flickr: Mike Mozart

Comparable-same store sales grew 1.1 percent in the second quarter, which wasn't enough to satisfy Wall Street.

Dave & Buster’s is Facing More Competition Than Ever Before

Shares of the casual dining brand tumbled Wednesday following a second quarter that missed Wall Street expectations.

Sales and growth remained in positive territory for Dave & Buster’s in the second quarter. That wasn’t enough to quell Wall Street disappointment, however, as shares of the entertainment-dining brand initially plunged 7 percent late Tuesday and continued to drop through midday Wednesday. Heading into the lunch hour, they were down more than 9 percent to $52.86. They closed at $58.14 the day before. Early Thursday, shares were trading at $51.41, the lowest since December 6, 2016.

The culprit was a comps and revenue report that missed analyst expectations, as well as lowered same-store sales outlook for fiscal 2017.

Dave & Buster’s second-quarter revenue rose 14.9 percent year-over-year to $280.8 million from $244.3 million, which came in under Wall Street’s $281.7 million estimate. Comparable-same store sales grew 1.1 percent and earnings per share were 59 cents. Food and beverage revenues increased 10.2 percent to $118.7 million. Comps were expected to increase 2.6 percent, according to Consensus Metrix.

Perhaps more notable, the company now believes comp sales will rise 1–2 percent for fiscal 2017 compared to its previous call of 2–3 percent.

So what went astray?

During a conference call Tuesday, CEO Steve King said the company was “pleased to report another strong quarter,” and that Dave & Buster’s “white space opportunity is large, and our pipeline is stronger than ever before.” However, he admitted the comps were below expectations as the casual dining arena remains challenged.

In the past, especially judging by an impressive 2016 where total revenues grew nearly 16 percent and same-store sales were up 3.3 percent, Dave & Buster’s has been somewhat immune to some of the industry’s traffic concerns thanks to its multi-platform approach to dining. That world is getting more crowded by the quarter.

During the period, rapidly expanding Main Event Entertainment, a Dallas-based concept that touts its “Eat. Bowl. Play.” model, opened five stores in Dave & Buster’s corridor. Two Topgolf stores debuted as well.

“We are watching the competitors closely in terms of when we think they're going to open and trying to measure the magnitude of that opening, but it's not always totally clear,” Brian Jenkins, Dave & Buster’s CFO, said in the call.

Additionally, Dave & Buster’s aggressive growth strategy will result in some negative headwinds related to cannibalization, he said.

Dave & Buster’s increased its development guidance to 14 new store openings in fiscal 2017 from 12. Eight have already opened this year (four in the second quarter) and nine are under construction. Fourteen openings would equate to unit growth of 15 percent for the brand. Eight of the units will be located in new markets while the other six will be in areas where Dave & Buster’s already has a presence.

The company’s long-term target for some time has been 211 locations in the U.S. and Canada. King said they’re “laser focused” on doing just that.

Naturally, that will make it more difficult for Dave & Buster’s to drive the traffic it has in recent quarters. In the first quarter, comps increased 2.2 percent and revenue climbed 16 percent.

“… during the second quarter, the impact of cannibalization and competition on our system was modestly above our expectations,” Jenkins said. “That said, our long-term growth strategy and our plans to continue to gain market share anticipate some cannibalization and competitive intrusion in our existing stores.”

Jenkins also credited some of the guidance to unknowns related to the impact of Hurricane Harvey. Dave & Buster’s shut down three Houston-area stores for an entire week. He said the stores are open again, but not running at full strength.

“Our thoughts and prayers go out to everyone affected by hurricane Harvey, including many Dave & Buster’s employees who have been significantly impacted. We are working to help get them back on their feet as soon as possible,” King said in a statement.

The “amusement” side of Dave & Buster’s remains a strong point as the brand grapples with challenges facing the full spectrum of casual dining.

“While D&B's differentiated experience across our four platforms, Eat, Drink, Play, and Watch, has provided us with meaningful degree of separation from casual dining over the past several years, we are certainly not immune to the macro trends around us,” King said, adding that 24 of the chain’s 100 stores were non-comp units.

On the amusement front, Dave & Buster’s has reported great success with collaboration and will continue to do so moving forward, King said. Games featuring Spider-Man, Despicable Me, and more, provided strong returns thanks to consumer sentiment and familiarity.

Dave & Buster’s introduced two sharable appetizers, an upgraded Caesar salad, a new sandwich, and two entrees—Dynamite Fried Shrimp and Americana Ribs. Four rum-based Monster Isle Punch drinks were also unveiled during the quarter and “are performing extremely well.”

“Food and Beverage is a focus area for us, and we're taking a thoughtful approach to reignite the momentum there. Fundamentally, our approach is to increase the crossover between amusement and F&B traffic in a manner that will incrementally drive sales. For example, in recent weeks, we began highlighting our Eat & Play Combo promotion on national television. We're also conducting tests that will help inform our F&B strategy going forward, but we're still in the early stages of reading those results,” he said.

King said Dave & Buster’s is preparing to test technology initiatives, including pay-at-the-table and handheld ordering devices in the future that “should improve both the speed of service and overall guest satisfaction.”