Dave & Buster's Entertainment (NASDAQ: PLAY) reported a narrower decline in comparable sales for its fiscal second quarter, but profitability continued to deteriorate as the company grapples with a shift in consumer spending toward food and beverage and away from higher-margin entertainment offerings.
Revenue for the quarter came in at $544.1 million, down 2.4% year-over-year, according to the company's filing with the Securities and Exchange Commission. Adjusted EBITDA fell 23.8% to $98.9 million, while the company swung to a net loss of $12.5 million, or 36 cents per diluted share, compared with a profit of $11.4 million in the year-ago period. On an adjusted basis, the company reported a loss of $9.5 million versus a profit of $14.2 million a year earlier.
The stock gave up its regular-session gains in after-hours trading, falling 12.2% to approximately $7.44 per share as of 5:49 p.m. Eastern, according to delayed data from Yahoo Finance. The shares had closed Monday's regular session at $8.47.
Comparable Sales Improve, But Mix Shift Hurts Margins
Comparable-store sales declined 2.9% compared with a year earlier, an improvement from the 5.4% drop recorded in the first quarter. Management pointed to this improvement as evidence that its turnaround initiatives are beginning to take hold. However, the underlying sales mix weakened profitability.
Entertainment revenue fell 8.8% to $332.6 million, while food-and-beverage revenue rose 9.6% to $211.5 million. As a result, entertainment accounted for 61.1% of total revenue, down from 65.4% in the prior-year period. This shift is significant because entertainment has a much lower direct product cost than food and beverage. In the quarter, entertainment costs equaled 9.2% of that segment's revenue, while food-and-beverage costs were 24.8% of its revenue, excluding labor, occupancy, and other store expenses. Consequently, the growth in restaurant sales cannot fully offset the decline in higher-margin game revenue.
Store-level expenses also rose. Operating payroll and benefits increased to $140.2 million from $138.7 million, and other store operating expenses grew to $192.9 million from $186.9 million. As a result, adjusted EBITDA margin contracted to 18.2% from 23.3%, and operating margin fell to 3.6% from 9.5%.
CEO Cites Progress, But Third-Quarter Details Lacking
Chief Executive Darin Harper said in the release that food-and-beverage and special-events sales are growing, that remodels are outperforming the system average, and that comparable sales improved in July and again early in the third quarter. However, the company did not provide specific numbers for that third-quarter improvement. A return to positive comparable sales would be a stronger signal than merely a narrower decline.
Despite the profit pressure, cash flow improved. Adjusted free cash flow for the first six months was $19.5 million, compared with negative $36.5 million in the prior-year period. Operating cash flow reached $160.6 million, even as capital expenditures totaled $190.0 million. The company opened six new domestic locations during the quarter and ended with $492.1 million in available liquidity.
However, only $16.0 million of that liquidity was cash. As of August 4, the company carried $1.534 billion in gross debt, including $155.0 million drawn on its revolving credit facility. Net interest expense for the quarter was $38.0 million, nearly double the company's operating income of $19.4 million. Management said it remains in compliance with its debt covenants.
Leverage Remains a Key Concern
Based on 34.85 million shares outstanding at quarter-end and the after-hours price of $7.44, PLAY's implied equity value was about $259 million, meaning gross debt was nearly six times that figure. With such a leveraged balance sheet, investors will be looking for a quarter in which entertainment revenue stabilizes and EBITDA margins stop contracting. Simply opening more locations will not address the leverage question on its own.
The market's negative reaction reflects ongoing skepticism about the company's ability to turn around its core entertainment business while managing a heavy debt load. The narrowing of comparable sales declines provides some hope, but the continued margin erosion and widening net losses underscore the challenges ahead.
