How do you engineer an upside surprise when you are running a restaurant and entertainment chain? How can an enterprise like that distinguish itself in a world where more people are staying home to play video games and order food delivery? How can you afford the technology, the advertising, the rent and so many other variables that have hobbled mall-based brick and mortar outfits in the age of Amazon (AMZN) ?
It's not easy, but Dave & Buster's (PLAY) managed to do it this quarter. And it is worthy of study because the strength has to do with using everything at your disposal to generate excitement, and an experience where you will throw away money playing games for near-worthless prizes that only have value to children, like mine. Of course, before they end up in the landfill, they do generate many nights of sharing pillows with the faces of the youngins'.
While the call is a bit non-linear, let me summarize what I see generated that successful 2.9% comparable-store gain, when The Street was looking for 2%, and a $0.75 gain, when analysts were only looking for $0.63.
First, the company demonstrated an incredible use of technology. Fifty-five percent of revenue is amusements -- and the old Dave & Buster's never really varied from the same old same old. Now they have attraction, virtual reality attractions that change and get refreshed so you have something new to go to. I used to dread going there because my kids would eventually get bored because they had played everything so we would just throw money away at the claw where we would watch the darn thing smash our hopes over and over again until we finally ended up hooking a 5 cent, made in China doll for about $32 in change.
Second, because of tight labor, the company did have to give raises, but they are using technology to better organize shifts and use people more wisely. That's how 5% wage inflation and higher medical insurance didn't wreck the quarter. In fact, it only ended up costing the company 110 basis points over last year. Which is remarkable. It didn't hurt that they streamlined the menu, something I can tell you from our restaurants can really cut back the amount of kitchen labor you need.
They continue to put up terrific unit growth. One of the most positive aspects of the conference call? They have 125 stores now, and think that can easily double in a few years. So check the growth box that the portfolio managers so stridently want to see. How can they do that so easily? The malls need them, as they are known as a "traffic donor." That's the term that the mall managers are using in the age of so many bankruptcies and store closings. You sure would prefer a Dave & Buster's to a Sears (SHLD) or a JC Penney (JCP) .
How about millennials, the ever-present millennials who are now having families? How do you get them in the door? You can try promotions, like unlimited wings, as they seem to thrive on what's cheap.
But more importantly, you have to change your mindset and your advertising efforts. While D&B still has plenty of TV dollars, they are leaning in heavily to digital now, using programmatic advertising -- usually meaning giving money to an outfit like Google (GOOGL) so it can use artificial intelligence to target young families. And once they get there, it's not the same old fare. The company just added fresh juices and purees as well as Zoodles, which is a zucchini based pasta. Don't laugh -- this is exactly the kind of thing that shows millennials that D&B gets fresh, natural, organic and picky.
Of course, they are now going the route of the mobile app, although I can't yet figure out exactly how it will work, and they have a rewards program -- another must -- that gives you just enough discounts to make you want to come back.
Finally, they just hired a chief information officer from Royal Caribbean Cruises (RCL) , a brilliant move because the cruise ships are the most adept at getting more money out of patrons.
I know each of these is pedestrian: virtual reality, labor-saving technology, better gaming investment, digital advertising, less processed food and shrewd use of the collapse of other brick and mortar stores. But in the end, this combination of cost control, millennial experiential creation and digital advertising is what makes for a successful retail stock in the year 2019.