Dave & Buster’s Banks on Virtual Reality as Sales Momentum Slips
A “dramatic change” in Dave & Buster’s amusement business triggered troubling fourth-quarter results. Same-store sales fell 5.9 percent versus a 3.2 percent increase in the year-ago quarter, tumbling the entertainment-driven brand’s stock nearly 7 percent late Tuesday.
CEO Steve King said in a conference call that 106-unit Dave & Buster’s “did not anticipate the abrupt drop in momentum in the latter part of the quarter,” given the company’s tendency to turn in seasonally strong results in December and January. The company hinted at this downturn in December, and trimmed its fiscal 2017 guidance in response—a move that sunk shares more than 22 percent. But the chain believed those tepid results would reverse. Instead, they deteriorated further.
Dave & Buster’s reported a 6.4 percent decrease in walk-in sales in Q4 and a 2.9 percent decline in special events sales. Amusement sales were down 4.2 percent and food and beverage fell 7.5 percent and 8.5 percent, respectively.
But the leading culprit: The slowdown of Dave & Buster’s typically robust amusement business.
“In retrospect, our new amusement offerings in the quarter produced less compelling than in the comparable period last year,” King said. “Weather was unfavorable and the impact of competitive intrusion was higher than we had forecast.”
King added that a subset of younger guests, those casual gamers who are more interested in Dave & Buster’s other experiences, didn’t connect with the brand in the way the chain hoped. “We have opportunities to improve our food and beverage offerings to better meet their needs during their visits,” he said.
Dave & Buster’s earned $35.6 million, or 85 cents per share, in the quarter, compared with net income of $27.4 million, or 63 cents per share, year-over-year. Excluding net tax benefits, Dave & Buster’s earned 61 cents per share. Sales rose 13 percent to $304.9 million versus $270.2 million in Q4 2016. FactSet analysts expected earnings of 61 cents per share on sales of $305 million and for comps to drop 5.1 percent.
For fiscal 2017 versus the prior-year period, total revenues increased 13.4 percent to
Is VR the answer?
There is a lot on the table for Dave & Buster’s. King said the brand is “taking this opportunity to advance several key food and beverage initiatives that will serve to improve our guest satisfaction.”
“Overall we need to deliver new game content, food improvement, better and specifically faster service, as well as [make] redemption prizes been more accessible,” he added. “Value comes through as an issue in [our] research, but it appears to be less about products and more of the overall quality of experience.”
Goal No. 1 on the dock is reigniting amusement. A key component will be the launch of a proprietary virtual reality platform in the middle of the year. King said Dave & Buster’s signed an agreement and development is underway for its first title, which is based on a “very well-known Hollywood film franchise.”
“In an increasingly similar-to-competitive environment, offering differentiated content will be more important than ever,” he said.
Guests will purchase what Dave & Buster’s calls “an attraction chip” to put on Power Cards for a separate price. The company has tested VR at $5 per person and King said he expects Dave & Buster’s to grow at that mark, and “see what kind of demand it generates.”
While Dave & Buster’s has some titles in the pipeline with potential to drive traffic, similar to the Tomb Raider release, King said VR would be the “hero” item to revitalize amusement. “Our virtual reality platform will enable us to build a library of content and capitalize on the opportunity for many years,” King said, adding that he doesn’t think anybody else is going to do this in the business.
On the competition note, this is really something that began to surface in fall 2017. Dave & Buster’s posted comps growth of 1.1 percent in the second quarter, but came under the 2.6 percent Consensus Metrix prediction. In the call afterward, executives spoke about fellow eat-and-play concepts opening in Dave & Buster’s corridor, including Main Event Entertainment (also a Texas-based brand in Plano), which debuted five units, and Top Golf, which opened two.
“We are watching the competitors closely in terms of when we think they're going to open and trying to measure the magnitude of that opening, but it's not always totally clear,” Brian Jenkins, Dave & Buster’s CFO, said in the call.
