In his first presentation to investors this week, new Dave & Buster’s CEO Tarun Lal argued that his company’s stock was undervalued. “I genuinely see our stock as materially undervalued in the public markets with significant upside potential,” he said.
It’s a lot more undervalued now. Investors, clearly unconvinced by the comment, sold off the company’s shares on a disappointing earnings report, sending that undervalued stock down another 17% on Tuesday.
At issue for Dave & Buster’s is both sales and margins. Same-store sales declined 3% in the quarter, the company’s fiscal second, but that implied a slowdown in the second half of the period. Company executives blamed that slide on the Fourth of July, which landed on a Friday this year, rather than a Thursday like last year.
Unit-level profit margins also declined, by about 320 basis points, to 27.9% of sales. So, too, did adjusted EBITDA margin.
The weak period sets up a tough early period for Lal, who on the company’s earnings call Monday largely backed the company’s “back to basics” comeback plan developed by its chairman, Kevin Sheehan, who had been acting as interim CEO.
Lal has some work to do to regain investor favor. Same-store sales at the chain have been down for 10 straight quarters. The company’s stock is now down 32% on the year, having lost some momentum following its previous earnings call when Sheehan highlighted improvements.
It is now trading at levels unseen since 2020, which for an eatertainment chain is, well, not very good.
The company has spent recent months lamenting the mistakes of the previous CEO, Chris Morris, who left in December. Those mistakes included removing high-revenue menu items, elimination of television ads, poor remodel planning, poor training of staff and not enough new games. Dave & Buster’s has reversed many of those strategies in recent months and at least appeared to gain some momentum.
Dave & Buster’s argues that its 3% same-store sales decline was an improvement over recent periods. Indeed, when you’re comparing your results to declines of 9.4% and 8.3%, a decline of only 3% looks awfully good.
But it’s also instructive to expand horizons, because the chain’s slide has lasted for so long. On a three-year stacked basis, Dave & Buster’s same-store sales declined 15.2% last quarter. That was marginally better than the 18% decline the previous period. But go back to the company’s fiscal fourth quarter, or late last year, and that number was actually positive.
Or, in simple terms, this year should be better, particularly given everything the company has gone through and all the improvements its management team has made. The quarter shouldn’t be so easily derailed by a one-day shift in a federal holiday.
Investors in any restaurant chain do not care what happened in the quarter so much as they care about what will happen next quarter. In the previous quarter, Dave & Buster’s stock got a boost because its sales were improving. This week the company told investors that its sales were weakening.
Only those investors spent years buying into a management team arguing in favor of its strategy, only to watch that strategy result in weakening sales. They’re not going to automatically trust the new guys, especially when they highlight a below-expectation result as improvement.
Investors can argue all they want that a stock is undervalued, but the best way to show that is to demonstrate some real, tangible improvement.
The good news for the chain’s new CEO is that it’s always good to start when expectations are low, because frankly Dave & Buster’s can only go up from here.