Dave & Buster’s Entertainment (NASDAQ:PLAY) isn’t setting sales records as of early 2021, but it just took a big step toward that milestone. The restaurant chain’s latest earnings report revealed slowing revenue declines as stores reopened following pandemic shutdowns. Management’s new outlook implies an imminent end to the slump, while profitability is benefitting from deep cost cuts over the past year.
But is that news good enough to justify its surging stock price since the plunge in early 2020? Let’s take a closer look.
Sales are rebounding
The chain comfortably beat the upgraded outlook that management issued in late April. Instead of rising to between $252 million and $257 million, revenue hit $265 million on improving customer traffic in key markets like New York and California. That equates to a 66% spike from last year, but sales were still down 27% compared to the same period in 2019, before the pandemic.
Yet management is happy with the pace of the recovery. Fully operational stores in the first quarter were down just 17% from their record highs compared to 48% declines in the previous quarter. “We saw significant improvement in demand across our store base,” CEO Brian Jenkins said in a press release.
The good news extended into Dave & Buster’s finances, which have benefited from management’s aggressive cost slashing. The chain kept a lid on costs for maintaining games while being careful not to overstaff its restaurant section. As a result, operating income was solidly positive a year after the company booked significant losses related to pandemic shutdowns. “Our lean operating model drove outstanding profit flow-through during the quarter,” Jenkins said.
Dave & Buster’s still has room to recover here, too. Operating margin was 14% of sales compared to 16% back in 2019. Ideally, management can improve on that 2019 result over time once revenue gets back into record territory.
Some of the best news in this report revolved around the fiscal second quarter, which started in early May. Comparable-store sales are trending at just 4% below 2019 levels, putting a full rebound within reach by the second half of 2021. Executives warned about a weaker earnings performance since many costs, including food, labor, and marketing, are rising today. Yet adjusted profits should still approach 2019 levels this quarter.
That outlook lines up well with Wall Street’s bullish prediction of Dave & Buster’s returning to form this year while enjoying better earnings strength than before the pandemic. That’s why it’s no surprise that the stock has rebounded so sharply from its 2020 lows.
But Dave & Buster’s was struggling with sluggish growth before COVID-19 scrambled demand trends, and it’s unclear whether those operating challenges will show up again once consumer spending returns to normal. The chain has executed well through the crisis and has plenty of resources it can direct toward its growth initiatives.
The big question is whether those projects will deliver sustainably-faster growth than the 3% comps decline that Dave & Buster’s reported in fiscal 2019.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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