Dave & Buster's (PLAY)

Arcade company Dave & Buster’s (NASDAQ:PLAY) met Wall Street’s revenue expectations in Q1 CY2025, but sales fell by 3.5% year on year to $567.7 million. Its non-GAAP profit of $0.76 per share was 25% below analysts’ consensus estimates.

Company Overview

Founded by a former game parlor and bar operator, Dave & Buster’s (NASDAQ:PLAY) operates a chain of arcades providing immersive entertainment experiences.

Leisure facilities companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted their spending from "things" to "experiences". Leisure facilities seek to benefit but must innovate to do so because of the industry's high competition and capital intensity.

Dave & Buster’s competitors include Bowlero (NYSE:BOWL), TopGolf Callaway (NYSE:MODG), Six Flags (NYSE:SIX), and private company Barcade.

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, Dave & Buster's grew its sales at a 12.9% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Dave & Buster’s recent performance shows its demand has slowed as its revenue was flat over the last two years. Note that COVID hurt Dave & Buster’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

We can better understand the company’s revenue dynamics by analyzing its same-store sales, which show how much revenue its established locations generate. Over the last two years, Dave & Buster’s same-store sales averaged 4.9% year-on-year declines. Because this number is lower than its revenue growth, we can see the opening of new locations is boosting the company’s top-line performance.

This quarter, Dave & Buster's reported a rather uninspiring 3.5% year-on-year revenue decline to $567.7 million of revenue, in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.1% over the next 12 months. Although this projection suggests its newer products and services will catalyze better top-line performance, it is still below the sector average.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Dave & Buster’s operating margin has been trending down over the last 12 months, but it still averaged 10.9% over the last two years, decent for a consumer discretionary business. This shows it generally does a decent job managing its expenses.

In Q1, Dave & Buster's generated an operating margin profit margin of 11.1%, down 3.4 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Dave & Buster’s EPS grew at an astounding 35.9% compounded annual growth rate over the last five years, higher than its 12.9% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, Dave & Buster's reported EPS at $0.76, down from $0.99 in the same quarter last year. This print missed analysts’ estimates, but we care more about long-term EPS growth than short-term movements. Over the next 12 months, Wall Street expects Dave & Buster’s full-year EPS of $1.99 to grow 7%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

While Dave & Buster's posted positive free cash flow this quarter, the broader story hasn’t been so clean. Over the last two years, Dave & Buster’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 3%, meaning it lit $3.00 of cash on fire for every $100 in revenue.

Dave & Buster’s free cash flow clocked in at $95.8 million in Q1, equivalent to a 16.9% margin. This result was good as its margin was 17.6 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts predict Dave & Buster’s cash conversion will improve to break even. Their consensus estimates imply its free cash flow margin of negative 5.6% for the last 12 months will increase by 6.4 percentage points.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Dave & Buster's historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 11.1%, somewhat low compared to the best consumer discretionary companies that consistently pump out 25%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Dave & Buster’s ROIC averaged 2.9 percentage point increases over the last few years. This is a good sign, and we hope the company can continue improving.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Dave & Buster's burned through $117.9 million of cash over the last year, and its $3.12 billion of debt exceeds the $11.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Dave & Buster’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Dave & Buster's until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We struggled to find many positives in these results as its EPS and same-store sales fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 4.9% to $24.60 immediately following the results.

Updated: June 19, 2025 at 11:56 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Dave & Buster's, you should also grasp the company’s longer-term business quality and valuation.

Dave & Buster's isn’t a terrible business, but it doesn’t pass our bar. For starters, its revenue growth was mediocre over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its astounding EPS growth over the last five years shows its profits are trickling down to shareholders, the downside is its same-store sales performance has disappointed. On top of that, its cash burn raises the question of whether it can sustainably maintain growth.

Dave & Buster’s P/E ratio based on the next 12 months is 15x. While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $33 on the company (compared to the current share price of $31.40).