Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The supplied filing covers the thirteen weeks ended May 5, 2019, compared with the thirteen weeks ended May 6, 2018. The request metadata identifies “2018 Q1,” but the filing is for fiscal first quarter 2019.
Business Context and Reporting Period
Dave & Buster’s operates high-volume entertainment and dining venues in North America under one operating and reportable segment. During the quarter, the Company opened seven stores and permanently closed one store in Duluth, Georgia. It operated 127 stores in 39 states, Puerto Rico and one Canadian province as of May 5, 2019.
Financial Performance and Liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $363.6 million | $332.2 million | Up 9.5% |
| Operating income | $57.8 million | $58.6 million | Down 1.5% |
| Operating margin | 15.9% | 17.6% | Down 170 bps |
| Net income | $42.4 million | $42.2 million | Up 0.7% |
| Net margin | 11.7% | 12.7% | Down 100 bps |
| Diluted EPS | $1.13 | $1.04 | Up $0.09 |
| Adjusted EBITDA | $98.2 million | $95.9 million | Up 2.4% |
| Adjusted EBITDA margin | 27.0% | 28.9% | Down 190 bps |
| Net cash from operating activities | $85.7 million | $98.9 million | Down $13.2 million |
| Capital expenditures | $67.2 million | $61.4 million | Up $5.9 million |
Food and beverage revenue increased 6.1% to $148.2 million, while amusement and other revenue increased 11.9% to $215.4 million. Comparable-store sales declined 0.3%; revenue growth was primarily driven by new stores.
Cash and cash equivalents were $20.4 million at May 5, 2019. The Company reported a net working capital deficit of $186.1 million but stated that its cash flows, cash balance, available revolver capacity and landlord payments should support operations, capital expenditures, dividends, share repurchases and debt payments for at least the next twelve months.
Total debt outstanding was $443.5 million, consisting of $277.5 million under the term loan and $166.0 million under the revolver. Net borrowing availability was $327.4 million after $6.6 million of letters of credit. The credit facility matures in August 2022, and the Company was in compliance with its covenants. The weighted-average interest rate was 4.17%.
Operating lease right-of-use assets were $879.6 million and operating lease liabilities were $1.074 billion at quarter-end, following adoption of the new lease accounting standard. The adoption produced a $145,000 after-tax reduction to opening retained earnings and did not materially affect operating results or cash flows.
Material Changes Versus the Prior Comparable Period
- Revenue growth was largely attributable to 196 additional operating store-weeks from non-comparable stores; comparable-store revenue declined $0.9 million.
- Operating payroll and benefits increased 13.7%, partly due to approximately 5% hourly wage-rate increases, new-store labor and virtual-reality staffing.
- Other store operating expenses increased 13.8%, reflecting new-store occupancy costs, sports-viewing costs and the absence of prior-year hurricane-related business interruption proceeds.
- Interest expense increased 42.0% to $4.1 million because of higher average debt and interest rates.
- The effective tax rate declined to 21.0% from 24.4%, reflecting higher excess tax benefits, tax credits and changes in the mix of jurisdictional earnings.
- Operating cash flow declined despite slightly higher net income, primarily because of working-capital changes.
- The Company repurchased approximately 1.29 million shares for $63.5 million during the quarter and paid $5.5 million in dividends. Approximately $206.7 million remained under the $600 million repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
Management expects to open 15 to 16 new stores in fiscal 2019 and maintains a long-term objective of opening new stores at an annual rate of at least 10% of the existing store base. Fiscal 2019 capital additions are expected to be $231 million to $241 million, or $190 million to $200 million net of landlord payments, including approximately $184 million to $194 million for new-store construction and operating initiatives.
Management cited unfavorable holiday and school-break timing, increased competition and sales transfers to new stores as factors affecting comparable-store sales. It also identified food, labor, energy, occupancy, construction and minimum-wage inflation as continuing cost risks.
The Company uses interest-rate swaps with a $350 million notional amount to manage variable-rate debt exposure. The swaps had a fair-value liability of $3.5 million at quarter-end, and changes in fair value reduced other comprehensive income by $2.5 million, net of tax.
Legal proceedings arise in the ordinary course of business. A previously recorded ERISA settlement remains subject to final court approval; management stated that ultimate liabilities from legal proceedings are not expected to materially affect financial condition or results, although the actual settlement payment could differ from the estimate.
No impairment charges were recognized during the quarter. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Confirm the reporting-period mismatch: the filing is fiscal Q1 2019, not Q1 2018.
- Assess whether new-store expansion can offset flat or declining comparable-store sales and margin pressure.
- Monitor labor, food, occupancy and construction costs, particularly minimum-wage and commodity-price exposure.
- Review debt covenant compliance, revolver availability, variable-rate exposure and the August 2022 maturity.
- Evaluate the cash requirements of planned capital expenditures, dividends and share repurchases relative to operating cash flow.
- Consider the scale and duration of operating lease commitments, including $1.123 billion of discounted lease liabilities and approximately $689.2 million of implied interest.
- Verify the final outcome and cash cost of the ERISA settlement and any other ordinary-course litigation.