Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume dining and entertainment venues in North America as one operating and reportable segment. As of May 3, 2020, it operated 137 stores in 39 states, Puerto Rico and one Canadian province. The filing covers the 13 weeks ended May 3, 2020, compared with the 13 weeks ended May 5, 2019. The filing metadata identifies “2019 Q1,” but the reported period is fiscal 2020 first quarter.
COVID-19 materially disrupted operations. All 137 stores were temporarily closed by March 20, 2020; only one store was open to the public with limited offerings at quarter-end, while two others provided limited off-premises dining.
Key Financial Metrics
| Metric | Q1 Fiscal 2020 | Q1 Fiscal 2019 | Change |
|---|---|---|---|
| Total revenue | $159.8 million | $363.6 million | Down 56.0% |
| Food and beverage revenue | $63.9 million | $148.2 million | Down 56.9% |
| Amusement and other revenue | $95.9 million | $215.4 million | Down 55.5% |
| Operating income (loss) | $(61.4) million | $57.8 million | Margin declined from 15.9% to (38.4)% |
| Net income (loss) | $(43.5) million | $42.4 million | Margin declined from 11.7% to (27.2)% |
| Diluted EPS | $(1.37) | $1.13 | Declined |
| Adjusted EBITDA | $(10.8) million | $98.2 million | Margin declined from 27.0% to (6.7)% |
| Net cash from operating activities | $16.8 million | $85.7 million | Down $68.9 million |
| Capital expenditures | $55.2 million | $67.2 million | Down $12.1 million |
Comparable store sales decreased 58.6%, reflecting a 77% reduction in comparable store operating weeks during the portion of the quarter affected by closures. Product costs were 17.6% of revenue versus 17.0% in the prior-year quarter. Operating payroll and benefits were 27.4% of revenue versus 22.8%, while other store operating expenses increased to 59.8% of revenue from 29.2% because fixed costs were spread over substantially lower sales and included impairment charges.
Cash and cash equivalents were $156.8 million at May 3, 2020, compared with $24.7 million at February 2, 2020. Total debt outstanding was $751.5 million, including $262.5 million of term debt and $489.0 million drawn on the revolver. Only $0.9 million of net revolving availability remained after outstanding letters of credit. Stockholders’ equity was $192.6 million.
Material Changes Versus the Prior Comparable Period
- Revenue fell $203.8 million because nearly all stores were closed for most of the quarter.
- The Company moved from operating profit of $57.8 million to an operating loss of $61.4 million and from net income of $42.4 million to a net loss of $43.5 million.
- Depreciation and amortization increased 13.5% to $35.4 million, while interest expense increased 50.8% to $6.1 million because of higher average debt.
- The Company recorded $11.5 million of long-lived asset impairment, including $6.7 million primarily related to store property and operating lease assets, and $4.8 million of impairment and contract termination costs related to abandoned or delayed development projects.
- Debt increased by $103.3 million during the quarter as the Company drew substantially all remaining revolver availability. Financing cash flow was $170.5 million, including $138.0 million of debt proceeds and $72.1 million of net common-stock issuance proceeds.
- Share repurchases and dividends were suspended. The Company issued 6.15 million shares on April 14, 2020 for $75.0 million before offering expenses.
- The Company opened one store in Chattanooga on March 16, 2020, then halted planned openings and delayed or abandoned construction and other development projects.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a full-year fiscal 2020 outlook because of uncertainty regarding reopening timing, capacity restrictions, customer demand and possible renewed closures. Through June 4, 2020, 28 stores had reopened in limited form across 12 states; the remaining stores were closed. Reopened stores operated with reduced menus, games, seating, hours and capacity, with expected labor inefficiencies and higher cleaning and supply costs.
The financial statements include a going-concern disclosure. Management stated that COVID-19 conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from issuance of the financial statements and to meet obligations when due. The Company furloughed most employees, reduced compensation, curtailed capital spending, negotiated rent and vendor relief, drew its revolver and pursued additional financing.
On April 14, 2020, the credit facility was amended to suspend financial covenant compliance through November 1, 2020, subject to a $30.0 million minimum liquidity covenant and additional reporting requirements. Pricing increased to LIBOR plus 2.00%, with a 1.00% LIBOR floor. A covenant failure or other default could permit acceleration of debt, termination of revolver commitments, cash collateral requirements for letters of credit and acceleration of interest-rate swap obligations. Management noted that failure to obtain further waivers could result in a Chapter 11 restructuring.
Subsequent to quarter-end, the Company issued additional common stock generating approximately $110.6 million before offering expenses. Rent deferral agreements increased from four during the quarter to 46 through June 4, 2020. The Company also ceased hedge accounting for its interest-rate swaps effective April 14, 2020 and expects to reclassify approximately $7.5 million from accumulated other comprehensive loss into interest expense over the following twelve months.
Other risks include prolonged or renewed government restrictions, reduced consumer demand, access to additional financing, high leverage, lease and rent obligations, commodity and labor cost inflation, variable interest rates and pending California wage-and-hour litigation. Management could not estimate the reasonably possible loss for certain California cases.
Investor Verification Checklist
- Verify the pace and economics of store reopenings, including capacity limits, sales recovery and customer demand.
- Review liquidity, minimum liquidity compliance, revolver availability, debt maturities and the status of covenant waivers or amendments.
- Assess whether subsequent equity proceeds and rent deferrals are sufficient to address operating cash needs and lease obligations.
- Monitor additional impairment charges, development cancellations and potential goodwill or tradename impairment.
- Reconcile future interest expense to the amended credit facility, LIBOR floor and de-designated interest-rate swaps.
- Track the outcome and potential exposure from California employment litigation and other legal proceedings.
- Confirm the effect of suspended dividends and share repurchases on capital allocation and share count.