Dave & Buster’s Entertainment, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 1, 2015, consisting of 52 weeks. The supplied metadata references “2013 Q4,” but the filing is the fiscal 2014 annual report and includes comparisons with fiscal 2013, ended February 2, 2014. Dollar amounts are in thousands unless otherwise stated.
Business context
Dave & Buster’s owns and operates dining and entertainment venues combining food, beverages, arcade and redemption games, and sports viewing. The Company operated 73 stores in 30 states and Canada at year-end and opened eight stores during fiscal 2014. It permanently closed the Bethesda, Maryland location in August 2014 and closed the Farmingdale, New York location on February 8, 2015 after fiscal year-end.
The Company completed its initial public offering in October 2014. Its common stock trades on NASDAQ under the symbol PLAY. Oak Hill Funds remained the controlling stockholder.
Financial performance and key metrics
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Total revenue | $746,751 | $635,579 | +17.5% |
| Food and beverage revenue | $359,125 | $310,111 | +15.8% |
| Amusement and other revenue | $387,626 | $325,468 | +19.1% |
| Operating income | $73,861 | $51,039 | +44.7% |
| Operating margin | 9.9% | 8.0% | +190 basis points |
| Net income | $7,636 | $2,169 | +252.0% |
| Diluted EPS | $0.21 | $0.06 | Increased |
| Adjusted EBITDA | $165,127 | $134,790 | +22.5% |
| Adjusted EBITDA margin | 22.1% | 21.2% | +90 basis points |
| Net cash from operations | $86,715 | $109,878 | Decreased |
| Capital expenditures | $129,688 | $105,894 | +22.5% |
Comparable-store sales increased 7.3%, including 3.8% growth in food, 9.6% growth in beverages, and 8.9% growth in amusement and other revenue. Amusement and other revenue represented 51.9% of total revenue; food represented 32.5% and beverages 15.6%.
Store-level EBITDA was $198,804, or 26.6% of revenue, compared with $160,856, or 25.3%, in fiscal 2013. Entertainment gross margins were approximately 86.0%. Food cost was 8.6% of total revenue, while amusement and other product costs were 7.3%.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $70,876 at February 1, 2015, compared with $38,080 at the prior year-end.
- Net working capital was $17,140, compared with a $13,700 deficit in fiscal 2013.
- Total debt was $430,000 gross, or $429,020 net of discount. The Company had no revolving-credit borrowings and $5,822 of letters of credit outstanding.
- The July 2014 refinancing established a $530,000 term loan maturing in 2020 and a $50,000 revolving facility maturing in 2019. The term loan carried a 4.25% stated interest rate at year-end and has variable-rate exposure.
- The Company used IPO proceeds of approximately $98,573 to prepay $100,000 of term-loan principal. Fiscal 2014 included a $27,578 loss on debt retirement related to the refinancing and prepayment.
- Management expected cash flows from operations, cash on hand, and available credit to satisfy anticipated working-capital, capital-expenditure, and debt-service needs in the foreseeable future.
- Fiscal 2015 planned capital additions were $141,000 to $151,000 gross, or $116,000 to $126,000 net of expected landlord allowances.
Material changes versus fiscal 2013
- Revenue growth reflected eight new store openings, a 7.3% comparable-store sales increase, stronger amusement sales, and higher beverage sales.
- Operating leverage reduced other store operating expenses to 30.2% of revenue from 31.4%, partially offset by higher food and beverage product costs, marketing costs, and sports-viewing expenses.
- Net interest expense declined to $34,789 from $47,809 following debt refinancing and lower interest rates.
- Net income improved substantially, although the benefit was partly offset by the $27,578 debt-retirement charge.
- Operating cash flow declined despite higher earnings, primarily because of refinancing-related cash costs, payment of accreted interest and redemption premiums, and higher pre-opening costs.
- Capital expenditures increased mainly because of new-store construction. The Company had 17 signed leases for new locations as of year-end, including four stores under construction.
Outlook, commentary, risks, and unusual items
- Management expected to continue opening stores at approximately 10% of the existing store base annually, subject to site availability, financing, permits, staffing, and store performance.
- The Company estimated potential for more than 200 stores in the United States and Canada, compared with 73 stores at year-end, and targeted an international development agreement in fiscal 2015 and an opening outside Canada in 2016.
- Management planned to remodel three additional stores, roll out paperless eTickets, refresh games, expand D&B Sports, and continue national marketing and loyalty-program initiatives.
- Results are seasonal, with generally stronger first and fourth quarters and a weaker third quarter. Severe weather can materially affect traffic and sales.
- Key risks include dependence on discretionary consumer spending, competition from restaurants and other entertainment, execution and returns on new stores, food and commodity costs, wage increases, labor availability, licensing requirements for alcohol and redemption games, lease obligations, variable-rate debt, cybersecurity, litigation, and brand or food-safety events.
- All stores were leased. Future operating-lease commitments totaled approximately $662,060 under the lease note, while the contractual-obligations table reported $663,283 including related commitments.
- The Bethesda lease litigation resulted in an adverse trial-court ruling and store closure; the Company appealed. Management stated that ordinary-course legal proceedings were not expected to materially affect financial condition or results.
- No impairment charges were recognized for property and equipment, goodwill, or indefinite-lived tradenames in fiscal 2014.
Investor verification checklist
- Verify that the relevant period is fiscal 2014 ended February 1, 2015, rather than “2013 Q4.”
- Reconcile reported net income with Adjusted EBITDA and review the Company’s non-GAAP adjustments, particularly the debt-retirement charge and pre-opening costs.
- Assess whether comparable-store sales growth and new-store returns remain sustainable after the reported “honeymoon” period.
- Review the variable-rate term loan, debt covenants, maturity profile, and sensitivity to higher interest rates.
- Evaluate planned fiscal 2015 capital spending and the Company’s ability to fund expansion while meeting lease and debt obligations.
- Monitor the Bethesda appeal, the Farmingdale closure, lease expirations without renewal options, and other pending legal or regulatory matters.
- Consider Oak Hill Funds’ voting control, related-party arrangements, limited dividend prospects, and potential future share dilution.