Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume entertainment and dining venues in North America under one reportable segment. As of October 29, 2017, it owned and operated 101 stores in 34 states and one Canadian province.
The filing is a Form 10-Q for the 13-week and 39-week periods ended October 29, 2017, compared with October 30, 2016. The request metadata identifies “2016 Q3,” but the filing itself is for fiscal 2017 third quarter.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 39 Weeks 2017 | 39 Weeks 2016 |
|---|---|---|---|---|
| Total revenue | $250.0 million | $228.7 million | $834.9 million | $735.0 million |
| Operating income | $19.9 million | $18.7 million | $123.3 million | $105.8 million |
| Operating margin | 8.0% | 8.2% | 14.8% | 14.4% |
| Net income | $12.2 million | $10.8 million | $85.3 million | $63.4 million |
| Net margin | 4.9% | 4.7% | 10.2% | 8.6% |
| Diluted EPS | $0.29 | $0.25 | $1.99 | $1.47 |
| Adjusted EBITDA | $54.1 million | $48.3 million | $220.3 million | $187.1 million |
| Adjusted EBITDA margin | 21.7% | 21.1% | 26.4% | 25.5% |
Revenue increased 9.3% in the quarter and 13.6% year to date. Growth was primarily driven by new stores; comparable-store sales decreased 1.3% in the quarter and increased 0.8% year to date.
Quarterly food and beverage revenue was $107.7 million and amusement and other revenue was $142.3 million. Year-to-date food and beverage revenue was $356.2 million and amusement and other revenue was $478.7 million.
Net cash provided by operating activities was $201.1 million for the first 39 weeks, compared with $174.6 million in the prior-year period. Capital expenditures were $150.3 million, resulting in net cash used in investing activities of $147.0 million. Financing activities used $58.9 million, including $110.0 million of share repurchases.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $15.3 million at October 29, 2017, compared with $20.1 million at January 29, 2017.
- Total debt outstanding was $316.0 million, consisting of a $300.0 million term loan and $16.0 million drawn on the revolver. Net long-term debt was $299.9 million.
- The August 17, 2017 refinancing established a $300.0 million term loan and a $500.0 million revolving facility maturing August 17, 2022. Borrowing availability was $479.0 million, with $4.97 million of letters of credit outstanding.
- The stated weighted-average interest rate was 2.49%; the year-to-date effective rate was 3.06%. A hypothetical 25-basis-point increase in one-month LIBOR would increase annualized interest expense by approximately $0.8 million, assuming no change in revolver borrowings.
- Net working capital was negative $128.0 million. Management stated that operating cash flow, cash on hand and revolver availability should satisfy foreseeable liquidity needs.
- The company repurchased 1.78 million shares for $110.0 million during the first 39 weeks. Approximately $161.2 million remained under the $300.0 million authorization, which expires at the end of fiscal 2018.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected 25 non-comparable stores and 515 additional operating store weeks year to date; nine new stores opened during the first 39 weeks versus seven in the prior-year period.
- Comparable-store performance weakened in the quarter, partly due to Hurricane Harvey, Hurricane Irma and California wildfires. Comparable food and beverage sales declined, while amusement revenue increased.
- Year-to-date product cost declined to 17.0% of revenue from 18.0%, helped by lower amusement costs, price increases and a favorable Texas use-tax audit settlement.
- Quarterly other store operating expenses increased to 33.1% of revenue from 31.4%, primarily due to occupancy costs at newer stores, higher marketing costs and sports-viewing costs.
- Net income benefited from a lower effective tax rate: 28.7% for the quarter and 26.8% year to date, compared with 37.1% and 36.7%, respectively. The reduction primarily reflected recognition of excess tax benefits from share-based payments.
- The company recorded a $0.7 million loss on debt refinancing in the quarter.
Guidance, Outlook, Risks and Unusual Items
- Management anticipated opening 14 new stores in fiscal 2017 and maintained a long-term goal of opening new stores at an annual rate of at least 10% of the existing store base.
- The company expected its first international opening outside Canada in 2018 under a seven-store licensed development agreement covering six Middle Eastern countries.
- Fiscal 2017 capital additions were expected to be $231 million to $236 million, or $195 million to $200 million net of tenant improvement allowances. The company expected to spend approximately $195 million to $200 million on new-store construction and operating initiatives.
- Operating lease commitments totaled $1.404 billion, including $100.7 million due within one year. The company had signed leases for ten future sites expected to open in late fiscal 2017 and early fiscal 2018, plus 19 additional contingent site agreements not included in the commitment table.
- The company recorded a $2.55 million net charge in the second quarter for an ERISA litigation settlement, based on $7.5 million of gross costs and $4.95 million of insurance recoveries. The final payment could vary and required court approval.
- Key risks include consumer spending and weather, comparable-store volatility, commodity prices, wage and minimum-wage increases, occupancy costs, variable-rate debt, execution of new-store growth and substantial lease obligations.
- The company stated that it was in compliance with its credit-facility covenants. No material changes were reported to previously disclosed risk factors, and management concluded that disclosure controls were effective.
- Adoption of the new lease accounting standard is expected to materially increase reported assets and liabilities, with an expected insignificant effect on the income statement.
Investor Verification Items
- Verify the reporting-period discrepancy: the filing is for fiscal 2017 Q3, not 2016 Q3.
- Assess the sustainability of earnings growth excluding tax benefits, new-store contributions, the Texas use-tax benefit and other unusual items.
- Monitor comparable-store sales, particularly the decline in Q3 food and beverage sales and the impact of weather-related disruptions.
- Evaluate leverage, variable-rate exposure, scheduled term-loan amortization and the $252.3 million debt payment due in 2022.
- Review the pace and returns of new-store openings against the company’s capital-spending outlook and lease commitments.
- Confirm the ultimate cost and approval status of the ERISA litigation settlement.