Dave & Buster's Entertainment, Inc. annual report, FY2023

Dave & Buster’s Entertainment, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended February 4, 2024. Fiscal 2023 contained 53 weeks, compared with 52 weeks in fiscal 2022. The request references “2022 Q4,” but the provided filing is an annual report for fiscal 2023 and does not provide a standalone fiscal 2022 fourth-quarter summary.

Business Context

Dave & Buster’s operates entertainment and dining venues under the Dave & Buster’s and Main Event brands. At year-end, the Company operated 220 venues: 162 Dave & Buster’s locations and 58 Main Event locations across the United States, Puerto Rico and Canada. Entertainment represented 65.1% of fiscal 2023 revenue, with food and beverage representing 34.9%.

The Company opened 11 Dave & Buster’s stores and five Main Event stores during fiscal 2023. Main Event was acquired on June 29, 2022, and its results continue to affect year-over-year comparability.

Financial Performance

Metric	Fiscal 2023	Fiscal 2022	Change
Total revenue	$2,205.3 million	$1,964.4 million	12.3% increase
Entertainment revenue	$1,434.8 million	$1,286.1 million	11.6% increase
Food and beverage revenue	$770.5 million	$678.3 million	13.6% increase
Operating income	$306.6 million	$262.5 million	16.8% increase
Operating margin	13.9%	13.4%	50 basis-point increase
Net income	$126.9 million	$137.1 million	7.4% decrease
Diluted earnings per share	$2.88	$2.79	Increase
Adjusted EBITDA	$555.6 million	$480.4 million	15.7% increase
Adjusted EBITDA margin	25.2%	24.5%	70 basis-point increase

Revenue growth was driven primarily by Main Event, new noncomparable Dave & Buster’s stores and the extra fiscal week, which contributed approximately $39.5 million of revenue. Comparable store revenue declined, reflecting lower walk-in transaction counts, partly offset by menu price increases and higher special-event bookings.

Comparable entertainment revenue declined 6.5% to $973.8 million. Comparable food revenue declined 3.1% to $366.8 million, while comparable beverage revenue increased 2.8% to $184.2 million.

Margins, Cash Flow and Capital Investment

Total product costs were $337.0 million, or 15.3% of revenue, compared with 15.7% in fiscal 2022.
Food and beverage product cost decreased to 26.3% of related revenue from 28.6%, benefiting from pricing, supply-chain and menu optimization.
Operating payroll and benefits were 23.9% of revenue, broadly consistent with 24.0% in fiscal 2022.
General and administrative expense declined to $122.6 million, or 5.6% of revenue, from $137.8 million, or 7.0%.
Depreciation and amortization increased to $208.5 million from $169.3 million, primarily because of Main Event and the extra week.
Cash flow from operations was $364.2 million, down from $444.4 million, primarily because fiscal 2022 benefited from income-tax refunds and favorable working-capital timing.
Capital expenditures were $330.2 million, compared with $234.2 million, including new-store construction, operating initiatives, game refreshment and maintenance capital.
Store Operating Income Before Depreciation and Amortization, a non-GAAP measure, increased to $656.1 million, or 29.8% of revenue, from $584.2 million, or 29.7%.

Debt and Liquidity

Total debt outstanding was $1,337.8 million at February 4, 2024, consisting primarily of $897.8 million of term loans and $440.0 million of senior secured notes, before discounts and issuance costs.
The $550.0 million senior secured notes bear interest at 7.625% and mature November 1, 2025, unless earlier redeemed.
The Company refinanced its term loans in June 2023 and again in January 2024. The January refinancing reduced the term-loan SOFR margin to 3.25% and removed the prior 0.10% credit spread adjustment.
Cash and cash equivalents were $37.3 million. The revolving facility had $490.3 million of unused availability and $9.7 million of outstanding letters of credit.
Total reported liquidity was $527.6 million, including cash and available revolver capacity.
Credit Adjusted EBITDA was $577.1 million and net total leverage was 2.2 times.
Net interest expense increased to $127.4 million from $87.4 million. A hypothetical one-percentage-point change in interest rates on outstanding credit-facility borrowings would affect annual results by approximately $9.0 million.

