Dave & Buster's Is Down 17%. Is the Stock a Buy?

Key Points

• With a new CEO that essentially laid out a long list of issues, Dave & Buster's has a long road ahead.

• Stagnating revenues and weakening earnings are weighing the stock down.

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Dave & Buster's (NASDAQ: PLAY) made headlines this week, and not in a good way. The company's stock dropped more than 17% following the release of a disappointing second-quarter earnings report and a cautious tone from new CEO Tarun Lal. Investors were hoping for signs of a rebound or new energy in the business, but what they got instead were signs of deeper problems and a tough road ahead. Based on the current outlook, it's becoming harder to view Dave & Buster's as a strong investment opportunity -- at least for now.

Weak Q2 results reveal deeper issues

The company's second-quarter performance failed to inspire confidence. Comparable store sales declined by 3% year over year, signaling a drop in foot traffic or spending per guest. Total revenue barely moved, ticking up just 0.05% to $557.4 million. While flat sales might not seem catastrophic on their own, the real blow came in the form of sharply declining profitability.

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Net income for the quarter was just $11.4 million, or $0.32 per diluted share. That's a staggering 67% decline from the same period last year, when net income came in at $40.3 million, or $0.99 per share. These numbers are especially concerning when you consider that in 2022, the company was posting triple-digit growth. That momentum has clearly evaporated.

Image source: Getty Images.

Looking at the broader picture, the first six months of the current fiscal year show more of the same. Total revenue during this period was $1.125 billion, a 1.7% decline from $1.145 billion a year ago. Meanwhile, operating costs have risen, squeezing margins and reducing operating income from $170 million to $116.2 million. These aren't just blips -- they reflect a trend of stagnation and operational inefficiency that the company has yet to reverse.

CEO Lal acknowledges missteps

Tarun Lal, who recently stepped in as CEO, didn't sugarcoat the situation. In comments highlighted by CNN, Lal acknowledged several strategic errors that have hurt the company's performance. For example, he pointed out that the brand focused too heavily on appetizers, which encouraged customers to share rather than order full meals, reducing overall check sizes.

He also noted a lack of investment in new games -- an essential part of the Dave & Buster's experience. Without fresh entertainment offerings, it's harder to entice repeat visits or generate excitement among guests. On top of that, the company had cut back on television advertising, leading to a dip in brand awareness. While cutting marketing costs might have helped short-term margins, it appears to have come at the expense of long-term visibility.

These are not small issues. They point to a business that may have lost sight of what makes it unique -- and what keeps customers coming back.

Outlook remains cautious

Looking ahead, it's unclear whether Lal will be able to turn things around quickly. His background includes leadership experience at KFC, but Dave & Buster's presents a very different challenge. It's a hybrid model of food, beverage, and entertainment -- a complex business that requires innovation and consistent customer engagement.

Analyst forecasts aren't optimistic in the short term. Estimates for fiscal 2026 suggest earnings of just $0.46 per share. Based on that, the company trades at a forward price-to-earnings (P/E) ratio of 43.78 -- an expensive valuation for a business that has not demonstrated consistent growth or outperformance. That high multiple may not be justified, especially given the challenges the company is facing.

The stock has been struggling to keep pace with the broader market, which raises concerns about its ability to attract and retain long-term investors.

Final thoughts

Although the CEO's honesty about past mistakes is a step in the right direction, the solutions on the table -- reviving marketing, tweaking the menu, and refreshing the arcade experience -- may not be enough to drive meaningful growth. Dave & Buster's has long struggled to stand out in a competitive landscape, and unless more significant strategic changes are made, this stock could remain a laggard for some time to come.

With seemingly many headaches to fix, this doesn't seem like a buy even after a 17% drop.

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David Butler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.