buster’s terminated its Middle East partnership in the most recent quarter due to continued delays, it plans to expand its international presence in the long run. This could increase its diversity and reduce its reliance on the North American market.

Customer experience

The business is investing in marquee titles in order to differentiate its customer offering when compared to rivals. As part of this, it is seeking to combine fan-favorite titles with its proprietary gaming technology to capitalize on existing customer connections with a variety of brands. For example, Dave & Buster’s released games featuring Star Trek and Men In Black titles in the most recent quarter.

The company is also seeking to introduce subtle differences in game play across its titles so that each customer experience is increasingly unique. It expects this to lead to customers playing each game multiple times in order to experience the full features of each title.

Risks

Dave & Buster’s performance in the most recent quarter was mixed. Although its sales and gross profit increased to record levels, the company’s 0.3% comparable store sales decline was below previous guidance. It also recorded underperformance versus market expectations in its food and beverage segment, while its operating environment was challenging due to competition. The business expects competition to ramp up in the remainder of the current year due to aggressive entry into its markets.

The company is seeking to increase convenience for guests in order to improve on its disappointing performance last quarter. For example, it is rolling out a new contactless card that provides customers with faster and more accurate game activation. In addition, Dave & Buster’s will unveil its new mobile app in the second half of 2019. It believes that a new app will align its offering more closely with changing consumer tastes and lead to higher engagement levels among its customers.

Outlook

Dave & Buster’s is forecast to record a rise in earnings per share of 10% in the next fiscal year. The stock’s forward price-earnings ratio of 13.7 suggests it could offer a margin of safety.

While the stock has underperformed the S&P 500’s 6% rise in the last year, it could deliver capital growth in the long run as it puts in place its refreshed strategy.

Disclosure: The author has no position in any stocks mentioned.

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