Material Changes and Unusual Items

Main Event was included for a full fiscal year in fiscal 2023, versus only part of fiscal 2022.
The Company recorded a $16.1 million loss on debt refinancing, compared with $1.5 million in fiscal 2022.
Adjusted EBITDA excludes $11.1 million of Main Event transaction and integration costs, $9.4 million of system implementation costs, $16.0 million of share-based compensation and other adjustments.
In October 2023, the Company entered into a sale-leaseback involving four store properties. The transaction was accounted for as a failed sale-leaseback, resulting in an $84.2 million financing obligation rather than a sale gain.
The Company repurchased 8.49 million shares for $300.0 million during fiscal 2023 at an average price of $35.35 per share. The remaining authorization was $100.0 million at year-end; the Board increased total authorization to $500.0 million on April 2, 2024.
No dividends were declared or paid in fiscal 2023, fiscal 2022 or fiscal 2021.
Annual impairment testing identified no impairment of goodwill or tradenames. Goodwill was $742.5 million and tradenames were $178.2 million at year-end.

Guidance, Outlook and Management Commentary

Management planned to open 15 stores in fiscal 2024. The filing also describes international franchise plans for 38 Dave & Buster’s locations beginning in 2024.
Growth priorities include comparable-store sales, new games and attractions, menu innovation, loyalty and digital marketing, remodels, special events, technology investments and domestic and international expansion.
Management stated that cash, expected operating cash flow, revolver availability and landlord payments should fund operating needs and planned capital allocation for at least the next twelve months.
The filing does not provide a specific fiscal 2024 revenue, earnings or comparable-store-sales forecast.
Management expects continued pressure from labor, commodity, occupancy and other operating costs, with selective pricing actions used where competitively appropriate.

Risks and Contingencies

Comparable-store performance is vulnerable to lower discretionary spending, changing consumer preferences, competition, adverse weather, seasonality and economic uncertainty.
Labor shortages, wage inflation, benefits costs and potential changes in employment regulations could pressure margins.
Variable-rate debt exposes the Company to higher interest expense, while the 2025 maturity of the senior secured notes creates refinancing and liquidity risk.
Long-term non-cancelable leases create fixed obligations even when individual stores underperform. Future minimum operating lease payments totaled $2.598 billion, excluding approximately $216.3 million related to executed but not yet commenced leases.
Cybersecurity, payment-card, privacy and information-technology failures could result in operational disruption, litigation, regulatory costs and reputational damage. The Company reported that cybersecurity threats had not materially affected results during the period.
The Company faces regulatory requirements involving alcohol, food safety, amusement games, labor, privacy, zoning and environmental matters.
Legal proceedings, including employment, premises liability, customer injury, intellectual property and dram-shop claims, arise in the ordinary course. Management believes the ultimate liabilities are not material, but the filing does not quantify individual exposures.
Deferred entertainment revenue was $121.2 million and depends on estimates of future game-credit use and ticket redemption. These estimates were identified as critical audit matters.

Investor Verification Items

Reconcile future comparable-store sales trends separately from Main Event acquisition and new-store growth effects.
Assess the sustainability of Adjusted EBITDA after excluding transaction, integration, implementation and other nonrecurring costs.
Review the November 2025 senior secured note maturity, refinancing alternatives and compliance with credit-facility covenants.
Validate the return potential and funding requirements for the planned fiscal 2024 openings, remodels and international franchise expansion.
Monitor cash flow conversion, capital expenditures and the effect of share repurchases on liquidity and leverage.
Evaluate assumptions supporting the $121.2 million deferred entertainment revenue balance and the $742.5 million goodwill balance.
Review the filing’s lease obligations, sale-leaseback financing obligation and other contractual commitments.