December 28, 2016

Dave and Buster’s is Beating the Competition With This One Simple Trick

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Among the top trends in hospitality for 2016, this year has marked a significant slowdown in traffic to fast casual and QSR restaurants known more broadly as the Restaurant Recession. With many of the major players lowering guidance for the year, and traffic in the fast-food space declining for the first time in 5 years, it seems this trend is set to continue in 2017. The industry tracker NPD Group cites familiar factors that have impacted discretionary spend ranging from the higher costs of eating out, to the lower cost of grocery-shopping, to changing consumer behavior, as well as uncertainty around the election and higher bills for items such as rent and prescription drugs.

But don’t tell any of that to Dave and Buster’s (NASDAQ: PLAY) as they continue to buck the trend, rising 15% on December 7th and reaching new 52-week highs as the year comes to a close. With a Q3 earnings beat of 25 cents per share – they reported a staggering 79% above Wall Street estimates of 13 cents per share and are up 108% year-over-year! Revenues of $228.7 million also topped expectations and were up 18.6%.

All of this is a little surprising for Wall Street, as PLAY is one of the most discretionary income based stocks out there with the arcade and games categories making up over half of all of Dave & Buster’s revenue in the latest quarter. So what is driving these increases and how are they succeeding while their competition is not?

Dave & Buster’s has been focused heavily for some time now on one thing – reaching more millennials – and they are succeeding in a big way where other brick-and-mortars have fallen short. To do this, Dave & Buster’s had to first understand that what this class of customer cares most about is experience and they are more than willing to pay for it. “Entertainment matters and it matters in a big way,” said Piper Jaffray analyst Nicole Miller Regan, who says millennials these days are looking for something outside of traditional retail. “It’s a mindset,” she said, “where they maybe don’t want something material; they want an experience.”

Dave & Buster’s strategy has evolved in recent years. With a focus on making their stores more experience-oriented, Dave & Buster’s began remodeling existing locations to position them as a go-to spot for nights out during football season and for other major sporting events. The pool tables of the past have been replaced with a sports-focused TV arena. Dave and Buster’s has also focused on making their spaces more hip and given them more of a nightclub feel. All of this is adding up to bigger crowds and increased traffic.

Dave and Buster’s is also committed to increasing its offerings, with a focus on unique gaming. This summer they offered an exclusive Star Trek game and are now bringing life-size Rock’em Sock’em Robots to multiple Dave and Buster’s locations in 2017.  

Because of these efforts, “Dave & Buster’s has less exposure to labor headwinds than a typical restaurant because the entertainment side is less labor intensive,” William Blair analyst Sharon Zackfia said. “The full-service restaurant’s labor costs as a percentage of sales is only around 23%,” she said, which makes it look “more like a fast-casual company.”

With a focus on experience and entertainment, Dave and Buster’s is continuing to win over millennials, and succeeding in spite of an overall downtrend in the restaurant space. Dave and Buster’s has never missed on earnings since IPOing in 2014 and it does not seem like they will any time in the near future.