Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume entertainment and dining venues in North America under one operating segment. As of November 4, 2018, the Company operated 118 stores in 38 states, Puerto Rico and one Canadian province.
Period clarification: Although the request identifies “2017 Q3,” the supplied filing is the Form 10-Q for the thirteen and thirty-nine weeks ended November 4, 2018, with comparable periods ended October 29, 2017. Fiscal 2018 contains 52 weeks; fiscal 2017 contained 53 weeks.
Key Financial Metrics
| Metric | Thirteen weeks ended November 4, 2018 | Change versus 2017 | Thirty-nine weeks ended November 4, 2018 | Change versus 2017 |
|---|---|---|---|---|
| Total revenue | $282.1 million | +12.9% | $933.5 million | +11.8% |
| Operating income | $15.5 million; 5.5% margin | Down from $19.9 million; 8.0% | $120.0 million; 12.9% margin | Down from $123.3 million; 14.8% |
| Net income | $11.9 million; 4.2% margin | Down from $12.2 million; 4.9% | $87.8 million; 9.4% margin | Up from $85.3 million; 10.2% |
| Diluted EPS | $0.30 | Up from $0.29 | $2.18 | Up from $1.99 |
| Adjusted EBITDA | $52.7 million; 18.7% margin | Down from $54.1 million; 21.7% | $231.0 million; 24.7% margin | Up from $220.3 million; 26.4% |
| Net cash from operations | Not provided for the quarter | Not provided for the quarter | $237.0 million | Up from $201.1 million |
Food and beverage revenue was $118.8 million in the quarter and $388.8 million year to date. Amusement and other revenue was $163.3 million in the quarter and $544.7 million year to date.
Comparable-store sales declined 1.3% in the quarter and 3.0% year to date. Revenue growth was driven primarily by new stores: the Company opened 12 stores during the first 39 weeks, compared with nine in the prior-year period.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $19.7 million at November 4, 2018, versus $18.8 million at February 4, 2018.
- Total debt outstanding was $384.0 million, consisting of a $285.0 million term loan and $99.0 million drawn on the revolver. The stated weighted-average interest rate was 3.55%.
- Borrowing availability under the credit facility was $396.0 million, with $5.0 million of letters of credit outstanding. The Company was in compliance with its debt covenants.
- Capital expenditures were $163.7 million year to date, compared with $150.3 million in the prior-year period. The Company expects fiscal 2018 capital additions of $229 million to $239 million, or $179 million to $189 million net of landlord payments.
- Financing activities used $72.7 million of cash year to date, including $86.1 million of share repurchases and $5.8 million of dividends. Approximately $133.2 million remained under the $400 million repurchase authorization.
- Future operating lease payments totaled $1.76 billion, including $119.0 million due within one year.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially because of store expansion, but comparable-store sales declined amid increased competition and sales transfers to newly opened stores.
- Operating and adjusted EBITDA margins contracted. Payroll and benefits increased as a percentage of revenue because of approximately 5% hourly wage increases, additional amusement labor and weaker comparable-store leverage. Occupancy and other store costs also increased.
- Interest expense increased to $3.3 million in the quarter and $9.4 million year to date, primarily because of higher variable interest rates and higher average debt.
- The effective tax rate declined to 2.4% in the quarter and 20.6% year to date, primarily reflecting the Tax Cuts and Jobs Act and, in the quarter, higher excess tax benefits from share-based compensation.
- Year-to-date net income and diluted EPS increased despite lower operating margins, partly because of the lower tax rate and the absence of the prior-year $718,000 debt-refinancing loss.
- The Company repurchased 1.77 million shares year to date and had 4.35 million treasury shares at November 4, 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 15 new stores in fiscal 2018 and maintained a long-term objective of opening new stores at an annual rate of at least 10% of the existing store base.
- Management stated that cash from operations, existing cash and revolver availability should be sufficient for working capital, capital expenditures, debt service and planned share repurchases in the foreseeable future.
- Growth depends on new-store development, comparable-store sales and potential international expansion. Results are seasonal, with the third quarter historically weaker than the first and fourth quarters.
- Key risks include consumer spending and competition, food and commodity costs, wage and minimum-wage increases, occupancy costs, weather, construction costs and variable interest rates. A hypothetical 25-basis-point increase in one-month LIBOR was estimated to increase annualized interest expense by approximately $1.0 million.
- The Company recognized approximately $2.2 million of business-interruption insurance recoveries and approximately $540,000 of property insurance recoveries in the third quarter related to prior hurricanes. These items benefited reported store operating costs and asset-disposal results.
- An Employee Retirement Income Security Act litigation settlement remained subject to court approval. The Company had recorded a prior-year net charge of $2.55 million; no additional settlement liability was recorded in the current 39-week period.
- Operating lease accounting under ASC 842 was scheduled for adoption at the beginning of fiscal 2019. Management expected an insignificant income-statement impact but a material increase in reported assets and liabilities.
- No material changes to previously disclosed risk factors were reported. Disclosure controls and procedures were assessed as effective.
Most Important Facts to Verify
- Confirm that the intended filing period is fiscal 2018 third quarter, not fiscal 2017 third quarter, because the supplied Form 10-Q covers November 4, 2018.
- Assess whether continued comparable-store sales declines are offset by new-store growth and whether new-store economics remain attractive after the initial “honeymoon” period.
- Reconcile reported operating and adjusted EBITDA margin compression with labor, occupancy, commodity and other cost pressures.
- Review debt covenant headroom, variable-rate exposure, scheduled term-loan amortization and the sustainability of share repurchases and dividends.
- Evaluate the effect of ASC 842 lease capitalization, given $1.76 billion of undiscounted future operating lease commitments.
- Separate recurring operating performance from insurance recoveries, tax benefits, deferred amusement revenue recognition and other unusual items.