Dave & Buster’s Entertainment, Inc. — Form 10-K Summary
Reporting period: The supplied filing is the annual report for the 52-week fiscal year ended January 29, 2017 (fiscal 2016), not 2015 Q4. Fiscal 2015 ended January 31, 2016. The company operated 92 entertainment and dining stores in 33 states and Ontario, including 11 stores opened during fiscal 2016.
Business Context
Dave & Buster’s combines food, beverages, arcade and redemption games, and sports viewing under its “Eat Drink Play and Watch” concept. Amusement and other revenue represented 55.0% of fiscal 2016 revenue, while food and beverage represented 45.0%. The company operated as one reportable segment.
Key Financial Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $1,005.2 million | $867.0 million | 15.9% increase |
| Operating income | $150.5 million | $110.0 million | 36.8% increase |
| Operating margin | 15.0% | 12.7% | 230 basis-point increase |
| Net income | $90.8 million | $59.6 million | 52.3% increase |
| Diluted EPS | $2.10 | $1.39 | 51.1% increase |
| Adjusted EBITDA | $261.5 million | $207.8 million | 25.8% increase |
| Adjusted EBITDA margin | 26.0% | 24.0% | 200 basis-point increase |
| Cash flow from operations | $231.3 million | $187.0 million | 23.7% increase |
| Capital expenditures | $180.6 million | $162.9 million | 10.9% increase |
Comparable-store sales increased 3.3%, versus 8.9% in fiscal 2015. Comparable amusement revenue increased 6.5%, while comparable food and beverage revenue declined 0.3%. Store Operating Income Before Depreciation and Amortization margin increased to 30.7% from 29.3%.
Debt, Liquidity, and Capital Allocation
- Cash and cash equivalents were $20.1 million at January 29, 2017, compared with $25.5 million a year earlier.
- Total debt outstanding was $264.8 million, consisting of $138.8 million under the term loan and $126.0 million under the revolver. Net debt was reported at $264.1 million.
- The credit facility matures May 15, 2020 and had $219.0 million of borrowing availability, with $5.0 million of letters of credit outstanding.
- The company had a $102.2 million working-capital deficit, but stated that cash is generally collected before operating liabilities become due.
- Fiscal 2016 financing cash outflows included $73.5 million of net debt repayment and $28.8 million of share repurchases. The company repurchased 566,756 shares during the year under a $100 million authorization.
- Contractual obligations included $264.8 million of debt principal, $19.2 million of estimated debt interest, and approximately $1.125 billion of operating lease commitments.
Material Changes Versus Fiscal 2015
- Revenue growth was driven primarily by 11 new stores and 532 additional operating store weeks from non-comparable stores, with non-comparable revenue increasing 106.8%.
- Product costs improved to 17.9% of revenue from 18.8%, helped by lower food commodity costs and reduced paper-ticket costs from the e-ticket initiative.
- Operating payroll declined to 22.8% of revenue from 23.1%, and general and administrative expense declined to 5.4% from 6.2% due to revenue leverage.
- Interest expense declined to $7.0 million from $11.5 million following the May 2015 refinancing and lower debt balances. Fiscal 2015 also included a $6.8 million loss on debt retirement that did not recur.
- Capital spending increased, including $135.5 million for new stores, $20.9 million for operating initiatives and remodels, $19.8 million for games, and $16.0 million for maintenance capital.
- The company completed six store remodels and added D&B Sports branding to three additional stores. Approximately 85% of stores had the newer design at year-end.
Outlook, Commentary, and Unusual Items
- Management anticipated opening 11 to 12 additional stores in fiscal 2017, with four expected to open in the first quarter.
- Fiscal 2017 capital additions were expected to total $190 million to $200 million, or $156 million to $166 million net of tenant-improvement allowances. Planned spending included new-store construction, four remodels, game refreshment, and maintenance capital.
- The company stated that operating cash flow, existing cash, and revolver availability should be sufficient for anticipated working capital, capital expenditures, debt service, and share repurchases in the foreseeable future.
- Management was assessing international expansion and had signed a seven-store franchise agreement covering six Middle Eastern countries, targeting the first opening outside Canada in 2018.
- Results are seasonal, with generally higher first- and fourth-quarter revenue and lower third-quarter revenue. Weather, holiday timing, and new-store opening dates can materially affect quarterly performance.
- The business is exposed to discretionary consumer spending, competition, food and labor inflation, minimum-wage increases, supply-chain constraints, liquor and amusement regulation, food-safety incidents, cybersecurity risks, and long-term lease obligations.
- All stores were leased. Future operating lease commitments were approximately $1.125 billion, and the company expects adoption of lease accounting standards to materially increase reported assets and liabilities.
- No material off-balance-sheet arrangements or material adverse legal proceedings were reported. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm that the intended period is fiscal 2016 ended January 29, 2017 rather than 2015 Q4.
- Reconcile revenue and profit growth with the 11-store expansion and the lower 3.3% comparable-store sales growth.
- Assess whether amusement-led growth can continue while comparable food and beverage sales remain soft.
- Review the company’s ability to fund planned capital spending, debt repayment, lease commitments, and share repurchases from operating cash flow.
- Monitor variable-rate debt exposure, including the estimated impact of a 25-basis-point LIBOR increase of approximately $0.6 million on annual interest expense.
- Evaluate the assumptions supporting new-store cash-on-cash return targets, impairment testing, Power Card revenue recognition, ticket liabilities, gift-card breakage, and self-insurance reserves.