Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarter ended July 31, 2022; 13-week second quarter and 26 weeks year-to-date. The request identifies “2021 Q2,” but the supplied filing is for fiscal 2022 Q2, compared primarily with the quarter ended August 1, 2021.
Business context
The company operates Dave & Buster’s entertainment and dining venues and, following the June 29, 2022 acquisition, Main Event and The Summit family entertainment centers. At July 31, 2022, it operated 148 Dave & Buster’s stores and 52 Main Event locations, including three The Summit locations, across North America. The businesses are aggregated into one reportable segment.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total revenue | $468.4 million | $377.6 million | 24.0% increase |
| Operating income | $56.5 million | $79.2 million | 28.7% decrease |
| Operating margin | 12.1% | 21.0% | Down 8.9 points |
| Net income | $29.1 million | $52.8 million | 44.9% decrease |
| Diluted EPS | $0.59 | $1.07 | Decrease |
| Adjusted EBITDA | $119.6 million | $119.2 million | Essentially flat |
| Adjusted EBITDA margin | 25.5% | 31.6% | Down 6.1 points |
For the 26 weeks ended July 31, 2022, revenue was $919.5 million versus $643.0 million, operating income was $155.2 million versus $116.2 million, and net income was $96.1 million versus $72.4 million. Year-to-date diluted EPS was $1.95 versus $1.47, and Adjusted EBITDA was $262.8 million versus $195.9 million.
Q2 comparable Dave & Buster’s sales increased 5.7% versus 2021 and 9.6% versus 2019. Food and beverage revenue increased to $157.0 million, while amusement and other revenue increased to $311.4 million. Main Event contributed $51.4 million of revenue after the acquisition date.
Cash flow, liquidity and capital structure
- Cash provided by operating activities was $233.1 million for the first 26 weeks, compared with $198.1 million in the prior-year period.
- Capital expenditures were $99.9 million, compared with $37.9 million. Investing cash outflow was $922.2 million, including $822.8 million for the Main Event acquisition.
- Ending cash was $100.4 million, compared with $25.9 million at January 30, 2022.
- Total debt outstanding was $1.290 billion, consisting of $440.0 million of senior secured notes and an $850.0 million term loan. The balance sheet reported $1.220 billion of long-term debt net of discounts and issuance costs.
- The new credit facility matures June 29, 2027 for the revolving facility and June 29, 2029 for the term loan. The company had no revolving borrowings, $8.6 million of letters of credit, and $491.4 million of unused revolving capacity.
- The $550.0 million, 7.625% senior secured notes mature November 1, 2025. The weighted-average effective interest rate on total debt was 10.08% for the first 26 weeks.
- Management stated that cash, expected operating cash flow, revolving availability and expected landlord payments should fund operations and planned capital expenditures for at least the next twelve months.
Material changes versus the prior comparable period
- The Main Event acquisition was completed for total consideration of approximately $837.4 million, including $456.1 million of preliminary goodwill and $111.1 million of tradename value. Main Event results were included from June 29, 2022.
- Revenue benefited from the acquisition, additional Dave & Buster’s store weeks, new store openings and removal of COVID-19 operating restrictions.
- Profitability declined in Q2 despite higher revenue. Food and beverage cost as a percentage of related revenue rose to 29.6% from 26.9%; payroll and benefits rose to 24.3% of revenue from 21.3%; and other store operating expenses rose to 30.4% from 27.9%.
- General and administrative expense more than doubled to $37.7 million, driven by acquisition and integration costs, a $1.8 million impairment of the Main Event corporate office lease, higher compensation and additional support-center personnel.
- Interest expense increased by $3.4 million in Q2 due primarily to higher average debt, and the company recognized a $1.5 million loss on debt refinancing.
- The company repurchased 765,000 shares during Q2 for $25.0 million, leaving approximately $75.0 million under its $100.0 million authorization. No dividends were declared.
Outlook, risks and unusual items
- Management expects the combined businesses to provide accelerated growth and cost synergies, but pro forma results exclude potential future synergies and are not predictive of future performance.
- Principal operating risks include inflation, commodity costs, wage rates, staffing, consumer discretionary spending, seasonality, weather, and any renewed effects of COVID-19.
- Variable-rate debt exposes the company to higher interest expense. The term loan bears interest based on SOFR plus a 5.00% margin and related adjustments.
- Debt agreements impose restrictions on additional debt, acquisitions, asset sales, dividends and repurchases, and require compliance with a maximum net total leverage ratio under specified conditions. The filing identifies a 3.50:1.00 maximum ratio when the applicable borrowing threshold is met.
- The company faces California wage-and-hour lawsuits, including purported or potential class and representative actions. Management believes existing proceedings are not expected to materially affect results, but ultimate costs could differ materially from current estimates.
- Main Event’s internal controls over financial reporting were excluded from the company’s current disclosure-controls assessment because it was recently acquired. Management stated that the acquisition materially affected internal control over financial reporting and will be incorporated over time.
- Q2 included $13.9 million of acquisition-related transaction and integration costs in Adjusted EBITDA adjustments, a $1.8 million lease impairment, $1.5 million of refinancing loss and $3.9 million of pre-opening costs.
Investor verification checklist
- Verify the final purchase-price allocation for Main Event, including goodwill, tradename valuation, contingent consideration and deferred tax amounts.
- Assess whether Main Event integration costs decline and whether projected operating synergies materialize.
- Monitor food, beverage, labor and occupancy costs and their effects on margins.
- Review leverage-ratio compliance, SOFR exposure, debt maturities and the company’s ability to preserve revolving liquidity.
- Reconcile Adjusted EBITDA to GAAP net income and cash flow, particularly the acquisition-related and other excluded costs.
- Track comparable sales excluding Main Event, new-store performance and the sustainability of post-COVID traffic recovery.
- Evaluate the potential financial exposure from California employment litigation and other contingencies.