Dave and Buster's Entertainment inc. (PLAY) made a move in the right direction in the fourth quarter. We need to see more in order to call it a trend, but positive comparable sales growth was a big thing on my list.
The stock swung around 3.3% throughout trading on Tuesday as investors awaited the company's fourth-quarter earnings results. I've held the notion for a while that Dave & Buster's was relying far too much on revenue from new stores to compensate for declines in older ones. But the company delivered in the fourth quarter.
Total revenue in the quarter increased 8.8% to $331.8 million from $304.9 million and climbed 15.7% on a comparable 13-week basis (the year-earlier quarter was 14 weeks). The most encouraging piece about this revenue growth was that comp-store sales contributed to the gains. On a comparable 13-week basis, comp-store sales increased 2.9% in the fourth quarter. I'm super glad to see that.
If you come at net income from a stance of ignoring the extra week in 2017, along with adjustments related to tax reform, Dave and Buster's was able to claim growth in net income. Net income in the fourth quarter of 2018 was $29.4 million, while net income in the fourth quarter of 2017 was $27.3 million, excluding the aforementioned adjustments. Diluted earnings per share rose to $0.75 from $0.66 a year earlier using those net income figures.
Some earnings estimates had put earnings at $0.63 a share, so $0.75 offers a nice 19% surprise. That explains why Dave & Buster's is up nearly 7% from Tuesday's close in pre-market trading here on Wednesday morning.
I'll acknowledge that one quarter doesn't fix everything. For the full year, comparable-store sales decreased 1.6%. Dave & Buster's will need to prove it can continue to buck that trend in the quarters ahead. And guidance has me a bit nervous about the degree to which it actually will do that.
The company's full-year 2019 guidance provided in the fourth-quarter release expects comp-store sales growth to be flat to up 1.5%. Total revenues are expected to between $1.37 billion and $1.40 billion. Conservatively, that would represent an 8.7% increase from 2018. While still positive growth, this continues a trend of smaller year-over-year revenue gains that we've witnessed the past six years.
I think the story moving forward is all about comp-store sales. The growth experienced in the fourth quarter needs to happen again and again. Otherwise the revenue gained from new stores will keep getting cannibalized by the costs of the weaker old stores.
You can see it happening in the lower rates of growth in annual revenue. It also doesn't bode well for the long-term sustainability of the company's business.
Another concern I have is the balance sheet. While still strong, Dave & Buster's continues to increase its long-term debt, which I'm sure is a byproduct of opening stores. Debt increased 7.7% in 2018 to $378.5 million. I don't like seeing stockholders' equity hit by debt.
As a whole, I am pleased with Dave & Buster's fourth-quarter earnings, but I'm not sure that it's enough to rate the stock as a strong buy. Net income of $105 million to $117 million is expected for fiscal 2019. That would mark stagnation from 2018's $117.2 million in net income.
Dave & Buster's announced more planned share buybacks, authorizing an additional $200 million throughout the year. This likely will help earnings per share, but those buybacks will cost either cash or produce an increase in liabilities. They're not a long term answer.
I won't venture to guess an appropriate EPS for full-year 2019 yet, but trailing full-year EPS of $2.93 means the stock is trading at a price-to-earnings (P/E) multiple of around 18.6. That seems a bit steep for a company that's forecasting stagnant net income.
I love the restaurants, or bars, or arcades, or whatever Dave & Buster's locations are. But as an investment, there's still some work to be done before I'd rate it a buy.