Earnings season is slowing down.
That doesn't mean there still aren't stocks to watch, though.
Here are two names I'm watching this week.
Dave & Buster's (April 2)
Dave & Buster's Entertainment, Inc. (PLAY) is one of those stocks that feel fun to own.
Unfortunately, the company's trends have been a bit mixed lately. While the company pushes revenue, the bottom line has suffered.
The costs associated with increasing sales have been higher, pressing into operating income. Dave & Buster's has relied on stock buybacks, and lower taxes, in order to maintain net income and earnings per share.
It will be interesting to see if the company was able to buck the trend in the fiscal fourth quarter. When looking through the past five fiscal years of performance, Dave & Buster's has experienced slowing overall revenue growth. During that time frame, PLAY succeeded in increasing earnings (though it's worth noting the growth rates also slowed there as well).
Things were not going the same way through the bulk of last year. Through the first three quarters of 2018, Dave & Buster's had revenue growth of 12% to $933.5 million. However, the costs being incurred to keep driving that growth are canceling it out in terms of actual operating margins. Operating income actually declined roughly 2.7% to $120.01 million in the nine months. Lower provisions for income taxes were actually what helped get net income to $87.8 million vs. $85.3 million the year before.
The thing that I haven't liked about Dave & Buster's is the reliance on new stores to compensate for weakening old ones. In the third quarter, comparable store sales decreased 1.3%, even as revenues increased 15.4% on a comparable week basis (fiscal 2017 had a 53rd week). The company noted that by the end of the year they expected to have a 14% increase in stores.
I worry that PLAY is becoming too dependent on new locations to create revenue. Obviously, every major restaurant chain does this, but it doesn't have the best effect if comp store sales are decreasing.
Here's what I'll be looking for in Tuesday's fourth-quarter earnings results: Did Dave & Buster's fix its same-store sales issue? If it didn't, the costs of weaker stores are going to keep damaging margins.
Constellation Brands (April 4)
Constellation Brands, Inc. (STZ) is a popular name these days. Perhaps talked about more for its investment in Canadian marijuana, rather than its success in beer and spirits, Constellation will likely get a lot of media attention when it reports earnings on April 4.
I think investors are looking at a lot of different things when they look at STZ. Constellation Brands is viewed by many as an indirect (and rather safer) play into Canada's burgeoning recreational marijuana market. The company invested in Canopy Growth Corp. (CGC) . I'm half and half on that investment.
While the 38% stake makes a bold move into what could become a worldwide market comparable to beer, it also seems like a big risk. The workup of the Canadian market is still unclear. Most of the big names aren't making money, and we haven't seen who's winning yet. Thanks to the financial backing and expertise of Constellation, Canopy Growth certainly seems to have an edge, but the investment still carries risk.
I think the payout on marijuana is a bit down the road. Therefore, STZ needs continued success in beer in order for the stock to remain strong.
Through the first three quarters of fiscal 2019, net sales were up 8.6% to over $6.3 billion. Operating income did grow to $1.95 billion vs. $1.77 billion a year earlier, but the bulk of the growth in net income actually stemmed from the inclusion of income from unconsolidated investments. In other words, the value of the company's investment in Canopy Growth increased. It's important to remember this can change easily. In the third quarter, the company actually reported a loss of $134.6 million in the same category.
For the fiscal fourth quarter, I'll be focused on the company's beer and liquor sales, rather than valuations from Canopy. Through the first nine months, beer sales were up 12%, with a 10% increase in segment operating income. Wine and spirits were up a collective 2%, but operating income in the segment was down 2%.
This needs to change. We need to see higher performance if the stock is to regain momentum. Thanks to the pullback over the past six months, the stock is now much more reasonably priced. To get the price running again, the company has to prove it can justify the valuation with earnings. Right now, that comes from alcohol rather than marijuana.
