Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the 13-week and 39-week periods ended November 1, 2015, compared with November 2, 2014. Although the request metadata identifies “2014 Q3,” the filing itself is the fiscal 2015 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 the United States and Canada under the Dave & Buster’s and Dave & Buster’s Grand Sports Café brands. The company operated 77 stores at November 1, 2015, including six openings during the first 39 weeks of fiscal 2015. It operates as one reportable segment.
Financial performance and liquidity
| Metric | Q3 FY2015 | Q3 FY2014 | 39 Weeks FY2015 | 39 Weeks FY2014 |
|---|---|---|---|---|
| Total revenue | $192,753 | $163,474 | $632,767 | $539,682 |
| Comparable-store sales growth | 8.8% | 8.7% | 10.0% | 6.2% |
| Operating income | $9,459 | $908 | $71,974 | $45,886 |
| Operating margin | 4.9% | 0.6% | 11.4% | 8.5% |
| Net income (loss) | $4,554 | $(4,607) | $36,669 | $(7,024) |
| Diluted EPS | $0.11 | $(0.13) | $0.86 | $(0.21) |
| Adjusted EBITDA | $34,498 | $24,583 | $149,080 | $113,642 |
| Adjusted EBITDA margin | 17.9% | 15.0% | 23.6% | 21.1% |
Revenue increased 17.9% in the quarter and 17.2% year to date. Growth reflected comparable-store sales, additional store weeks from new locations, and increased amusement revenue. In the quarter, food and beverage represented 46.6% of revenue and amusement and other revenue represented 53.4%.
Net cash provided by operating activities was $121,589 for the first 39 weeks, versus $36,713 in the prior-year period. Capital expenditures were $118,883, producing negative investing cash flow of $117,523. Financing activities used $55,613, principally reflecting debt repayments. Cash declined from $70,876 at February 1, 2015 to $19,329 at November 1, 2015.
At November 1, 2015, the company had a working-capital deficit of $53,937, total debt outstanding of $355,125, and $137,815 of borrowing availability under its revolving credit facility. Current and long-term debt reported on the balance sheet totaled $355,125, before applicable presentation adjustments.
Material changes versus the prior comparable period
- Comparable-store sales growth improved to 10.0% year to date from 6.2% in the prior-year period; quarterly comparable-store sales increased 8.8%.
- Operating margin expanded to 11.4% year to date from 8.5%, supported by sales leverage and lower store operating costs as a percentage of revenue.
- The company moved from a prior-year net loss to net income, aided by stronger operating performance and substantially lower interest expense.
- Net interest expense fell to $9,057 year to date from $29,826, following debt refinancing and prior debt repayment activity.
- The company recorded a $6,822 loss on debt retirement in fiscal 2015, versus $27,578 in the prior-year period.
- Amusement and other revenue increased 19.9% year to date, faster than food and beverage revenue, driven by advertising, game promotions, and new stores.
- Capital expenditures increased to $118,883 from $91,670, primarily due to new-store construction.
Guidance, outlook, risks, and unusual items
Management expects to continue expanding stores at an annual rate of approximately 10% of the existing store base. Two additional stores opened after quarter-end, and management planned two more fiscal 2015 openings. The company also reported a seven-store Middle East franchise agreement and targeted its first international opening outside Canada in 2017.
Fiscal 2015 capital additions were expected to total $174,000 to $179,000, or $144,000 to $149,000 net of tenant-improvement allowances. Near-term expected requirements included $142,000 to $152,000 of capital additions, $15,316 of debt service, $71,437 of lease payments, and approximately $46,000 of cash income taxes.
Management stated that operating cash flow, cash on hand, and revolving-credit availability should be sufficient for foreseeable needs, but noted that liquidity depends on future operating performance, economic conditions, competition, and access to financing. The company has substantial lease commitments of $800,103 and variable-rate debt exposure. A 25-basis-point increase in LIBOR was estimated to increase annualized interest expense by approximately $870.
Key operating risks include food and commodity price volatility, wage and minimum-wage increases, consumer spending pressure, seasonality, severe weather, execution of new-store openings, and competition. The company does not hedge commodity-price risk. It purchased a $200,000-notional interest-rate cap effective when one-month LIBOR exceeds 3.0%.
Legal proceedings arise in the ordinary course, including employment-related claims; management does not expect them to materially affect results. The company identified a future compliance risk associated with becoming subject to the auditor-attestation requirements of Sarbanes-Oxley Section 404 after ceasing to qualify as an emerging growth company at the end of fiscal 2015. Management stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Confirm the applicable period: the filing is for Q3 fiscal 2015, not Q3 fiscal 2014.
- Reconcile reported revenue growth with comparable-store growth and the contribution from six new stores and additional store weeks.
- Assess whether cash of $19,329 and $137,815 of revolver availability adequately cover planned capital spending, lease payments, taxes, and debt service.
- Review the refinancing terms, variable-rate exposure, scheduled $1,875 quarterly term-loan amortization, and the $325,125 debt payment due in year five.
- Evaluate the sustainability of margin expansion after excluding refinancing-related items, pre-opening costs, stock compensation, and other Adjusted EBITDA adjustments.
- Monitor food costs, labor and minimum-wage increases, seasonality, and the company’s ability to pass cost inflation through menu pricing.
- Verify execution of planned store openings, international development, and compliance with Section 404 internal-control requirements.