Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates entertainment and dining venues under the Dave & Buster’s brand. The filing is a Form 10-Q for the thirteen weeks ended May 1, 2016, compared with the thirteen weeks ended May 3, 2015. The request metadata identifies “2015 Q1,” but the filing itself is for fiscal 2016 first quarter. The company operated 84 stores across the United States and Canada at period-end, including 66 comparable stores.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $262.0 million | $222.7 million | 17.7% increase |
| Food and beverage revenue | $117.1 million | $103.6 million | 13.1% increase |
| Amusement and other revenue | $144.9 million | $119.1 million | 21.6% increase |
| Operating income | $51.2 million | $35.7 million | 43.1% increase |
| Operating margin | 19.5% | 16.1% | 340 basis-point increase |
| Net income | $31.2 million | $19.5 million | 59.4% increase |
| Net margin | 11.9% | 8.8% | 310 basis-point increase |
| Diluted EPS | $0.72 | $0.46 | Increase |
| Adjusted EBITDA | $79.5 million | $61.9 million | 28.4% increase |
| Adjusted EBITDA margin | 30.3% | 27.8% | 250 basis-point increase |
Net cash provided by operating activities was $76.7 million, versus $51.7 million in the prior-year quarter. Capital expenditures were $38.1 million, resulting in net cash used in investing activities of $38.1 million. Financing activities used $35.9 million, primarily reflecting $43.9 million of credit-facility repayments partly offset by $6.0 million of borrowings.
At May 1, 2016, cash and cash equivalents were $28.1 million. The company reported a net working-capital deficit of $87.7 million, total debt outstanding of $300.4 million, and $189.0 million of available borrowing capacity under its credit facility. Debt consisted of $144.4 million under the term facility and $156.0 million under the revolver. The stated weighted-average interest rate was 2.19%, and the effective rate was 2.60%.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales increased 3.6%, while non-comparable-store revenue increased 181.6%, primarily due to 141 additional store weeks from recent openings.
- The company opened three stores during the quarter, compared with two in the prior-year quarter, and had opened eleven stores since May 3, 2015.
- Product costs declined to 17.6% of revenue from 19.1%, reflecting improved food, beverage, and amusement cost ratios.
- Operating payroll and benefits declined to 21.5% of revenue from 22.0%, and other store operating expenses declined to 27.3% from 27.5%.
- Interest expense declined to $2.1 million from $4.7 million following the May 2015 refinancing and lower debt balances.
- Debt declined from $430.0 million at May 3, 2015 to $300.4 million at May 1, 2016.
- The effective tax rate decreased to 36.5% from 37.2%.
Outlook, Risks, Contingencies, and Unusual Items
- Management planned to open six to seven additional stores in fiscal 2016 and targeted approximately 10% annual growth in the store base over the long term.
- Fiscal 2016 capital additions were expected to total $164 million to $174 million, or $123 million to $133 million net of tenant-improvement allowances and other landlord payments.
- Management expected short-term liquidity requirements to include $120 million to $130 million of capital additions, $14.1 million of scheduled debt service, $73.7 million of lease payments, and approximately $39 million of cash income-tax payments.
- Management stated that operating cash flow, cash balances, and revolver availability should be sufficient for anticipated working capital, capital expenditures, debt service, and the subsequently authorized share repurchase program.
- On June 7, 2016, after the reporting period, the board authorized repurchases of up to $100 million of common stock through the end of fiscal 2018, primarily to offset equity-compensation dilution.
- The company had $826.8 million of future operating-lease commitments and $300.4 million of future debt principal payments as of May 1, 2016.
- Variable-rate debt creates interest-rate exposure; management estimated that a 25-basis-point increase in one-month LIBOR would increase annualized interest expense by approximately $0.7 million. A $200 million notional interest-rate cap applies when one-month LIBOR exceeds 3.0%.
- Key operating risks include consumer spending, seasonality, severe weather, food and commodity prices, wage and benefit increases, construction costs, competition, and interest-rate changes. The company does not hedge commodity-price risk.
- The company disclosed ordinary-course employment and other legal claims, but management did not expect them to materially affect operations or financial condition. No material changes were reported to the risk factors in the prior Form 10-K.
Important Facts for Investors to Verify
- Confirm that revenue and profit growth is sustainable beyond the benefit from new-store openings and additional store weeks.
- Monitor comparable-store sales, which grew 3.6% in the quarter versus 9.9% in the prior-year quarter.
- Assess the effect of the company’s substantial lease commitments and negative working capital on liquidity.
- Track debt reduction, revolver utilization, covenant compliance, and exposure to variable interest rates.
- Evaluate whether planned six-to-seven-store expansion and projected capital expenditures remain achievable without increasing leverage.
- Consider the effect of minimum-wage increases, commodity inflation, consumer spending trends, and seasonality on margins.
- Review the subsequent $100 million share-repurchase authorization alongside expansion and debt-service requirements.