Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen weeks ended May 5, 2024, representing the first quarter of fiscal 2024. The request metadata identifies “2023 Q1,” but the filing is for 2024 Q1 and compares against the thirteen weeks ended April 30, 2023.
Business context
The Company operates Dave & Buster’s and Main Event entertainment and dining venues. It opened four stores during the quarter and operated 224 stores in 43 states, Puerto Rico and one Canadian province as of May 5, 2024. The Company reports one operating segment.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Total revenue | $588.1 million | $597.3 million | Down 1.5% |
| Entertainment revenue | $385.7 million | $393.1 million | Down 1.9% |
| Food and beverage revenue | $202.4 million | $204.2 million | Down 0.9% |
| Operating income | $85.5 million | $121.4 million | Down 29.5% |
| Operating margin | 14.5% | 20.3% | Down 580 basis points |
| Net income | $41.4 million | $70.1 million | Down 41.0% |
| Diluted EPS | $0.99 | $1.45 | Down 31.7% |
| Adjusted EBITDA | $159.1 million | $182.1 million | Down 12.6% |
| Adjusted EBITDA margin | 27.1% | 30.5% | Down 340 basis points |
Comparable store revenue decreased 5.6% on a calendar-period basis, primarily because of lower walk-in transaction counts. Incremental revenue from noncomparable stores partially offset the comparable-store decline. Total product costs improved to 14.8% of revenue from 15.8%, reflecting pricing, supply-chain and menu-mix benefits.
Operating payroll and benefits increased to 24.1% of revenue from 21.9%, while other store operating expenses increased to 29.9% from 27.8%. Depreciation and amortization rose to $62.8 million from $48.9 million, driven by new stores, remodels and accelerated depreciation for two planned closures. Net interest expense increased to $33.1 million from $30.7 million.
Operating cash flow was $108.8 million, compared with $92.4 million in the prior-year period. Capital expenditures were $113.0 million, resulting in cash used in investing activities of $112.8 million. Cash used in financing activities was $1.2 million. Cash declined to $32.1 million at May 5, 2024, from $37.3 million at February 4, 2024.
Total debt outstanding was $1,340.5 million, including $895.5 million under the term loan, $5.0 million under the revolver and $440.0 million of senior secured notes. The Company had $484.0 million of unused revolver capacity, excluding $11.0 million of outstanding letters of credit. The weighted average effective interest rate was 9.7%. Management stated that liquidity, expected operating cash flow and available revolver borrowings should fund operating needs and planned capital allocation for at least the next twelve months.
Material changes versus the prior comparable period
- Revenue declined modestly, but lower comparable-store traffic and higher labor, marketing, occupancy and depreciation costs produced a substantial decline in operating income and net income.
- Adjusted EBITDA decreased $23.0 million, and its margin contracted 340 basis points.
- Capital expenditures more than doubled to $113.0 million from $51.2 million, primarily for new stores and remodels.
- The Company opened four stores, compared with a year-end store base of 208 stores in the prior-year comparison table.
- Share repurchases were reduced to $9.8 million during the quarter versus $126.9 million in the prior-year period. Through the filing date, the Company had repurchased 0.97 million shares for $50.0 million.
- A 2023 failed sale-leaseback remains accounted for as financing, with an $83.6 million long-term liability and $1.4 million of related quarterly interest expense.
- The Company changed its fiscal-year calendar beginning May 6, 2024; the second quarter and fiscal 2024 include two additional days.
Outlook, commentary, risks and unusual items
The filing does not provide specific financial guidance for fiscal 2024. Management expects results to remain affected by seasonality, store-opening timing, consumer spending, wage rates, commodity prices, inflation and weather. New stores may initially benefit from a “honeymoon” sales effect, followed by lower second-year sales and margins.
Key risks include weaker consumer traffic, food and beverage commodity volatility, labor and wage inflation, energy costs, interest-rate exposure, tariffs and trade regulations, and the ability to pass cost increases to customers without reducing demand. A hypothetical one-percentage-point change in interest rates would affect annual results by approximately $9.0 million based on the May 5, 2024 credit-facility balance.
The Company was in compliance with its debt covenants. Its trailing-four-quarter Credit Adjusted EBITDA was $548.4 million, net debt was $1,277.1 million and the net total leverage ratio was 2.3x versus a maximum permitted ratio of 3.5x. Senior secured notes with a principal balance of $440.0 million mature November 1, 2025.
Unusual or nonrecurring items included system implementation costs, strategic marketing consulting fees, severance, transaction and integration costs, accelerated depreciation for planned closures and the failed sale-leaseback financing treatment. Management stated that ordinary-course legal proceedings are not expected to materially affect financial condition or results.
Important facts for investors to verify
- Confirm that comparable-store traffic and sales trends improve sufficiently to offset the 5.6% calendar-period comparable-store revenue decline.
- Monitor labor, marketing, occupancy and depreciation costs, which drove the quarter’s margin compression.
- Assess whether planned capital expenditures and new-store openings generate acceptable returns and cash flow.
- Review the November 2025 senior secured notes maturity and the Company’s refinancing or repayment capacity.
- Track interest rates and covenant headroom, including the 2.3x net leverage ratio versus the 3.5x limit.
- Evaluate the effect of the fiscal-calendar change on quarter-to-quarter and year-over-year comparisons.
- Reconcile adjusted EBITDA and other non-GAAP measures to GAAP results because they exclude material costs.
- Verify the impact of the $40.3 million of share repurchases made between May 6 and the filing date and the remaining $150.0 million authorization.