Dave & Buster's Isn't Playing Around This Time

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Albuquerque, New Mexico, USA. 29th Oct, 2014. 102914.Dave & Busters' bar, restaurant and arcade, located in the old movie theate
Marla Brose/Albuquerque Journal/Zuma Wire/Alamy Live News
They say that the worst thing a company can do after its IPO is to disappoint in its first quarter as a public company -- and Dave & Buster's Entertainment (PLAY) came prepared to play hard.

The chain of 73 venues that combine full-service eateries with massive video game arcades saw its stock open nicely higher on Wednesday after posting better-than-expected quarterly results. Revenue climbed nearly 15 percent to $163.5 million, fueled partly by new openings over the past year but primarily by an 8.7 percent spike in comparable-store sales relative to last year's third quarter.

Dave & Buster's posted a small operating profit, reversing a year-ago loss. Its adjusted quarterly loss of 6 cents a share may not seem all that encouraging, but analysts were holding out for a larger deficit during the seasonally sleepy quarter.

Getting It Right the Second Time Around

The market wasn't exactly looking forward to Dave & Buster's IPO two months ago. Underwriters had to price the offering at the low end of its initial $16 to $18 range. However, the stock has been ticking higher in its first few weeks on the market, and its well-received quarterly report pushed the stock to open at $23 on Wednesday.

Why was Mr. Market initially uninterested in Dave & Buster's? It could have been that some of the recent restaurant IPOs have failed to live up to the initial hype. Another thing that may have played a part in Wall Street's apathy is that revenue inched just 5 percent higher in 2013.

However, perhaps the biggest reason the market yawned at the October IPO is that Dave & Buster's didn't exactly set the world on fire in its first run as a publicly traded company. For better or worse, the company was lumped together with Planet Hollywood and Rainforest Cafe when themed restaurants that were all the rage in the late 1990s. When the "eatertainment" craze subsided, investors moved on to the next shiny market trend.

Dave & Buster's was taken private in 2006 by Wellspring Capital Management, which eventually handed it off to another private equity firm, Oak Hill Capital Partners, in a $570 million transaction four years later.

The soft debut this time around is likely a blessing. Instead of hitting the market as part of a hot trend, Dave & Buster's is flying under the radar. That may seem odd for a chain of mammoth eateries that take up an average of 47,000 square feet each, but it's paying off for the early investors who got in a few weeks ago.

Setting the Stage for 2015

It's probably not fair to lump Dave & Buster's in with traditional casual-dining establishments. After all, a little more than half of its revenue comes from the games and other amusements available inside, from high-tech video games to stylish billiard halls. A lot of people come to Dave & Buster's without any intention of eating. Food and beverage sales make up less than 48 percent of its revenue mix, and that's something that even Cracker Barrel Old Country Store (CBRL), with its rustic gift shops, can't say.

This is a good thing. Amusements are high-margin endeavors, and it also saves Dave & Buster's from having to live or die by the fluctuating commodity food prices like traditional restaurants do.

The one thing that investors should keep an eye on here is potential expansion. There are only so many of these large venues that a market can bear, and Dave & Buster's has already opened eight more so far this year, to hit 73. The chain's response has been to target smaller locations that are 25,000 to 35,000 square feet. That's not necessarily a bad thing, especially since they require smaller investments. However, investors chasing the current heady growth rate may want to dial back expectations in the future when expansion and comps growth aren't as kind. For now, it's a game that investors deem worth playing.

Motley Fool contributor Rick Munarriz owns shares of Cracker Barrel Old Country Store. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Check out The Motley Fool's free report onone great stock to buy for 2015 and beyond.
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