Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 26 weeks ended July 31, 2016, compared with August 2, 2015. Although the request metadata states “2015 Q2,” the filing itself is the second quarter of fiscal 2016. The company operated 86 stores across 32 states and Canada at quarter-end and opened a Las Vegas location on August 8, 2016.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | 26 weeks FY2016 | 26 weeks FY2015 |
|---|---|---|---|---|
| Total revenue | $244.3 million | $217.3 million | $506.3 million | $440.0 million |
| Operating income | $36.0 million | $26.8 million | $87.2 million | $62.5 million |
| Net income | $21.5 million | $12.6 million | $52.7 million | $32.1 million |
| Diluted EPS | $0.50 | $0.29 | $1.22 | $0.76 |
| Net cash from operations | Not separately provided | Not separately provided | $121.7 million | $85.5 million |
| Adjusted EBITDA | $64.2 million | $52.7 million | $143.7 million | $114.6 million |
Q2 revenue increased 12.4%, while 26-week revenue increased 15.1%. Q2 operating margin improved to 14.7% from 12.3%, and net margin improved to 8.8% from 5.8%. The 26-week operating margin increased to 17.2% from 14.2%, and net margin increased to 10.4% from 7.3%.
- Q2 food and beverage revenue was $107.7 million; amusement and other revenue was $136.7 million.
- Comparable-store sales increased 1.0% in Q2 and 2.3% for the first 26 weeks. Growth was driven primarily by amusement sales; comparable food and beverage sales declined.
- Q2 Adjusted EBITDA margin improved to 26.3% from 24.2%; 26-week margin improved to 28.4% from 26.0%.
- Capital expenditures were $84.8 million in the first 26 weeks, compared with $78.0 million in the prior-year period.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $23.3 million at July 31, 2016, compared with $25.5 million at January 31, 2016.
- Total debt outstanding was $290.5 million, consisting of $142.5 million under the term loan and $148.0 million under the revolver. Net long-term debt was $282.3 million.
- The company had $196.984 million of borrowing availability under its credit facility and $5.016 million of outstanding letters of credit.
- The credit facility matures May 15, 2020 and bears variable interest. The stated weighted-average rate was 1.99%; the effective rate was 2.54%. The company was in compliance with its covenants.
- Operating cash flow of $121.7 million exceeded investing cash outflow of $84.0 million and financing cash outflow of $40.0 million, resulting in a $2.2 million decrease in cash.
- The company authorized up to $100 million of share repurchases through the end of fiscal 2018 and repurchased 38,394 shares for $1.831 million during the quarter.
Material changes versus the prior comparable period
- Revenue growth was substantially driven by new stores: non-comparable-store revenue increased $24.7 million in Q2 and $55.8 million year to date. The company opened five stores in the first 26 weeks, compared with four in the prior-year period.
- Comparable-store sales growth moderated materially from 11.0% to 1.0% in Q2 and from 10.4% to 2.3% year to date.
- Product costs improved as a percentage of revenue, from 18.8% to 18.1% in Q2 and from 19.0% to 17.8% year to date, reflecting lower food commodity costs and reduced paper-ticket costs.
- Interest expense declined because of the May 2015 refinancing, lower debt balances, and lower rates. The prior-year periods included a $6.822 million debt-retirement loss that did not recur.
- The effective tax rate increased to 36.9% in Q2 and 36.7% year to date, primarily because of state taxes and reduced FICA Tip Credit benefits.
Outlook, risks, contingencies, and unusual items
- Management planned five to six new stores in fiscal 2016, with a long-term objective of opening stores at an annual rate of at least 10% of the existing store base.
- Fiscal 2016 capital additions were expected to total $172 million to $184 million, or $130 million to $140 million net of tenant-improvement allowances and other landlord payments.
- Management expected short-term liquidity needs to include $130 million to $140 million of capital additions, $13.267 million of scheduled debt service, $80.616 million of lease payments, and approximately $47 million of cash income-tax payments.
- Management believed operating cash flow, cash balances, and revolver availability would be sufficient for foreseeable needs, but noted dependence on future operating performance and economic and competitive conditions.
- Key risks include consumer spending and traffic, seasonality, food commodity prices, wage and benefit inflation, variable interest rates, construction and new-store execution, and the substantial operating lease commitment of $1.018 billion.
- A 25-basis-point increase in one-month LIBOR was estimated to increase annualized interest expense by approximately $0.750 million, assuming no change in revolving debt.
- Legal claims arise in the ordinary course, including employment-related matters; management did not expect them to materially affect results or financial condition.
- The company disclosed no material changes to previously reported risk factors and concluded that disclosure controls and procedures were effective.
Investor verification points
- Reconcile the filing period to the request metadata: the document is fiscal 2016 Q2, not fiscal 2015 Q2.
- Assess whether modest comparable-store growth, particularly declining comparable food and beverage sales, can improve beyond the benefit from new-store openings.
- Verify execution of the planned five to six fiscal 2016 openings, the Las Vegas opening, and the pipeline of future sites.
- Monitor debt reduction, revolver utilization, covenant compliance, and exposure to LIBOR increases.
- Evaluate whether planned capital expenditures and share repurchases remain compatible with liquidity and lease obligations.
- Consider the effect of higher tax rates, wage increases, commodity prices, seasonality, and the upcoming lease-accounting standard on future reported results.