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Investors are not playing around today, sending shares of Dave & Buster's (PLAY -14%) back toward 2024 lows after missing Q3 (Oct) earnings and sales estimates. The entertainment and restaurant chain also announced that its CEO, Chris Morris, resigned, appointing the current Chairman, Kevin Sheehan, as interim CEO until a permanent replacement is found.

PLAY has been on a downward spiral since reaching five-year highs in April, as a weak economic backdrop finally caught up with the company, resulting in softening sales trends. What took the market by surprise earlier this year was that a broader shift among consumers toward experiences and entertainment was not benefiting PLAY. Management immediately took action, deploying several strategic initiatives, including revamping its menu and remodeling its stores. These moves came at a steep cost, not only in the financial cost of developing new recipes, games, and interiors but also in the opportunity cost of shuttering stores undergoing remodeling.

Following some silver linings related to PLAY's comprehensive turnaround plan last quarter, performance languished in Q3. Making matters worse, PLAY is now without its CEO, who oversaw its strategic plan, injecting additional uncertainty.

• Same-store sales deteriorated from last quarter, dropping by -7.7% in Q3 compared to -6.3%. While the quarter tends to be PLAY's lowest seasonal quarter from a volume and margin standpoint, results were made worse by adverse weather across several key markets and disruption to certain stores under remodel construction. Producing additional frustration today is that management pointed to healthy forward bookings last quarter as a sign of strength for the back half of FY25 (Jan).
• Sluggish comps weighed on profitability. Adjusted EBITDA margins slid by 240 bps yr/yr to 15.1%. Adjusted EPS went from positive $0.01 in the year-ago quarter to negative $(0.45) in Q3. On the bright side, PLAY continues to optimize its cost structure, which, combined with its various top-line initiatives, is expected to lead to margin growth in the coming quarters.
• Speaking of top-line initiatives, PLAY is focused on six core pillars, from better marketing and strategic pricing to improved food and beverage, remodels, and special events. Thus far, the initiatives have yet to lead to material outperformance. However, PLAY remains confident in its plan. For instance, the company has engaged a new marketing agency, which it believes will drive revenue growth, pointing to a test launch of a promotion that resulted in higher visit frequency. Additionally, tests of the remodeled stores show higher returns than previous layouts.

While the bright spots from last quarter were encouraging, we noted that too much uncertainty existed in the economy and surrounding PLAY's strategic moves, cautioning that it remains better to employ a wait-and-see attitude. Given the slipping performance in Q3, we continue to hold this view. PLAY already had plenty on its plate without the additional hassle of conducting a CEO search. Meanwhile, it is unclear if new marketing, promotions, food items, and remodeling are enough to overcome a shaky economic environment and produce a meaningful turnaround effect over the near future.