Why Dave & Buster’s Think Higher Profits are Here to Stay

Despite a huge increase in the stock of Dave & Buster’s (NASDAQ: PLAY) last year, investors found reason to celebrate the company’s latest earnings report. Of course, the chain is yet to return to setting sales records after COVID-19 closures caused customer traffic to plummet last year. But that full rebound is in sight, as is potentially higher profitability from here on out.

In a conference call with Wall Street analysts, CEO Brian Jenkins and his team detailed this possible increase in earnings while expressing caution in the face of short-term cost spikes. Let’s take a look at some highlights from this presentation in regards to investors’ hopes of big gains from this popular stock.

Image source: Getty Images.

The rebound is real

Some investors were concerned that the rally in Dave & Buster’s stock price had taken the company ahead. But this report has helped allay some of those fears. Sales even exceeded revised forecasts executives issued in April, with revenues up more than 60%. This has helped stores in key markets like New York and California return to near capacity as consumers seek entertainment options outside of their homes.

“The reopening of our store base coupled with stimulus payments, extended vaccinations and excellent operational execution resulted in a significant revenue clawback,” Jenkins said on the call. He pointed to the fact that same-store sales fell only 12% in April from 40% at the start of the first quarter. About half of the store base is approaching the record sales volumes of 2019, and these positive trends also continued into the first full month of the second quarter.

Come back in the dark

A year ago things looked grim for this company. It had just posted an operating loss of $ 61 million against $ 58 million in profit in 2019. The company has not fully regained its earnings strength, but it has taken a big step in that direction until beginning of May.

Operating profit reached $ 47 million, or 14% of sales, up from 16% of sales in 2019. Dave & Buster managed labor and operating costs while making sure not to overdo it. expand its catering segment. “We have achieved a dramatic turnaround in profitability,” said CFO Scott Bowman, “thanks to our lean operating model and the extraordinary efforts of all of our operations and support teams.”

Look ahead

The good news spread at the start of the second quarter, with sales trending just 4% below their 2019 levels in May. This success made management feel good about their chances of returning to overall growth during this year.

Executives are also committed to sustainably increasing their profit margins, through changes in staffing levels and efficiency gains in other parts of the business. They have reduced the restaurant menu, for example, while adding premium drinks and food.

These adjustments are likely to increase the operating margin in 2021 and beyond, but the big question is whether Dave & Buster’s can achieve faster sales growth than the modest drop in comps the company reported in 2019 before the pandemic hits. The path to this success depends on customer satisfaction, which is linked to high quality food and service in the catering segment as well as plenty of entertainment in the entertainment and bar areas.

It’s too early to tell if Dave & Buster’s has all of these ingredients in place right now. But early indications are encouraging as they show buyers are ready to give the chain a chance to win back their business now that the COVID threat is diminishing.

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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