Dave & Buster's Entertainment, Inc. quarterly report, Q2 FY2021

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

Filing period: The supplied filing is for the 13 and 26 weeks ended August 1, 2021, representing fiscal 2021 second quarter and year-to-date results. The request metadata identifies “2020 Q2,” but the filing itself is a fiscal 2021 Q2 report comparing against August 2, 2020.

Business Context and Reporting Period

Dave & Buster’s operates entertainment and dining venues in North America as one operating and reportable segment.
As of August 1, 2021, the company owned and operated 142 stores in 40 states, Puerto Rico, and one Canadian province. All stores were open in some capacity at quarter-end.
The company opened two stores during fiscal 2021 and permanently closed two stores near the end of their leases. The comparable-store base comprised 114 stores.
Results remain materially affected by the COVID-19 pandemic, including prior-year closures and capacity restrictions, labor shortages, supply-chain disruptions, and potential effects from the Delta variant.

Financial Performance

Metric	13 Weeks Ended August 1, 2021	13 Weeks Ended August 2, 2020	26 Weeks Ended August 1, 2021	26 Weeks Ended August 2, 2020
Total revenue	$377.6 million	$50.8 million	$643.0 million	$210.6 million
Operating income (loss)	$79.2 million	$(81.1) million	$116.2 million	$(142.5) million
Net income (loss)	$52.8 million	$(58.6) million	$72.4 million	$(102.1) million
Basic EPS	$1.10	$(1.24)	$1.51	$(2.59)
Diluted EPS	$1.07	$(1.24)	$1.47	$(2.59)
Adjusted EBITDA	$119.2 million	$(38.5) million	$195.9 million	$(49.3) million

Quarterly revenue increased 642.9% year over year, primarily because the prior-year quarter included widespread temporary store closures and operating restrictions. Year-to-date revenue increased 205.3%.
Quarterly net margin was 14.0%, compared with negative 115.3% in the prior-year quarter. Year-to-date net margin was 11.3%, compared with negative 48.5%.
Adjusted EBITDA margin was 31.6% for the quarter and 30.5% year to date, compared with negative 75.7% and negative 23.4%, respectively, in the prior-year periods. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP earnings or operating cash flow.
Comparable-store sales increased 690.8% in the quarter and 199.1% year to date. Quarterly comparable sales were approximately 103.6% of the comparable fiscal 2019 level; year-to-date comparable sales were approximately 83.3% of the fiscal 2019 level.
Amusement revenue represented 67.4% of quarterly revenue and 67.5% of year-to-date revenue. Food and beverage revenue represented 32.6% and 32.5%, respectively.
Product costs improved to 15.3% of quarterly revenue and 15.2% year to date, compared with 17.1% and 17.4% in the prior-year periods. Payroll and benefits declined to 21.3% and 20.4% of revenue, respectively, from 27.1% and 27.3%.
Interest expense increased to $13.7 million for the quarter and $28.5 million year to date, principally because of higher borrowing costs following the issuance of senior secured notes and amendments to the credit facility.

Cash Flow, Liquidity, Debt, and Capital Allocation

Cash provided by operating activities was $198.1 million for the 26 weeks ended August 1, 2021, compared with cash used of $13.5 million in the prior-year period.
Investing cash outflow was $37.5 million, including $37.9 million of capital expenditures. Financing cash outflow was $64.7 million, including $97.0 million of debt repayments and $7.7 million of employee tax-related share withholding repurchases.
Cash and cash equivalents increased from $11.9 million at January 31, 2021 to $107.8 million at August 1, 2021.
Debt outstanding was $550.0 million, consisting of 7.625% senior secured notes due November 2025. The company had no revolver borrowings at quarter-end, compared with $60.0 million at January 31, 2021; net debt was $537.8 million after debt issuance costs.
The revolving facility has $500.0 million of commitments, with $489.5 million unused and $10.5 million of letters of credit outstanding at quarter-end. The company is subject to a minimum liquidity requirement of $150.0 million during the financial covenant suspension period.
Dividends remain indefinitely suspended, and the prior share repurchase program expired. The company expects fiscal 2021 capital additions of $95 million to $100 million, net of landlord payments.
Subsequent to quarter-end, the company announced its intention to redeem $55.0 million of notes before October 31, 2021. The redemption is expected to require a $1.65 million premium and approximately $1.2 million of additional debt extinguishment loss, while saving approximately $17 million of net cash interest over the remaining note term.

Material Changes Versus the Prior Comparable Period

Results shifted from substantial losses in fiscal 2020 to profitable operations as stores reopened and restrictions eased.
Store operating weeks increased from 628 to 1,817 in the quarter and from 1,461 to 3,450 year to date, making direct year-over-year comparisons heavily affected by the pandemic.
Payroll, occupancy, and utility costs benefited from revenue leverage, although wage rates, incentive compensation, labor shortages, and marketing spending increased.
No long-lived asset impairment or lease termination charge was recorded in the 26-week 2021 period, compared with $13.7 million in the prior-year period.
The weighted-average interest rate on outstanding borrowings increased to 10.17% from 3.98% year to date.
Stockholders’ equity increased to $229.9 million from $153.2 million at January 31, 2021, principally due to retained earnings.

Outlook, Risks, Contingencies, and Unusual Items

Management stated that available liquidity and store reopenings are expected to support estimated cash flow needs and covenant compliance obligations for at least the next twelve months.
Management did not provide formal revenue or earnings guidance in the supplied filing. The filing does provide expected fiscal 2021 capital additions of $95 million to $100 million, net of landlord payments.
Principal risks include renewed COVID-19 outbreaks, Delta-variant effects, capacity restrictions or reclosures, uncertain consumer traffic, labor shortages, wage inflation, food and beverage cost inflation, supply-chain disruption, and commodity-price volatility.
The company has executed 97 additional rent-relief agreements following 126 initial agreements. Deferred and modified lease obligations remain material, including $23.2 million of current deferred occupancy costs and $17.3 million of longer-term deferred occupancy costs.
The company expects approximately $57.4 million of federal tax refunds from fiscal 2020 carryback claims, with most proceeds expected in fiscal 2022 because of government processing delays.
California wage-and-hour and employment-related lawsuits remain outstanding. Management believes the ultimate liability will not materially affect consolidated results or financial condition, but disclosed estimates could change and ultimate costs may be higher or lower.
Interest-rate swaps with a $350 million notional amount mature August 17, 2022. The swaps were de-designated as hedges in fiscal 2020, and approximately $7.5 million of accumulated losses are expected to be reclassified into interest expense over the next twelve months.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.

Investor Verification Checklist

Verify the reporting period: the filing is fiscal 2021 Q2, not fiscal 2020 Q2.
Assess comparable-store sales and store-level profitability against pre-pandemic fiscal 2019 results, rather than relying solely on the unusually weak fiscal 2020 comparison.
Monitor COVID-19 restrictions, store reclosures, customer traffic, labor availability, and the sustainability of post-reopening sales.
Reconcile cash generation with deferred rent, lease obligations, capital spending, and the $150 million minimum-liquidity requirement.
Review the company’s ability to service and refinance the $550 million senior secured notes and the impact of the higher interest-rate structure.
Confirm completion and terms of the planned $55 million note redemption, including the premium and debt-extinguishment loss.
Track receipt and timing of the approximately $57.4 million federal tax refunds.
Review developments in the California employment litigation and the potential effect of labor, food, occupancy, and energy cost inflation.