Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: Quarterly period ended November 3, 2019; 13-week third quarter and 39 weeks year-to-date, compared with periods ended November 4, 2018. Although the request identifies “2018 Q3,” the supplied filing is the fiscal 2019 third-quarter Form 10-Q. Dollar amounts are in thousands except per-share data.
Business Context
Dave & Buster’s operates high-volume entertainment and dining venues in North America under one reportable segment. As of November 3, 2019, it operated 134 stores in 39 states, Puerto Rico and one Canadian province, including 14 openings during the first 39 weeks of fiscal 2019. The company permanently closed one store in Duluth, Georgia, during the period.
Key Financial Metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 39 Weeks FY2019 | 39 Weeks FY2018 |
|---|---|---|---|---|
| Total revenue | $299.4 million | $282.1 million | $1,007.5 million | $933.5 million |
| Operating income | $6.5 million | $15.5 million | $110.5 million | $120.0 million |
| Operating margin | 2.2% | 5.5% | 11.0% | 12.9% |
| Net income | $0.5 million | $11.9 million | $75.3 million | $87.8 million |
| Net margin | 0.2% | 4.2% | 7.5% | 9.4% |
| Diluted EPS | $0.02 | $0.30 | $2.15 | $2.18 |
| Adjusted EBITDA | $46.3 million | $52.7 million | $230.5 million | $231.0 million |
| Adjusted EBITDA margin | 15.5% | 18.7% | 22.9% | 24.7% |
Quarterly revenue increased 6.1%, while year-to-date revenue increased 7.9%. Growth was driven by non-comparable stores and was partially offset by lower comparable-store sales.
Cash Flow, Debt and Liquidity
- Year-to-date operating cash flow was $217.8 million, down from $237.0 million in the prior-year period.
- Capital expenditures were $172.9 million, compared with $163.7 million; net cash used in investing activities was $172.3 million.
- Financing activities used $46.2 million, including $297.3 million of share repurchases and $10.8 million of dividends, partially offset by $261.8 million of net debt proceeds.
- Cash and cash equivalents were $20.9 million at November 3, 2019, versus $21.6 million at February 3, 2019. The company reported a net working capital deficit of $209.8 million.
- Total debt outstanding was $656.0 million, consisting of a $270.0 million term loan and $386.0 million drawn on the revolver. Net long-term debt was $640.4 million.
- Revolver borrowing availability was $105.9 million after considering the outstanding balance and $8.1 million of letters of credit. The credit facility matures in August 2022.
- The company was in compliance with its debt covenants. Interest-rate swaps with a $350.0 million notional amount hedge variable-rate exposure; the swaps had a net fair-value liability of $10.3 million at period-end.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales declined 4.1% in Q3 and 1.9% year to date, compared with declines of 1.3% and 3.0%, respectively, in the prior-year periods.
- Quarterly operating income fell 58.0% and year-to-date operating income fell 8.0%, reflecting lower comparable sales, higher occupancy and store operating costs, and reduced operating leverage.
- Quarterly net income declined 95.9%; year-to-date net income declined 14.2%. Higher interest expense contributed materially, increasing to $6.1 million in Q3 from $3.3 million and to $14.8 million year to date from $9.4 million.
- Other store operating expenses rose to 37.1% of revenue in Q3 from 34.1%, and to 31.9% year to date from 30.5%. Management cited new-store occupancy costs, lower comparable sales, higher legal and marketing costs, and the absence of prior-year business interruption recoveries.
- Operating payroll and benefits increased to 25.4% of revenue in Q3 from 25.3% and to 23.8% year to date from 23.3%, including the effect of a 4.3% hourly wage-rate increase year to date.
- Share repurchases increased substantially: $297.3 million year to date versus $86.1 million in the prior-year period. The company had approximately $172.8 million remaining under its $800.0 million authorization.
- Adoption of the new lease standard produced $967.7 million of operating lease right-of-use assets and $1,174.8 million of operating lease liabilities at November 3, 2019. Comparative periods were not restated and management reported no significant effect on operations or cash flows.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 16 stores during fiscal 2019; 14 had opened during the first 39 weeks. The company was evaluating store size, opening pace and investments in existing-store revitalization.
- Fiscal 2019 capital additions were expected to be $249 million to $254 million, or $215 million to $220 million net of landlord payments.
- Management stated that cash, operating cash flow, available revolver capacity and expected landlord payments should fund operations, capital expenditures, debt payments, dividends and share repurchases for at least the next twelve months.
- Strategic initiatives included “Wow Walls,” a nationwide mobile-app launch, data analytics, digital marketing, store revitalization, cost savings and continued new-store investment.
- Key risks include declining comparable-store traffic, consumer spending, competition, food and commodity costs, tariffs, wage and minimum-wage increases, inflation, interest-rate exposure, seasonality and execution risk associated with rapid store growth.
- The company faces several California employment-related lawsuits, including purported class and representative actions. For matters considered reasonably possible but not probable, the company could not estimate a loss range.
- The company recorded a $7.5 million year-to-date unrealized derivative loss in other comprehensive income, net of tax. No asset impairments were recognized during the period.
- The third quarter is seasonally weaker than other quarters, and results may be affected by weather, holidays, school calendars and the “honeymoon” effect of newly opened stores.
Investor Verification Points
- Verify the filing period: the supplied Form 10-Q covers Q3 fiscal 2019, not Q3 fiscal 2018.
- Assess whether comparable-store sales stabilize after the 4.1% quarterly decline and whether new-store growth can offset comparable-store weakness.
- Monitor operating-cost deleverage, particularly occupancy, labor, food costs, legal costs and marketing expenses.
- Evaluate leverage, revolver availability, interest-rate exposure and compliance with debt covenants as share repurchases and capital expenditures continue.
- Review the sustainability of management’s liquidity outlook against the company’s substantial lease obligations and planned capital additions.
- Track the potential financial impact of California employment litigation and other legal contingencies.
- Reconcile non-GAAP Adjusted EBITDA with GAAP operating income and cash flow, recognizing that it excludes significant costs such as interest, depreciation, amortization and pre-opening expenses.