If anything, “eatertainment” has only accelerated as a segment since. Main Event opened 24 locations in the last three years and has plans to open five in 2018. There’s also Punch Bowl Social, which has plans for six units in 2018, and Pinstripes—an eight-unit bocci and bowling brand with Cleveland, Fort Worth, Houston, and San Mateo, California, on its radar for 2018.
When Dave & Buster’s debuted its gaming plus dining concept 35 years ago, “It was revolutionary; it was eatertainment for adults,” Darren Tristano, a River Forest, Illinois-based foodservice consultant, told FSR in December. Previously, the major form of entertainment plus dining was Chuck E. Cheese’s, which targeted kids.
But now these eatertainment concepts are infusing parity into a category Dave & Buster’s once fronted on its own. Differentiation, in other terms, is more important than ever.
Speed wins, and quick casual?
King said Dave & Buster’s food and beverage program remains a critical part of the equation since it contributes to overall satisfaction. And given the unique nature of the company’s layout, speed of service is becoming critical—perhaps far more so than in typical casual sit-down brands where the experience is solely focused.
King said Dave & Buster’s hired a new vice president of food and beverage development and is investing in higher quality products, including the introduction of a new burger made with Angus blend. New chicken and steak items are coming as the company transitions out of its existing contract, he added.
As for speed, King said menu redesign and simplification in the kitchen is accelerating tickets.
“Our third strategic priority is reducing pressure in the guest experience, a combination of technology, operating policies, and how we deploy our people will be a key to this strategy,” King said. “We continue to test new technologies, such as at the table that can improve table turns and reduce late times in the dining room. In addition, we are working on reducing friction in other areas as well, especially at the front desk, at our bars, and while activating games in the arcade area.”
King also spoke about Dave & Buster’s “quick-casual” test taking place sometime in the second half of the year. The company will try the model in a couple of stores to start, he said, and didn’t expect any significant impact in 2018. But it could give Dave & Buster’s a direction for 2019.
The company said this could help cater to guests who don’t want to spend as much time to eat, but would rather grab a quick bite and head to the arcade. It would be a complement to its full-service experience in-store.
Growth is a go
The next strategic priority involves Dave & Buster’s 10 percent or more annual unit growth. The company expects to open 14–15 new stores in fiscal 2018. Through the fourth quarter, the chain opened five units, including Brandon, Florida; Woodbridge, New Jersey; Auburn, Washington; Baltimore; and Puerto Rico.
Already in the first quarter, Dave & Buster’s debuted units in Rogers, Arkansas—its first 17,000 square-foot small store—and units in Memphis, Tennessee; Wayne, New Jersey; and Anchorage, Alaska. There are also eight stores in construction and 27 signed leases. In this growth, Dave & Buster’s expects 11 large-format stores, including nine that are about 40,000 square feet; two between 30,000–40,000 square feet; two at 20,000–30,000; and two at 17,000.
“Our plan focuses on taking market share by getting unit growth at a consistent measured pace, but at the same time … continuously developing new reasons to visit, while enhancing our offerings, improving the value of our offering, executing well inside the box, and ensuring that we're reaching our audiences effectively.”
In regards to square footage, Dave & Buster’s unveiled its smaller-format outline in December. These 15,000–20,000-square-foot spaces will attract anticipated average unit volumes of $4–$5 million, the company said, and allow Dave & Buster’s to enter markets it couldn’t before.
The idea, King said at the time, would be to open in 20–40 completely new markets once deemed too small for the brand’s current small format, which is 25,000–30,000 square feet. King added that the new format could fit in markets with populations of 200,000–500,000. “We look at a number of different factors to try to determine where we thought we could get that $4 million to $4.5 million of sales,” he said.
Dave & Buster’s attempted to trim down its massive stores in the past, but without much success. This model is a much different experience.
The first time around, Dave & Buster’s simply “took everything and proportionately shrunk it,” King said. There was a special event space; a dining room; and the arcade dropped down to 5,500 square feet. It was like a miniature version of the traditional big-box space. The new restaurant, however, will feature an arcade that’s 10,000 square feet, or essentially the same size as the current restaurants. And instead of having a separate dining room and special events space, Dave & Buster’s will showcase a straight sports theme King called “D&B Sports.”