Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2021. The filing compares results with the thirteen weeks ended May 3, 2020. Although the request identifies “2020 Q1,” the provided filing is the first quarter of fiscal 2021. Dave & Buster’s operated 141 stores in 40 states, Puerto Rico and one Canadian province, including one new store opened during the quarter.
Financial performance and position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $265.3 million | $159.8 million | +66.0% |
| Operating income (loss) | $37.0 million | $(61.4) million | Improved |
| Operating margin | 14.0% | (38.4)% | Improved |
| Net income (loss) | $19.6 million | $(43.5) million | Improved |
| Net margin | 7.4% | (27.2)% | Improved |
| Adjusted EBITDA | $76.7 million | $(10.8) million | Improved |
| Adjusted EBITDA margin | 28.9% | (6.7)% | Improved |
| Net cash from operating activities | $77.2 million | $16.8 million | +$60.4 million |
| Capital expenditures | $10.4 million | $55.2 million | Down $44.9 million |
Food and beverage revenue was $85.8 million, while amusement and other revenue was $179.6 million. Comparable store sales increased 56.5% year over year, but comparable sales and operating weeks were approximately 64.8% and 87.9%, respectively, of pre-pandemic levels from the comparable 2019 period.
Cash and cash equivalents were $20.2 million at May 2, 2021, compared with $11.9 million at January 31, 2021. Total debt outstanding was $550.0 million, consisting of senior secured notes; net debt was $537.1 million after debt issuance costs. The company had $489.5 million of unused revolving credit commitments and $10.5 million of outstanding letters of credit.
Total assets were $2.318 billion and stockholders’ equity was $178.6 million at May 2, 2021. Operating lease liabilities totaled $1.258 billion. The company paid no dividends and had no share repurchases under its repurchase plan during the quarter.
Material changes versus the prior comparable period
- Revenue benefited from substantially more stores and operating weeks being open. By quarter-end, 138 of 141 stores were operating in some capacity, compared with widespread closures during the prior-year quarter.
- The company returned to operating profitability, with operating income of $37.0 million versus an operating loss of $61.4 million.
- Cost of products declined to 15.0% of revenue from 17.6%, while operating payroll declined to 18.9% of revenue from 27.4%.
- Other store operating expenses declined despite higher activity, partly because the prior-year period included $11.5 million of impairment and lease termination costs.
- Interest expense increased to $14.8 million from $6.1 million, driven primarily by higher borrowing costs. The weighted-average interest rate increased to 10.15% from 3.59%.
- Operating cash flow increased to $77.2 million from $16.8 million, while capital spending decreased substantially as the company limited discretionary investment.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2021 capital additions of approximately $65 million to $70 million, net of landlord payments.
- The company stated that operating results would remain severely affected until capacity restrictions were lifted and dining rooms and midways could operate at full capacity.
- At quarter-end, the two Canadian stores remained closed to in-person customers, and one U.S. store had temporarily closed because of a local COVID-19 resurgence. Stores continued to use reduced hours, streamlined menus, fewer games, reduced seating and staffing, and enhanced health and safety protocols.
- COVID-19 created continuing risks related to re-closures, customer demand, consumer sentiment, supplier and labor costs, and the timing of a return to normal operations. Management stated that liquidity was sufficient to meet estimated needs and covenant obligations for at least the next twelve months.
- The company issued $550 million of 7.625% senior secured notes due November 2025 and amended its revolving facility. Financial covenant testing was suspended through the quarter ending May 1, 2022, subject to a minimum liquidity requirement of $150 million. The revolving facility matures August 17, 2024.
- Rent relief remained material: 126 initial agreements and 86 additional agreements had been executed. The company had delayed scheduled deferred rent payments at 11 locations and short-paid rent at four locations while continuing negotiations.
- The company expected approximately $57.4 million of cash tax refunds from CARES Act net operating loss carrybacks, although the ultimate amount could change based on legislative, judicial and tax developments.
- Interest rate swaps with a $350 million aggregate notional amount were de-designated as hedges in April 2020. The company expects to reclassify approximately $7.5 million of accumulated losses into interest expense over the next twelve months.
- Legal proceedings included California wage-and-hour and employment-related cases, some of which may be class or representative actions. Management stated that ultimate costs could differ materially from current estimates, although it did not believe the matters were expected to materially affect consolidated results or financial condition.
Important facts for investors to verify
- Whether sales and store-level margins can return to pre-pandemic levels as capacity restrictions are removed.
- The company’s ability to maintain the $150 million minimum liquidity requirement during the covenant suspension period.
- Cash requirements and repayment timing for deferred rent, operating lease obligations and other accrued liabilities.
- The sustainability of positive operating cash flow after COVID-related working-capital benefits and reduced capital spending normalize.
- Interest burden and refinancing risk associated with the 7.625% senior secured notes and amended revolving facility.
- The timing and actual amount of expected tax refunds, as well as potential changes in tax assumptions.
- Potential future impairment charges if customer demand, store closures or operating restrictions persist.
- Outcomes and settlement costs of the remaining California employment-related litigation.