Games carry Dave & Buster's once again

The food and games chain’s stock surged, thanks to amusements, despite declining same-store sales.

Dave & Buster’s Entertainment Inc. makes no illusions about its business. The Dallas-based chain is an entertainment chain that sells food, rather than a food chain that offers some games.

That trend continued in the company’s third quarter ended Oct. 29, when amusements same-store sales outperformed food and beverage same-store sales by 530 basis points. Amusements same-store sales rose 1.1%, while food and beverage same-store sales declined by 4.2%.

If the company is going to lose on anything, it’d better be the food. Dave & Buster’s gets the vast majority of its profits from its amusements, which are far more profitable than its food and beverage sales.

For instance, Dave & Buster’s food costs were 25.7% of its food and beverage revenue in the quarter. By comparison, amusement costs were just 10.5% of revenue. Those amusements also come with a much smaller labor cost component—though, to be fair, they require the chain to build massive locations that cost a lot more to build and maintain.

“We lead with amusements,” CEO Stephen King said on an earnings call in June. “We’re very cognizant of the fact that driving [food and beverage] at the expense of amusements would be a really bad trade for us, given the margin differential.”

Still, weak food sales appear to be dragging down the company’s overall performance, and the problems continued into the fourth quarter.

On Tuesday, Dave & Buster’s lowered its expectations for same-store sales for the year to between flat to up 0.75%—down from previous projections of 1% to 2% growth. Executives on Tuesday blamed the impact of hurricanes in the third quarter “and a slower-than-expected start to the fourth quarter.”  

The weak food sales and lowered guidance didn’t appear to faze investors. Dave & Buster’s stock rose 7% in morning trading on Wednesday. That helped the company recover some of its lost value. Going into Tuesday’s earnings, the company’s stock had fallen 27% since it reached a high of nearly $73 a share in June amid concerns about weakening sales.

And it’s not like the company isn’t doing something to generate more food sales.

King said on the company’s earnings call Tuesday that Dave & Buster’s spent much of the quarter conducting research to determine the “right path forward” on its food and beverage strategy. “The good news is the initial research confirms that a vast majority of our guests enjoy the full-service dining experience,” King said.

But, he said, customers expect improved speed of service, value and simplicity.

The company is testing a smaller menu in several of its locations. It is also emphasizing promotions, such as its Eat & Play Combo.

The chain hopes a menu redesign and simplification in its kitchens can improve speed. And the chain is testing technology to enable customers to pay at the table and pay by their smartphones to improve table turns and reduce wait times.

Executives are particularly bullish on the potential of pay-at-the-table technology, saying it should speed the checkout process and enable the company to survey customers and do other things. “We’re excited about what that technology can be in the shorter term,” King said.

Dave & Buster’s also said it plans to test a quick-casual service strategy inside of its restaurants to pair with its traditional wait service component. The goal, King said, would be to offer both options inside of its restaurants.

“Fully implementing this [food and beverage] strategy and realizing the path forward will take some time,” King said. “But this is clearly a focus for us.”

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