Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks and 39 weeks ended October 31, 2021, compared primarily with the periods ended November 1, 2020. Although the request identifies “2020 Q3,” the source filing is the fiscal 2021 third-quarter Form 10-Q, filed December 7, 2021.
Business Context and Operations
Dave & Buster’s operates entertainment and dining venues in North America as one reportable segment. It opened three stores during the first 39 weeks of fiscal 2021, including one during the quarter, and operated 143 stores at October 31, 2021. All stores had reopened by the end of the second quarter, although COVID-19-related restrictions and customer behavior continued to affect operations.
Key Financial Metrics
| Metric | Q3 Fiscal 2021 | Q3 Fiscal 2020 | 39 Weeks Fiscal 2021 | 39 Weeks Fiscal 2020 |
|---|---|---|---|---|
| Total revenue | $318.0 million | $109.1 million | $961.0 million | $319.7 million |
| Operating income (loss) | $24.5 million | $(56.0) million | $140.6 million | $(198.6) million |
| Net income (loss) | $10.6 million | $(48.0) million | $83.0 million | $(150.2) million |
| Net margin | 3.3% | (44.1)% | 8.6% | (47.0)% |
| Operating margin | 7.7% | (51.4)% | 14.6% | (62.1)% |
| Adjusted EBITDA | $68.2 million | $(16.0) million | $264.1 million | $(65.2) million |
| Adjusted EBITDA margin | 21.5% | (14.6)% | 27.5% | (20.4)% |
Q3 comparable store sales were 0.4% below Q3 2019 levels and 189.3% above Q3 2020. For the 39-week period, comparable store sales were approximately 88.0% of the comparable 2019 level. Amusement and other revenue represented 66.1% of Q3 revenue, while food and beverage revenue represented 33.9%.
Operating cash flow was $198.5 million for the first 39 weeks of fiscal 2021, compared with cash used in operations of $31.8 million in the prior-year period. Capital expenditures were $63.6 million, resulting in free cash flow of approximately $134.9 million before other financing considerations.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $27.0 million at October 31, 2021, compared with $11.9 million at January 31, 2021.
- Total debt outstanding was $495.0 million, consisting of $495.0 million of senior secured notes and no revolver borrowings; net debt on the balance sheet was $484.7 million after debt issuance costs.
- The company redeemed $55.0 million of notes on September 20, 2021, incurring a $1.65 million prepayment premium and a $1.18 million loss related to unamortized issuance costs.
- The revolving facility had $489.5 million of unused commitments and $10.5 million of letters of credit outstanding at October 31, 2021. Management reported approximately $340 million of available liquidity after the $150 million minimum liquidity requirement.
- On November 11, 2021, the company redeemed another $55.0 million of notes. At November 28, 2021, total debt was $463.0 million, including $440.0 million of notes and $23.0 million drawn on the revolver.
- On December 7, 2021, the company notified its credit facility agent that it was terminating the covenant suspension period.
- Dividends remained suspended and the prior share repurchase program had expired.
Material Changes Versus the Prior Comparable Period
- Revenue recovery was substantial as stores reopened and operating restrictions eased. Q3 revenue increased 191.6% year over year, while the 39-week increase was 200.6%; comparisons are heavily affected by COVID-19 closures and limited capacity in fiscal 2020.
- Profitability returned, with Q3 net income of $10.6 million versus a $48.0 million loss, and 39-week net income of $83.0 million versus a $150.2 million loss.
- Operating expense leverage improved materially, particularly occupancy, utilities, payroll as a percentage of revenue, and other store operating costs. The prior-year 39-week period included $13.7 million of long-lived asset impairment and lease termination costs; no comparable impairment was recorded in fiscal 2021.
- Interest expense increased to $42.0 million for the 39-week period from $22.5 million, primarily because of higher borrowing costs associated with the 7.625% senior secured notes and amended credit facility.
- The weighted-average interest rate on borrowings increased to 10.26% from 4.17%.
- General and administrative expenses included a $3.23 million severance obligation for the former chief executive officer, who left the position effective September 30, 2021. Kevin Sheehan became interim chief executive officer.
- The company incurred $2.83 million of debt extinguishment and refinancing losses during the 39-week period, compared with $0.9 million in the prior-year period.
Guidance, Outlook, Commentary and Risks
- Management expected fiscal 2021 capital additions of $95 million to $100 million, net of payments from landlords.
- Management stated that available measures and store reopenings provided sufficient liquidity for estimated cash flow needs and covenant compliance obligations for at least the next 12 months.
- COVID-19 variants, renewed government restrictions, vaccination or mask mandates, customer traffic, labor availability, and supply-chain disruptions remained significant uncertainties.
- Management cited labor shortages, higher hourly wages and retention incentives, food and amusement supply costs, freight costs, and potential minimum-wage increases as pressures on margins.
- The company faces litigation in California alleging wage-and-hour and related employment violations. Management believes ultimate liabilities will not materially affect consolidated results, but acknowledged that costs could be materially higher or lower than current estimates.
- The company disclosed that the OSHA vaccine mandate for employers with more than 100 employees could increase labor attrition, recruitment difficulty, operating costs, and supply-chain disruption. The mandate was subject to litigation and had been blocked by a federal appeals court as of the filing.
- The company’s interest-rate swaps have a combined notional amount of $350 million and were de-designated as hedges in 2020. The company remains exposed to commodity prices, labor costs, inflation, energy costs, and variable-rate debt.
Most Important Facts for Investors to Verify
- Whether post-pandemic comparable sales can remain at or above pre-pandemic levels without relying on unusually favorable amusement mix or reduced discounting.
- The sustainability of the reported Adjusted EBITDA margin, including the effect of labor shortages, wage inflation, food costs, freight, and supply-chain disruptions.
- Actual liquidity after the additional November 2021 debt redemption and the December 2021 termination of the covenant suspension period.
- Future interest expense and refinancing risk associated with the 7.625% notes due November 2025 and the amended revolving credit facility.
- The timing and amount of the approximately $57.4 million federal tax refund claims under the CARES Act.
- Potential financial exposure from California employment litigation, COVID-19-related restrictions, vaccine mandates, and other legal or regulatory requirements.
- Reconciliation of non-GAAP Adjusted EBITDA to GAAP results, including the $3.23 million former-CEO severance charge and other excluded costs.