Dave & Buster's Entertainment, Inc. quarterly report, Q2 FY2019

Business Context and Reporting Period

Dave & Buster’s Entertainment, Inc. operates high-volume entertainment and dining venues in North America as a single reportable segment. This Form 10-Q covers the 13 weeks and 26 weeks ended August 4, 2019, compared with the corresponding periods ended August 5, 2018. The supplied metadata identifies “2018 Q2,” but the filing is the fiscal 2019 second-quarter report.

As of August 4, 2019, the Company operated 130 stores in 39 states, Puerto Rico and one Canadian province.
Ten stores opened during the first 26 weeks of fiscal 2019, while one store in Duluth, Georgia, permanently closed.
The comparable-store base was 99 stores, versus 86 in the prior-year period.

Financial Results and Key Metrics

Metric	13 Weeks Ended August 4, 2019	13 Weeks Ended August 5, 2018	26 Weeks Ended August 4, 2019	26 Weeks Ended August 5, 2018
Total revenue	$344.6 million	$319.2 million	$708.2 million	$651.4 million
Operating income	$46.2 million	$45.9 million	$104.0 million	$104.5 million
Net income	$32.4 million	$33.8 million	$74.8 million	$75.9 million
Diluted EPS	$0.90	$0.84	$2.03	$1.88
Net cash from operations	Not separately disclosed	Not separately disclosed	$156.7 million	$184.9 million
Adjusted EBITDA	$86.0 million	$82.4 million	$184.2 million	$178.3 million

Second-quarter revenue increased 8.0%, driven primarily by non-comparable stores; comparable-store revenue declined 1.8%.
First-half revenue increased 8.7%, while comparable-store revenue declined 1.0%.
Second-quarter operating margin decreased to 13.4% from 14.4%; first-half operating margin decreased to 14.7% from 16.0%.
Second-quarter net margin decreased to 9.4% from 10.6%; first-half net margin decreased to 10.6% from 11.7%.
Second-quarter Adjusted EBITDA margin was 25.0%, compared with 25.8%; first-half margin was 26.0%, compared with 27.4%.
Interest expense increased to $4.6 million in the quarter and $8.7 million in the first half, primarily due to higher average debt and interest rates.

Cash Flow, Debt and Liquidity

Cash and cash equivalents were $23.3 million at August 4, 2019, compared with $21.6 million at February 3, 2019.
First-half operating cash flow was $156.7 million, down $28.2 million year over year, primarily because of working-capital changes.
Capital expenditures were $117.9 million, compared with $116.6 million in the prior-year period. Cash used in investing activities was $117.5 million.
Total debt outstanding was $567.8 million, consisting of $273.8 million of term debt and $294.0 million drawn on the revolver. Net long-term debt was $552.1 million.
Revolver availability was $197.9 million after considering the outstanding revolver balance and $8.1 million of letters of credit. The credit facility matures in August 2022.
The weighted-average interest rate on borrowings was 4.11%, including the effect of interest-rate swaps. The Company had $350 million of swap notional exposure.
The Company reported compliance with its debt covenants and stated that cash, operating cash flow, available borrowings and expected landlord payments should fund operations, capital expenditures, dividends, repurchases and debt payments for at least the next twelve months.
Net working capital was negative $178.4 million, which management attributes to receiving customer cash before related operating liabilities become due.

Material Changes Versus the Prior Comparable Period

Revenue growth came from 31 non-comparable stores, which contributed $29.6 million of incremental second-quarter revenue and $62.2 million during the first half. Comparable-store revenue declined because of competitive pressure, calendar effects and sales transfers to new stores.
Food and beverage cost ratios worsened, while amusement cost ratios improved. Payroll and other store operating expenses increased as a percentage of revenue because of wage increases, new-store inefficiencies, higher occupancy costs and lower comparable-store sales leverage.
Interest expense increased materially, while net income declined despite higher revenue and Adjusted EBITDA.
The Company repurchased 4.7 million shares for approximately $200.1 million during the first half and declared and paid $10.8 million of dividends. Approximately $270.0 million remained under the $800.0 million repurchase authorization at period end.
Adoption of ASC 842 lease accounting created $924.5 million of operating lease right-of-use assets and $1.1 billion of operating lease liabilities at August 4, 2019. The adoption reduced opening retained earnings by $145,000 and had no significant reported impact on operating results or cash flow.

Guidance, Outlook, Commentary and Risks

Management expected to open 15 to 16 new stores during fiscal 2019 and had opened ten through the first half.
Fiscal 2019 capital additions were expected to be $242 million to $252 million, or $200 million to $210 million net of landlord payments.
Planned initiatives included store revitalization, deployment of “Wow Walls” in 35 stores during the third quarter, a nationwide mobile-app launch, enhanced data analytics, cost reductions and continued investment in new stores.
Management identified competitive pressure, consumer spending, seasonality, weather, food and commodity costs, tariffs, wage and minimum-wage increases, occupancy costs and interest-rate changes as principal operating risks.
The Company uses interest-rate swaps to mitigate variable-rate debt exposure but does not hedge commodity-price risk.
California employment-related lawsuits, including potential class and representative actions, remain outstanding. Management stated that losses are reasonably possible but not probable and that it cannot estimate the potential loss range.
The Company disclosed ordinary-course legal claims and stated that they are not expected to materially affect financial condition or results of operations. The final approval of an ERISA settlement occurred on July 19, 2019; required funds were remitted after the quarter ended.
No material changes to previously disclosed risk factors were reported.

Important Facts for Investors to Verify

Confirm the reporting-period discrepancy: the filing is for fiscal 2019 second quarter, not 2018 second quarter.
Assess whether continued new-store growth is offsetting negative comparable-store sales and whether comparable-store trends improve after planned revitalization initiatives.
Monitor operating-margin pressure from wages, occupancy, food costs, tariffs, legal expenses and new-store inefficiencies.
Evaluate leverage, revolver utilization, interest-rate exposure and covenant headroom as share repurchases and capital expenditures continue.
Reconcile the effect of ASC 842 lease liabilities and the Company’s substantial long-term lease commitments on liquidity and valuation.
Track developments in the California employment litigation and any resulting loss estimates or settlements.