Dave & Buster’s Entertainment, Inc. — Form 10-K Summary
Filing and period: Annual report filed April 2, 2019, covering the 52-week fiscal year ended February 3, 2019 (“fiscal 2018”). The requested metadata states “2017 Q4,” but the supplied filing is a fiscal 2018 Form 10-K; fiscal 2017 ended February 4, 2018 and contained 53 weeks.
Business context
Dave & Buster’s operates high-volume entertainment and dining venues combining food, beverages, games and sports viewing. At fiscal year-end, the Company operated 121 stores in 39 states, Puerto Rico and Ontario, Canada. It opened 15 stores during fiscal 2018, including two new 17K-format locations. A Georgia store closed on March 3, 2019.
- Amusement and other revenue represented 57.6% of fiscal 2018 revenue; food and beverage represented 42.4%.
- Food represented approximately 28.9% of total revenue, beverages 13.5%, amusement 56.8% and other sources 0.8%.
- The Company operates as one reportable segment.
Financial performance and liquidity
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Total revenue | $1,265.3 million | $1,139.8 million | Up 11.0% |
| Operating income | $161.0 million | $165.8 million | Down 2.9% |
| Operating margin | 12.7% | 14.5% | Down 180 bps |
| Net income | $117.2 million | $120.9 million | Down 3.1% |
| Diluted EPS | $2.93 | $2.84 | Up 3.2% |
| Adjusted EBITDA | $311.1 million | $302.7 million | Up 2.8% |
| Adjusted EBITDA margin | 24.6% | 26.6% | Down 200 bps |
| Cash flow from operations | $337.6 million | $264.7 million | Up $72.9 million |
| Capital expenditures | $216.3 million | $219.9 million | Down $3.6 million |
Comparable store sales declined 1.6% on a comparable 52-week basis, primarily due to lower customer volumes, competitive pressure and sales transfers to newer stores. Comparable food and beverage sales declined, while comparable amusement revenue was approximately flat.
Cash and cash equivalents were $21.6 million, compared with $18.8 million at the prior year-end. Working capital was negative $153.3 million. Management states that the negative working capital model is supported by collecting customer cash before payment of many operating liabilities.
Total debt outstanding was $394.3 million, consisting of a $281.3 million term loan and $113.0 million revolver borrowings. The Company had $381.0 million of borrowing availability, subject to approximately $5.0 million of outstanding letters of credit, and was in compliance with its credit-facility covenants. Net interest expense increased to $13.1 million from $8.7 million due to higher debt and variable interest rates.
Material changes versus the prior comparable period
- Revenue growth was driven principally by 15 new store openings and additional non-comparable store weeks; fiscal 2018 had one fewer week than fiscal 2017.
- Operating margin declined because of occupancy pressure from newer stores and higher operating payroll and benefits. Payroll and benefits increased to 23.5% of revenue from 22.5%, reflecting wage inflation, additional labor for the virtual reality platform and higher benefits.
- Other store operating expenses increased to 30.4% of revenue from 29.4%, primarily due to occupancy costs and new-store expenses.
- General and administrative expense improved to 4.9% of revenue from 5.2%, benefiting from revenue leverage and the absence of a prior-year $2.6 million litigation settlement charge.
- The effective tax rate decreased to 20.7% from 22.7%, principally reflecting the lower federal statutory rate under the Tax Cuts and Jobs Act, partly offset by lower excess share-based compensation tax benefits and higher state taxes.
- The Company repurchased approximately $149.1 million of stock, or 3.1 million shares, and paid $11.6 million in dividends. Approximately $70.1 million remained under the $400 million repurchase authorization at year-end; an additional $200 million was authorized on April 2, 2019.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2019 capital additions of $231 million to $241 million, or $190 million to $200 million net of landlord payments, including approximately $184 million to $194 million for new stores and operating initiatives.
- The Company expected to continue opening stores at an annual rate of 10% or more of the existing store base and believed the brand had potential for more than 230 stores in the United States and Canada.
- Management stated that operating cash flow, cash balances and revolving-credit availability should be sufficient for anticipated working capital, capital expenditures, debt service and share repurchases in the foreseeable future.
- Future results remain exposed to comparable-store sales, discretionary consumer spending, competition, seasonality, weather, wage and benefit inflation, food and commodity costs, occupancy costs, interest rates and the timing and performance of new stores.
- The Company has substantial lease commitments: approximately $1.8 billion of operating lease obligations, including renewal periods considered reasonably assured. Adoption of the new lease standard in fiscal 2019 was expected to add approximately $1.05 billion to $1.175 billion of operating lease liabilities and $825 million to $925 million of right-of-use assets.
- The Company disclosed a pending employment-related litigation settlement with estimated net costs previously recorded at $2.6 million; final settlement payments could vary based on court approval and the claims process.
- Fiscal 2018 included approximately $3.1 million of business-interruption insurance recoveries and approximately $0.5 million of property insurance recoveries related to prior-year hurricanes.
- Amusement revenue depends partly on estimates of future use of unused game credits and redemption tickets. A hypothetical 10% increase in estimated future game-credit utilization would have reduced revenue by approximately $7 million.
- Subsequent to year-end, the Company entered into a $350 million interest-rate swap effective February 28, 2019, converting floating-rate exposure to a fixed 2.5% rate plus the applicable spread through the credit facility term.
Investor verification checklist
- Confirm the requested period: the supplied filing is fiscal 2018, not fiscal 2017 Q4.
- Assess whether negative comparable-store sales and lower customer volumes persist as the store base expands.
- Evaluate the effect of wage inflation, occupancy costs and commodity prices on store and consolidated margins.
- Review new-store returns against management’s targeted cash-on-cash returns and monitor potential sales cannibalization.
- Reconcile debt maturities, variable-rate exposure, interest-rate-swap terms and credit-facility covenants.
- Analyze the cash demands of the repurchase program, dividends, capital expenditures and long-term lease obligations.
- Review the fiscal 2019 adoption impact of the lease accounting standard on leverage, assets, liabilities and covenant calculations.
- Monitor litigation settlement approval, insurance recoveries, gift-card and unused Power Card liabilities, and applicable state abandoned-property laws.