Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume dining and entertainment venues in North America under the Dave & Buster’s and Main Event brands. This Form 10-Q covers the 13-week third quarter ended October 30, 2022, and the 39 weeks ended October 30, 2022, compared primarily with the periods ended October 31, 2021. The filing metadata references “2021 Q3,” but the filing period is fiscal 2022 Q3.
On June 29, 2022, the Company acquired Main Event, adding 49 Main Event and three The Summit locations. As of October 30, 2022, the Company operated 151 Dave & Buster’s stores, 49 Main Event stores, and three The Summit stores.
Key Financial Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 39 Weeks FY2022 | 39 Weeks FY2021 |
|---|---|---|---|---|
| Total revenue | $481.2 million | $318.0 million | $1.401 billion | $961.0 million |
| Operating income | $30.1 million | $24.5 million | $185.3 million | $140.6 million |
| Operating margin | 6.3% | 7.7% | 13.2% | 14.6% |
| Net income | $1.9 million | $10.6 million | $98.0 million | $83.0 million |
| Net margin | 0.4% | 3.3% | 7.0% | 8.6% |
| Diluted EPS | $0.04 | $0.21 | $1.99 | $1.68 |
| Adjusted EBITDA | $90.0 million | $68.2 million | $352.8 million | $264.1 million |
| Adjusted EBITDA margin | 18.7% | 21.5% | 25.2% | 27.5% |
Q3 comparable sales at Dave & Buster’s branded stores increased 13.8% year over year and 13.6% versus Q3 2019. Main Event contributed $106.8 million of Q3 revenue and $158.2 million for the 39-week period.
For the 39 weeks, operating cash flow was $301.0 million compared with $198.5 million in the prior-year period. Investing cash flow was negative $981.9 million, including $818.7 million for the Main Event acquisition and $164.0 million of capital expenditures. Financing cash flow was $763.2 million, principally reflecting $821.5 million of debt proceeds.
Cash and cash equivalents were $108.2 million at October 30, 2022, compared with $25.9 million at January 30, 2022. The Company reported $491.1 million of unused revolving credit availability, before considering $8.9 million of outstanding letters of credit.
Debt, Liquidity, and Capital Structure
- Total debt outstanding was $1.290 billion, consisting of $440.0 million of senior secured notes and an $850.0 million term loan. Reported long-term debt, net of discounts, issuance costs, and current maturities, was $1.222 billion.
- The senior secured notes carry a 7.625% coupon and mature November 1, 2025. The term loan matures June 29, 2029; the revolving facility matures June 29, 2027, subject to specified conditions.
- The weighted-average effective interest rate on total debt was 9.5% for the 39 weeks ended October 30, 2022, compared with 10.3% in the prior-year period.
- The Company was in compliance with its debt covenants at October 30, 2022 and stated that it expects to remain compliant through fiscal year-end.
- Operating lease liabilities were $1.584 billion, with a present value of future operating lease liabilities of $1.655 billion. The filing also identifies approximately $207 million of minimum payments for executed facility leases that had not yet commenced.
Material Changes Versus the Prior Comparable Period
- Revenue increased 51.3% in Q3 and 45.8% for the 39-week period, driven by the Main Event acquisition, new Dave & Buster’s locations, removal of remaining COVID-19 operating restrictions, and higher comparable sales.
- Despite higher revenue, Q3 net income declined to $1.9 million from $10.6 million. Higher interest expense, labor costs, store operating expenses, depreciation, and acquisition-related costs reduced margins.
- Q3 interest expense increased to $28.4 million from $13.4 million, primarily because of acquisition-related debt. For the 39 weeks, interest expense increased to $56.9 million from $42.0 million.
- Q3 operating margin declined to 6.3% from 7.7%, while Adjusted EBITDA margin declined to 18.7% from 21.5%. Management attributed cost pressure to hourly wage increases, utilities, maintenance, security, cleaning, marketing, and commodity inflation.
- Food and beverage cost as a percentage of related revenue increased to 29.5% in Q3 from 27.9% and to 29.2% for the 39 weeks from 27.3%. Amusement cost ratios improved.
- The Company incurred $4.0 million of Q3 and $22.3 million of year-to-date acquisition and integration costs related to Main Event. The year-to-date period also included a $1.8 million impairment charge for an abandoned Main Event corporate headquarters lease and a $1.5 million loss on debt refinancing.
- Capital additions were $161.9 million for the 39 weeks, compared with $69.9 million in the prior-year period. The Company opened seven new Dave & Buster’s stores during the 39 weeks.
- The Company repurchased $25.0 million of common stock during the 39 weeks under its share repurchase program and had approximately $75.0 million remaining under the authorization at quarter-end. No program repurchases occurred during Q3.
Outlook, Commentary, Risks, and Unusual Items
Management stated that cash, operating cash flow, available revolver capacity, and expected landlord payments should be sufficient to fund operations and capital allocation needs for at least the next twelve months. No specific revenue or earnings guidance was provided in the filing.
- Management expects growth opportunities and potential cost synergies from combining Dave & Buster’s and Main Event, but the acquisition accounting remains preliminary and the expected synergies are not guaranteed.
- Key operating risks include food, beverage, energy, labor, and other inflation; consumer spending weakness; seasonal and weather-related traffic volatility; and any renewed effects from COVID-19.
- Variable-rate borrowings expose the Company to higher interest expense as SOFR rates increase. At quarter-end, the $850.0 million term loan was outstanding and the revolving facility had no drawn balance.
- Debt agreements restrict additional borrowing, acquisitions, dividends, share repurchases, asset sales, and other corporate actions. The credit facility includes a maximum net total leverage ratio of 3.50:1.00 under specified utilization conditions.
- The Company faces California wage-and-hour and employment-related lawsuits, some of which may proceed as class or representative actions. Management believes the matters will not materially affect financial condition or results, but the ultimate costs could be higher or lower than current estimates.
- Main Event’s internal control over financial reporting was excluded from the Company’s current disclosure-controls assessment under SEC guidance for recently acquired businesses. Management stated that disclosure controls were effective, but the acquisition had a material impact on internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Main Event achieves the expected revenue growth, integration benefits, and cost synergies assumed in the acquisition rationale.
- The effect of higher SOFR-based borrowing costs and the Company’s ability to remain within leverage and other debt covenants.
- Whether commodity, wage, utility, maintenance, and other operating cost inflation can be offset through pricing and productivity improvements.
- The sustainability of comparable-store sales growth, particularly against normalized post-COVID comparisons.
- The Company’s future capital spending requirements, new-store returns, landlord payments, and available liquidity after acquisition-related expenditures.
- The resolution and potential exposure from California employment litigation and other legal proceedings.
- Completion of the preliminary purchase-price allocation for Main Event and any resulting changes to goodwill, intangible assets, deferred taxes, or contingent consideration.