Dave & Buster’s earnings: a big step towards normal

Dave & Buster Entertainment (NASDAQ: PLAY) doesn’t set a sales record at the start of 2021, but it has just taken a big step towards that milestone. The restaurant chain’s latest earnings report found a slowing decline in revenue as stores reopened following pandemic closures. Management’s new outlook implies an imminent end to the doldrums, while profitability benefits from strong cost reductions over the past year.

But is this news enough to justify the surge in its share price since the plunge in early 2020? Let’s take a closer look.

Image source: Getty Images.

Sales rebound

The channel largely exceeded the revised upward outlook issued by management at the end of April. Instead of increasing between $ 252 million and $ 257 million, revenue reached $ 265 million thanks to improved customer traffic in key markets like New York and California. This equates to a peak of 66% from last year, but sales were still down 27% from the same period in 2019, before the pandemic.

Yet management is satisfied with the pace of the recovery. Fully operational stores in the first quarter were only 17% lower from their record highs, compared to 48% decline in the previous quarter. “We have seen a significant improvement in demand across our stores,” CEO Brian Jenkins said in a press release.

Better profits

The good news spread to the finances of Dave & Buster, which benefited from the aggressive reduction in management costs. The chain has kept down maintenance costs for the games while making sure not to overload its catering section. As a result, operating profit was solidly positive a year after the company recorded significant losses related to pandemic shutdowns. “Our lean operating model delivered exceptional profits during the quarter,” Jenkins said.

PLAY Operating Margin Graph (TTM)

PLAY Operating Margin (TTM) data by YCharts. TTM = 12 rolling months.

Dave & Buster still have room to recover here too. The operating margin was 14% of sales compared to 16% in 2019. Ideally, management can improve this 2019 result over time once revenue returns to record territory.

Look ahead

Some of the best news in this report was for the fiscal second quarter, which began in early May. Comparable store sales are only 4% below 2019 levels, allowing a full rebound by the second half of 2021. Executives warned of lower results because of many costs, including food, labor and marketing are increasing today. Still, adjusted earnings are expected to approach 2019 levels again this quarter.

This outlook fits well with Wall Street’s bullish prediction that Dave & Buster is returning to shape this year while enjoying better earnings strength than before the pandemic. That’s why it’s no surprise that the stock has rebounded so strongly from its 2020 lows.

But Dave & Buster’s struggled with slow growth before COVID-19 scrambled demand trends, and it’s unclear whether these operating issues will recur once consumer spending recovers. normal. The chain has weathered the crisis well and has many resources it can devote to its growth initiatives.

The big question is whether these projects will generate sustained faster growth than the 3% drop in lineup reported by Dave & Buster in fiscal 2019.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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