Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Period covered: Thirteen and thirty-nine weeks ended November 1, 2020, compared with November 3, 2019. The request metadata identifies “2019 Q3,” but the supplied filing is the fiscal 2020 third-quarter Form 10-Q.
Business context and reporting period
Dave & Buster’s operates entertainment and dining venues in North America as one reportable segment. At November 1, 2020, it operated 137 stores in 40 states, Puerto Rico and one Canadian province. COVID-19 materially disrupted operations: all stores temporarily closed by March 20, 2020; 104 stores were open with limited operations at quarter-end, while 33 remained closed because of local restrictions. The company opened two stores during the quarter and decided not to reopen two stores near lease expiration.
- Limited operations included reduced menus, dining capacity, games, hours and staffing.
- Comparable-store base: 114 stores, of which 84 were open at quarter-end.
- Fiscal 2020 and fiscal 2019 each contain 52 weeks; each quarter contains 13 weeks.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Thirty-nine weeks 2020 | Thirty-nine weeks 2019 |
|---|---|---|---|---|
| Total revenue | $109.1 million | $299.4 million | $319.7 million | $1,007.5 million |
| Revenue change | -63.6% | — | -68.3% | — |
| Comparable-store sales change | -65.6% | -4.1% | -70.2% | -1.9% |
| Operating income (loss) | $(56.0) million | $6.5 million | $(198.6) million | $110.5 million |
| Net income (loss) | $(48.0) million | $0.5 million | $(150.2) million | $75.3 million |
| Diluted EPS | $(1.01) | $0.02 | $(3.56) | $2.15 |
| Adjusted EBITDA | $(16.0) million | $46.3 million | $(65.2) million | $230.5 million |
| Adjusted EBITDA margin | -14.6% | 15.5% | -20.4% | 22.9% |
Revenue declines reflected fewer operating weeks, lower customer traffic, capacity restrictions, reduced offerings and canceled or postponed events. Other store operating expenses rose to 64.9% of revenue in the quarter and 71.8% year to date, primarily because fixed occupancy and utility costs were spread over substantially lower sales.
- Q3 total product cost margin improved to 16.4% from 17.4%; food and beverage product cost increased to 27.8% of related revenue from 26.8%.
- Q3 operating payroll and benefits were $27.7 million, or 25.4% of revenue, unchanged as a percentage from the prior year.
- Q3 depreciation and amortization increased 3.1% to $34.4 million.
- Interest expense increased to $8.2 million in Q3 and $22.5 million year to date, versus $6.1 million and $14.8 million, respectively.
- The company recorded a $0.9 million loss on debt refinancing in Q3.
Cash flow, liquidity and debt
| Metric | Thirty-nine weeks 2020 | Thirty-nine weeks 2019 |
|---|---|---|
| Cash from operating activities | $(31.8) million | $217.8 million |
| Cash used in investing activities | $(72.4) million | $(172.3) million |
| Cash from financing activities | $87.8 million | $(46.2) million |
| Ending cash and equivalents | $8.3 million | $20.9 million |
| Capital expenditures | $72.6 million | $172.9 million |
- Total debt outstanding was $576.0 million at November 1, 2020, consisting of $550.0 million of 7.625% senior secured notes due November 1, 2025 and $26.0 million drawn on the revolving facility.
- Net long-term debt was $561.8 million after debt issuance costs.
- The amended revolving facility matures August 17, 2024, with $464.3 million of unused commitments and $9.7 million of letters of credit outstanding.
- During the covenant suspension period, the company must maintain minimum liquidity of $150.0 million. Financial covenant testing was suspended through the quarter ending May 1, 2022.
- The company raised approximately $182.2 million of net proceeds from common-stock issuances during the first two quarters.
- Share repurchases and dividends were suspended indefinitely.
Material changes versus the prior comparable period
- Q3 revenue fell 63.6%, and year-to-date revenue fell 68.3%, driven by COVID-19 closures and operating restrictions.
- The company moved from operating profit to operating loss and from net income to substantial net loss.
- Adjusted EBITDA declined from $46.3 million to $(16.0) million in Q3 and from $230.5 million to $(65.2) million year to date.
- Operating cash flow changed from $217.8 million provided to $31.8 million used year to date.
- Debt was refinanced through the issuance of $550.0 million of senior secured notes, repayment of the term loan and reduction of revolver borrowings.
- Stockholders’ equity increased to $206.8 million from $169.7 million at February 2, 2020, primarily reflecting the common-stock issuance, despite year-to-date net losses.
- Year-to-date unusual charges included $13.7 million of long-lived asset impairment, $7.0 million of impairment and contract termination costs for delayed or canceled development projects, and $0.9 million of debt-refinancing loss.
Guidance, outlook, risks and contingencies
Management did not provide a full-year fiscal 2020 financial outlook because of uncertainty regarding store reopening timing, government restrictions, customer demand and the duration of the pandemic. Management stated that results would remain severely affected until stores could reopen at full capacity.
- As of December 4, 2020, 48 stores were closed because of jurisdictional restrictions, compared with 33 at November 1, 2020.
- The company executed 123 rent-relief agreements, generally deferring rent for three months and providing partial deferrals for up to six months at approximately half of those locations. Eight properties without rent relief agreements had unpaid or partially paid rent at quarter-end.
- Management stated that available measures were expected to provide sufficient liquidity for estimated needs and covenant compliance for at least twelve months from issuance of the financial statements; this assessment depends on uncertain operating assumptions.
- Key risks include prolonged or renewed closures, weak consumer demand, going-concern and liquidity pressure, substantial indebtedness, covenant compliance, variable interest rates and the LIBOR transition.
- Pending California employment-related lawsuits include purported or potential class and representative actions. The company has accrued probable estimated losses where determinable, but stated that reasonably possible losses for some matters cannot currently be estimated.
- Interest-rate swaps with a $350.0 million notional amount were de-designated as hedges in April 2020. Total derivative liabilities were $14.7 million at November 1, 2020.
Most important facts for investors to verify
- Whether store closures and capacity restrictions continued or worsened after December 4, 2020, and the pace of traffic recovery at reopened stores.
- Actual cash burn, rent deferrals and other accrued obligations relative to the $150.0 million minimum-liquidity requirement.
- Compliance with the amended credit facility and senior-note covenants after the suspension period ends.
- Debt-service requirements, including the 7.625% notes and higher revolving-facility pricing during the covenant suspension period.
- Potential additional impairment charges, lease termination costs or other unusual items if the pandemic persists.
- Developments in California employment litigation and the amount of any additional exposure.
- The company’s ability to restore positive operating cash flow without additional equity or debt financing.