A menu misstep cost the eatertainment brand this past quarter. Can it correct course?

To some degree, Dave & Buster’s expected separation in its food and amusement performance this past quarter. Q3 marked the first full period the eatertainment chain’s proprietary virtual reality platform was live across the system. Dave & Buster’s knew the highly anticipated offering would push amusement comps forward, perhaps in light of some culinary kickback. But the actual gap turned out to be wider.

Dave & Buster’s stock plunged nearly 15 percent in pre-market trading Wednesday and was down about 10 percent by noon. As for what caused this split in sales, Dave & Buster’s admitted a misstep on sports viewing to start the year. Namely, it skipped an All You Can Eat Wings promotion that ran last year during the first six weeks of football season. Toward the end of Q3, 120-unit Dave & Buster’s corrected course, chief executive Brian Jenkins said during a December 11 conference call, with a “new and more compelling” $19.99 Unlimited Wings promotion that also includes unlimited video game plays.

“In hindsight, we underestimated the impact of All You Can Eat Wings when we decided to remove it from our promotional flight plan at the beginning of the year,” Jenkins said. The new deal runs on game days—Thursday, Sundays, and Mondays—and is expected to continue through mid-December.

In Q3, amusement and other sales lifted 14.8 percent, while food and beverage sales collectively grew 10.3 percent. Amusement and other represented 57.9 percent of total revenues at Dave & Buster’s, reflecting a 100-basis point increase from the prior-year period. Broken down on a comparable week basis, walk-in sales fell 0.7 percent in the quarter. Amusement was up 1.5 percent as food and beverage dropped 5 percent. Within F&B, Dave & Buster’s food and bar declined 5 and 4.9 percent, respectively.

In the previous quarter, food and beverage dropped 4.1 percent with food and bar down 3.3 and 5.9 percent, respectively. Amusement decreased 1.2 percent.

Overall, Dave & Buster’s same-store sales declined 1.3 percent across the system in Q3. Another drag on the comps, along with the decline in walk-in business, was a 6.9 percent drop in special events sales.

The chain’s total revenues upped 12.9 percent to $282.1 million from $250 million in the prior-year period. Adjusted earnings of 30 cents per share beat the Zacks Consensus Estimate of 21 cents by 42.9 percent. Dave & Buster’s also raised the lower end of guidance on a few key metrics, including total revenues of $1.243 billion to $1.255 billion versus $1.230 billion to $1.255 billion previously; net income of $106 million to $113 million versus $101 million to $111 million previously; and EBITDA of $268 million to $277 million versus $263 million to $277 million previously).

Can a fast-casual option get guests in and out quicker?

What’s going on with the food program?

The culinary conversation at Dave & Buster’s has progressed for some time now. The issues are defined: Speed of service, kitchen complexity, and quality. In early 2018, the chain took a 20 percent reduction in its menu. Jenkins said another slight reduction is coming in Dave & Buster’s February menu launch.

Additionally, the chain plans to roll out new premium choice steaks prior to the February move, building on the earlier burger and chicken upgrades. It’s also re-crafting and rebranding some of its classics—like the Dave’s Double Cheeseburgers and Parmesan Chicken Alfredo to highlight better quality, Jenkins said. Healthy offerings are also in the pipe, including zucchini-based noodles as a substitute option for pasta dishes.

Beverage wise, Dave & Buster’s is adding fresh juices and a puree system across the chain to further enhance flavor.

“We have seen an uptick in our food quality scores this year, which is encouraging and we believe this combination of improved ingredients as well as better execution is the right recipe,” Jenkins said.

One of the biggest food changes to hit Dave & Buster’s in recent years was the introduction of its fast-casual concept, TNT Tacos. Introduced last quarter conceptually, the unit just launched in a Dallas store last Friday.

“We have seen an uptick in our food quality scores this year, which is encouraging and we believe this combination of improved ingredients as well as better execution is the right recipe.” — Brian Jenkins, Dave & Buster’s CEO.

