Starting in 2015, the restaurant industry entered a prolonged slump. For a while, it looked as if Dave & Buster's (NASDAQ: PLAY) could buck the trend -- but it too eventually started to lose comparable-store business in late 2017.

Shareholders started this year off with a bang: Comps once again went positive, and the future looked bright. That party, however, ended this week, when the company's earnings were a disappointment. The forecast for the rest of the year was even worse.

friends are sitting upset while drinking beer and cheering for sport team at the pub

Image source: Getty Images.

Dave & Buster's earnings: The raw numbers

Before we get into the details of why the quarter was so disappointing, let's check out how the company performed on the headline numbers.

Metric Q1 2020 Q1 2019 Growth Revenue $364 million $332 million 9.6% EPS $1.13 $1.04 8.7% Free cash flow $18.5 million $37.6 million (50.8%)

Data source: Dave & Buster's investor relations.

On the face of it, these results aren't all that bad. Almost 10% growth on the top line is solid -- as is almost 9% growth in earnings in the face of rising minimum wages. And the free cash flow situation is in a state of flux thanks to the company's expansion plans.

Yet this hardly tells the whole story. Perhaps most important, the company wasn't able to keep comparable-store sales positive as it had forecast last quarter.

Chart of comps at Dave & Buster's over time

Data source: SEC filings. Chart by author.

There were a number of reasons for the negative turn. First, while special event comps grew 3%, walk-in sales dropped 0.6%. And even though comps for amusement, the games Dave & Buster's offers patrons, were up 1.8%, comps for food and beverage were down 3.3%.

Revenue was up 9.6% thanks to sales at new stores, but operating expenses increased even more, up 11.6%. The main driver of that increase was a 13.8% jump in payroll, benefits, and store operating expenses.

While the company is benefiting from more sales of high-margin amusement games, it hasn't found a way to stem the tide of increased expenses for its workforce. With fewer people coming through the door, that's become a real problem.

Management also admitted that cannibalization in more mature markets and encroachment from competitors played a significant role in the slower-than-expected sales.

What else happened during the quarter?

Management spent a lot of time talking up both the good and bad of the quarter. This included:

The company opened seven new stores during the first quarter and has already opened one more during the second quarter. It's still on track to open 15 to 16 new locations during the year.

The company continues to simplify its menu and has seen customer satisfaction scores increase for food and beverages.

Response to the company's quick-casual tests in Texas have been slower than expected.

Two new games, based on Marvel and Star Trek properties, were rolled out.

The company repurchased 1.3 million shares for an average price of $48.85 per share.

A new mobile app will be rolled out in the second half of the fiscal year.

The company reiterated that there remains room for 230 to 250 total locations in North America -- more than twice the number of locations today.

Looking ahead

The company's revised forecast for full-year 2020 is what probably caused shares to dip dramatically in after-hours trading. Here's how the outlook changed:

Metric Original Guidance New Guidance Revenue (billions) $1.370 to $1.400 $1.365 to $1.390 Comps Flat to +1.5% (1.5%) to 0.5% Net Income (millions) $105 to $117 $103 to $113

Data source: Dave & Buster's investor relations.

It's become clear that Dave & Buster's has found a winning combination with its high-margin amusement business. The company needs to shore up its food business, draw in more customers, and convince investors that it can eventually get payroll costs under control to get back on track.

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Brian Stoffel has no position in any of the stocks mentioned. The Motley Fool recommends Dave & Buster's Entertainment. The Motley Fool has a disclosure policy.