Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Filing-period clarification: The provided filing is for the quarterly period ended October 30, 2016, representing fiscal 2016 third quarter and year-to-date results through 39 weeks. It is not a 2015 Q3 filing; the comparable prior period ended November 1, 2015.
Business Context and Reporting Period
Dave & Buster’s operates high-volume entertainment and dining venues in North America. As of October 30, 2016, the Company owned and operated 88 stores in 33 states and one Canadian province, compared with 77 stores at the end of the comparable prior-year period. Management expected to open four additional stores in the fourth quarter and anticipated 11 new-store openings for fiscal 2016.
The Company’s fiscal year consists of 52 or 53 weeks, with 13-week quarters. The filing presents both the 13 weeks ended October 30, 2016 and the 39 weeks ended October 30, 2016, compared with the corresponding periods ended November 1, 2015.
Key Financial Metrics
| Metric | Q3 FY2016 | Q3 FY2015 | 39 Weeks FY2016 | 39 Weeks FY2015 |
|---|---|---|---|---|
| Total revenue | $228.7 million | $192.8 million | $735.0 million | $632.8 million |
| Operating income | $18.7 million | $9.5 million | $105.8 million | $72.0 million |
| Operating margin | 8.2% | 4.9% | 14.4% | 11.4% |
| Net income | $10.8 million | $4.6 million | $63.4 million | $36.7 million |
| Net margin | 4.7% | 2.4% | 8.6% | 5.8% |
| Diluted EPS | $0.25 | $0.11 | $1.47 | $0.86 |
| Adjusted EBITDA | $48.9 million | $34.5 million | $192.6 million | $149.1 million |
| Adjusted EBITDA margin | 21.4% | 17.9% | 26.2% | 23.6% |
Q3 revenue increased 18.6%, while year-to-date revenue increased 16.2%. Comparable-store sales increased 5.9% in Q3 and 3.4% year to date. Amusement and other revenue was the primary comparable-store growth driver.
Operating performance benefited from sales leverage and lower product costs as a percentage of revenue. Q3 total product costs declined to 18.4% of revenue from 18.9%; operating payroll declined to 24.1% from 24.9%; and other store operating expenses declined to 31.4% from 33.1%.
Net cash provided by operating activities was $174.6 million for the first 39 weeks of fiscal 2016, compared with $121.6 million in the prior-year period. Capital expenditures were $131.3 million, resulting in net cash used in investing activities of $130.5 million. Financing activities used $54.9 million, including net debt repayments and $7.4 million of share repurchases. Ending cash was $14.7 million, compared with $19.3 million at the prior-year comparable date.
Debt, Liquidity and Capital Resources
- Total debt outstanding was $278.6 million at October 30, 2016, consisting of $140.6 million under the term facility and $138.0 million under the revolver.
- Net long-term debt was $270.5 million after current installments and debt issuance costs.
- The Company had $206.984 million of borrowing availability under its credit facility, with $5.016 million of letters of credit outstanding.
- The credit facility matures May 15, 2020 and bears variable interest based primarily on LIBOR. The stated weighted-average interest rate was 2.02%; the effective rate was 2.52%.
- The Company was in compliance with its restrictive and financial-ratio covenants.
- Management estimated next-twelve-month capital additions of approximately $135 million to $145 million, scheduled debt service of $13.135 million, lease payments of $83.957 million, and cash income-tax payments of approximately $47 million.
- Fiscal 2016 capital additions were expected to total $195 million to $200 million, or $148 million to $153 million net of tenant allowances and other landlord payments.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by 11 additional stores opened during the preceding 12 months and positive comparable-store sales.
- Comparable-store amusement and other revenue increased 10.4% in Q3 and 6.4% year to date, while comparable-store food and beverage revenue was broadly flat or modestly lower year to date.
- Operating margin expanded by 330 basis points in Q3 and 300 basis points year to date, reflecting sales leverage and improved product-cost ratios.
- Interest expense declined to $1.6 million in Q3 from $2.2 million and to $5.6 million year to date from $9.1 million, primarily because of lower debt balances and the lower-cost May 2015 refinancing.
- The prior-year year-to-date period included a $6.8 million loss on debt retirement; no comparable charge was recorded in fiscal 2016.
- Debt declined by approximately $59.6 million from January 31, 2016, while property and equipment increased to $608.5 million from $523.9 million due largely to ongoing store development and capital investment.
- The Company initiated a share-repurchase program authorizing up to $100 million through the end of fiscal 2018. It repurchased 170,615 shares for $7.4 million during fiscal 2016 through the reporting date.
Guidance, Outlook, Risks and Unusual Items
Management’s stated growth strategy is to pursue disciplined new-store growth, increase comparable-store sales, update approximately 10% of games annually, leverage the sports concept, and expand internationally. The Company also has a seven-store Middle East franchise agreement covering six countries.
- Management believed operating cash flow, cash balances and revolver availability would be sufficient for anticipated working capital, capital expenditures, debt service and share repurchases in the foreseeable future.
- Results are seasonal and volatile: the third quarter historically has lower revenue, while the first and fourth quarters benefit from spring and year-end holidays. New-store results may also reflect an initial “honeymoon” effect followed by lower second-year sales.
- Principal operating risks include consumer spending, competition, food and beverage commodity prices, minimum-wage increases, labor costs, severe weather, construction costs and variable interest rates.
- A hypothetical 25-basis-point increase in one-month LIBOR was estimated to increase annualized interest expense by approximately $715,000, assuming no change in revolver borrowings.
- The Company had approximately $1.041 billion of future operating-lease payments and $278.6 million of future debt principal payments as of October 30, 2016.
- Ordinary-course legal proceedings were not expected by management to materially affect operations or financial condition. No material changes to previously disclosed risk factors were reported.
- The Company adopted new deferred-tax and debt-issuance-cost presentation guidance. Adoption of the new lease standard is expected to significantly increase reported assets and liabilities when implemented, although the filing does not quantify the effect.
Important Facts for Investors to Verify
- Confirm that the requested period is fiscal Q3 2016, not Q3 2015, based on the supplied filing.
- Assess the sustainability of comparable-store sales growth, particularly the stronger amusement performance versus relatively weak food and beverage trends.
- Evaluate whether planned store expansion and capital spending can be funded while maintaining debt reduction and share repurchases.
- Review exposure to variable-rate debt, commodity inflation, wage increases and the Company’s substantial long-term lease obligations.
- Distinguish GAAP net income and cash flow from management’s non-GAAP Adjusted EBITDA and Store EBITDA measures.
- Monitor the timing and profitability of new stores, including the potential reversal of initial “honeymoon” sales and margin benefits.