The chain converted a special event party room adjacent to the arcade into a highly visible area where guests can order street tacos and drinks. The interior includes a three-dimensional food truck façade with tables and walls.

“This area is designed to add fun to the guest experience, while serving their need for convenience and speed. We continue to view quick casual as complementary to our casual dining offering inside our facility,” Jenkins said.

So far, although it’s still early, Jenkins said the TNT Tacos test has struck a chord with late-night diners. “We like the concept,” he added. “We think it can be potentially additive to our offering. We know our guests when we did research, in 2017, said they like to have stuff faster, quicker and available and that was more accessible and this is an answer to that question or that desire.”

Simply, it makes sense for the chain’s customers. Dave & Buster’s lacked the dash-in, dash-out option. This solves that quandary and keeps guests engaged across food and amusement in ways they weren’t before when they had to sit down and commit to a full-service experience. Jenkins said Dave & Buster’s could scale the concept to a number of stores in time.

Reduce the friction, and the rise of VR

Dave & Buster’s has long faced challenges in regards to improving service and reducing friction in the guest experience. After all, how many restaurant concepts carry a revenue stream from handheld power cards. Jenkins said the brand continues to test and implement service model changes.

At select stores, Dave & Buster’s deployed front-desk guest ambassadors that guide the customer experience, kiosk attendants that facilitate interactions with the technology, and hosted seating in the sports lounge to improve flow during peak hours.

Some technology initiatives include kiosk upgrades and a newly implement workforce management system now live systemwide. Dave & Buster’s also recently started introducing RFID-enabled power cards in about 20 percent of its locations. These should reduce friction in activating gains, Jenkins said.

Dave & Buster’s amusement business represented 57.9 percent of total revenues this past quarter.

On the VR front, Jenkins said Dave & Buster’s second proprietary title, Dragonfrost, is slated for release next week. A third—based on the Star Trek movie franchise—is up after that.

VR has been an interesting labor challenge for Dave & Buster’s. To date, it has operated with at least one, sometimes two, attendants during busy periods. “We continue to learn and get better at how to operate an unattended attraction … and we view it to be a very successful platform for us that it’s a platform that has helped us meaningfully in terms of comps,” Jenkins said.” It is in our view a traffic builder and per cap builder both. And our feeling is that when we launched it, we wanted to make sure we delivered the guest experience.”

VR is an experience that runs $5 and clearly has per cap play peak, Jenkins said. The first release, Jurassic World, lacked some of the competition and collaboration features Dave & Buster’s hopes to introduce in later titles. “We think it differentiates us for a brand that scales VR to 120 locations,” Jenkins said. “And I don’t think there are brands out there that could play that, and I couldn’t be happier with way the teams executed on it.”

On the growth trail

Dave & Buster’s has steadily grown unit count—a key driver to its bottom-line figures. Jenkins said the chain expects to add 15–16 new stores in 2019 and plans on unit growth of about 12 percent in 2019 consistent with its previous target of 10 percent-plus annual expansion.

He said the 2017 class of stores is on track to generate first year cash on cash return of about 60 percent, one of Dave & Buster’s best in recent history. During Q3, Dave & Buster’s opened a store in Harrisburg, Pennsylvania. In Q4 already, a restaurant in Milford, Connecticut, and another in Birmingham, Alabama (a new-to-market entry) opened. The final openings of the year will be in Corpus Christi, Texas, next week. This restaurant will be the second 17,000-square-foot smaller-format store in Dave & Buster’s system.

In 2019, Jenkins said the openings would consist of 11 large stores, including nine that are about 40,000 square feet and two that are between 30,000–40,000 square feet. The remaining four will comprise two 17,000-square-foot spots and two under the large-scale size.

“Looking forward, we currently have a total of 22 signed leases, providing us significant visibility on new store growth into 2019 and the first half of 2020,” Jenkins said. “Our long-term target is down from 231 to 251 locations in the U.S. and Canada, including 20 to 40 of the 17,000 format stores.”

Casual Dining, Chain Restaurants, Feature, Finance