Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume dining and entertainment venues in the United States and Canada under the Dave & Buster’s and Dave & Buster’s Grand Sports Café brands. The company reports one operating segment. The supplied filing is a Form 10-Q for the thirteen weeks ended May 3, 2015, compared with the thirteen weeks ended May 4, 2014; it does not correspond to 2014 Q1 as stated in the request metadata.
The company had 74 stores at May 3, 2015, after opening two stores during the quarter and closing its Farmingdale location. It had 60 comparable stores, compared with 57 in the prior-year period.
Key Financial Metrics
| Metric | Thirteen weeks ended May 3, 2015 | Thirteen weeks ended May 4, 2014 |
|---|---|---|
| Total revenue | $222.7 million | $194.8 million |
| Operating income | $35.7 million | $28.2 million |
| Operating margin | 16.1% | 14.5% |
| Net income | $19.5 million | $11.5 million |
| Net margin | 8.8% | 5.9% |
| Diluted EPS | $0.45 | $0.34 |
| Adjusted EBITDA | $61.9 million | $50.6 million |
| Adjusted EBITDA margin | 27.8% | 26.0% |
| Cash flow from operations | $51.7 million | $52.8 million |
| Capital expenditures | $36.8 million | $29.6 million |
- Food and beverage revenue was $103.6 million, while amusement and other revenue was $119.1 million.
- Comparable-store sales increased 9.9%; comparable walk-in revenue rose 10.5% and comparable special-events revenue rose 4.0%.
- Cash and cash equivalents totaled $90.1 million at May 3, 2015, compared with $70.9 million at February 1, 2015.
- Debt consisted of $430.0 million outstanding under the term loan, or $429.1 million net of discount. No revolver borrowings were outstanding, and letters of credit totaled $5.2 million.
- Working capital was $25.5 million, and borrowing availability under the existing facility was $44.8 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased $27.9 million, or 14.3%, driven by $17.1 million of comparable-store growth and $11.7 million from non-comparable stores, partly offset by $1.0 million of other items.
- Operating income increased 26.6%, and operating margin expanded 160 basis points to 16.1%. Other store operating expenses declined to 27.5% of revenue from 28.9%, reflecting operating leverage.
- Net income increased 70.6%, and diluted EPS rose to $0.45 from $0.34. Weighted average diluted shares increased to 43.6 million from 34.1 million.
- Interest expense declined $7.4 million to $4.7 million, primarily because of the 2014 debt refinancing. The effective tax rate increased to 37.2% from 29.3%, limiting the benefit of pre-tax earnings growth.
- Operating cash flow decreased modestly by $1.0 million despite higher earnings, while investing cash use increased $7.2 million because of new-store construction and other capital projects.
- Adjusted EBITDA increased 22.3%, and its margin improved 180 basis points. Store-level EBITDA margin increased to 31.4% from 30.0%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management planned to open three to four additional stores in fiscal 2015 and expected to spend $146 million to $156 million on capital additions, or $118 million to $128 million net of tenant-improvement allowances.
- The long-term expansion objective was approximately 10% annual store growth. Management also targeted an international partnership by the end of fiscal 2015 and an initial international opening outside Canada in 2016.
- On May 15, 2015, after quarter-end, the company refinanced its debt with a $150 million term loan and a $350 million revolving facility. Approximately $45.3 million of cash was used to pay down the new revolver and related costs. Management expected lower interest expense, with $105.8 million of borrowing availability after the refinancing.
- Management believed cash from operations, cash on hand, and the new revolver would be sufficient for foreseeable working-capital, capital-expenditure, and debt-service needs, but noted dependence on future operating performance and refinancing conditions.
- Key risks include consumer spending and economic conditions, food commodity prices, wage inflation, interest-rate movements on variable-rate debt, seasonality and weather, execution of new-store development, and the ability to pass cost increases through to customers.
- Operating lease commitments totaled $687.6 million, and debt, interest, and lease commitments totaled $1.216 billion under the pre-refinancing schedule.
- The company reported ordinary-course legal claims, including employment-related matters, but management did not expect them to materially affect financial condition or results. No material changes to previously disclosed risk factors were reported.
- Management identified significant estimates involving goodwill impairment, property lives, equity compensation, self-insurance, deferred amusement and gift-card revenue, ticket liabilities, taxes, and deferred-tax valuation allowances.
Investor Verification Points
- Verify the applicable reporting period: the filing is for Q1 fiscal 2015, ended May 3, 2015, rather than Q1 2014.
- Reconcile reported revenue growth with comparable-store sales, store openings, and the Farmingdale and Bethesda closures.
- Review the May 15, 2015 refinancing, including the new debt balances, mandatory amortization, interest-rate spreads, covenants, and actual revolver availability.
- Assess whether the improved margins and Adjusted EBITDA adequately reflect higher pre-opening costs, capital spending, and adjustments excluded from the non-GAAP measure.
- Evaluate liquidity against planned fiscal 2015 capital expenditures, lease commitments, variable-rate debt, and expected cash taxes.
- Review the effect of higher food, labor, energy, and occupancy costs and the company’s ability to offset them through pricing and productivity.