Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Period covered: The filing is for the 13 and 26 weeks ended August 2, 2020, compared with August 4, 2019. The request metadata identifies “2019 Q2,” but the filing itself is the second quarter of fiscal 2020. Dollar amounts are in thousands unless otherwise noted.
Business context and reporting period
Dave & Buster’s operates high-volume entertainment and dining venues in North America as one operating and reportable segment. At August 2, 2020, it owned and operated 137 stores in 39 states, Puerto Rico and one Canadian province.
COVID-19 materially disrupted operations. All 137 stores were closed by March 20, 2020. During the second quarter, 83 additional stores progressively reopened with limited menus, reduced capacity and games, shorter hours and reduced staffing. At quarter-end, 84 stores were operating; as of September 4, 2020, 52 stores remained closed due to jurisdictional restrictions.
Key financial metrics
| Metric | 13 weeks ended August 2, 2020 | 13 weeks ended August 4, 2019 | 26 weeks ended August 2, 2020 | 26 weeks ended August 4, 2019 |
|---|---|---|---|---|
| Total revenue | $50,833 | $344,599 | $210,639 | $708,181 |
| Operating income (loss) | $(81,115) | $46,214 | $(142,528) | $103,964 |
| Net income (loss) | $(58,602) | $32,356 | $(102,146) | $74,799 |
| Net income (loss) per diluted share | $(1.24) | $0.90 | $(2.59) | $2.03 |
| Adjusted EBITDA | $(38,479) | $85,982 | $(49,257) | $184,166 |
| Net cash provided by (used in) operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $(13,504) | $156,690 |
Second-quarter revenue declined 85.2%, and year-to-date revenue declined 70.3%. Comparable-store sales decreased 87.0% in the quarter and 72.2% year to date. Second-quarter operating costs were 259.6% of revenue versus 86.6% in the prior-year period, producing an operating margin of negative 159.6% versus positive 13.4%. Year-to-date operating margin was negative 67.7% versus positive 14.7%.
Second-quarter Adjusted EBITDA margin was negative 75.7% versus positive 25.0%; year-to-date Adjusted EBITDA margin was negative 23.4% versus positive 26.0%. These are non-GAAP measures and should not be viewed as substitutes for GAAP results.
Liquidity, cash flow and debt
- Cash and cash equivalents were $224,305 at August 2, 2020, compared with $24,655 at February 2, 2020.
- Year-to-date operating cash flow was $(13,504), compared with $156,690 in the prior-year period. Investing cash flow was $(63,334), including $63,486 of capital expenditures.
- Financing activities provided $276,488, including $99,500 of net debt proceeds and $182,207 of net proceeds from common-stock issuances.
- Total debt outstanding was $747,750, consisting of $258,750 under the term facility and $489,000 under the revolver. Long-term debt, net, was $731,646, and the credit facility matures in August 2022.
- The revolver had only $1,314 of unused commitment after $9,686 of letters of credit. The amended facility requires minimum liquidity of $30,000 and suspended financial-covenant testing through the period ending November 1, 2020.
- The amended credit facility bears interest at LIBOR plus 2.00%, with a 1.00% LIBOR floor. The year-to-date weighted-average interest rate was 3.98%.
- Interest-rate swaps with a total notional amount of $350,000 were de-designated as cash-flow hedges on April 14, 2020. The company expects to reclassify $7,547 of accumulated other comprehensive loss into interest expense over the next 12 months.
Material changes versus the prior comparable period
- Revenue, comparable-store sales, operating income, net income and Adjusted EBITDA all shifted sharply from positive prior-year results to substantial losses because of store closures, capacity restrictions, reduced customer traffic and canceled events.
- Payroll, general and administrative and other store expenses were reduced through furloughs, pay reductions and lower discretionary spending, but fixed occupancy costs and other expenses were not reduced proportionately to revenue.
- Operating payroll and benefits rose to 27.1% of second-quarter revenue from 23.5%; other store operating expenses rose to 123.2% from 30.3%.
- The company raised $182,207 net through common-stock offerings, issued approximately 17.0 million shares during the first half, suspended share repurchases and suspended dividends.
- Capital spending was curtailed, planned store openings were delayed, and the company recorded $13,727 of year-to-date long-lived-asset impairment charges and $6,981 of impairment and contract-termination costs related to development projects.
- The company executed 92 rent-relief agreements, generally providing three months of full deferral followed by partial deferrals at approximately half of the affected locations. It also withheld payment of most remaining facility lease obligations where rent relief had not been obtained.
Outlook, risks and unusual items
Management did not provide a full-year fiscal 2020 outlook because of uncertainty surrounding store reopenings, government restrictions, customer demand and the duration of the pandemic. Management expects operating results to remain severely affected until stores can reopen at full capacity and customers return.
The financial statements disclose substantial doubt about the company’s ability to continue as a going concern for one year from issuance. Management warns that additional liquidity may be required. Failure to obtain further covenant relief or avoid other defaults could allow lenders to accelerate debt, terminate revolver commitments and require cash collateral for letters of credit. The filing states that a failure to obtain additional waivers could potentially result in a voluntary Chapter 11 filing.
- COVID-19 remains the principal risk, including renewed closures, capacity limits, staffing challenges, weakened consumer demand and uncertain reopening timing.
- Lease deferrals and unpaid obligations provide temporary liquidity relief but create future payment obligations and may require further negotiations.
- Commodity, labor, energy and interest-rate costs may pressure margins. The company has variable-rate debt and limited remaining revolver availability.
- The company is defending several California wage-and-hour lawsuits, some of which may be class or representative actions. For certain matters, loss exposure is reasonably possible but cannot be estimated clearly from the filing.
- Other unusual items include COVID-related asset impairments, project termination costs, derivative losses and tax benefits under the CARES Act, including net operating loss carrybacks.
Investor verification checklist
- Confirm the filing period: August 2, 2020, rather than fiscal 2019 Q2.
- Verify the pace and economics of store reopenings, including the number operating at full versus limited capacity and the status of the 52 stores closed as of September 4, 2020.
- Assess liquidity after rent deferrals, unpaid lease obligations, debt service, letters of credit and the $30,000 minimum-liquidity covenant.
- Review the amended credit agreement, post-November 1, 2020 covenant requirements and potential lender remedies.
- Evaluate whether the $224,305 cash balance and $182,207 equity raise are sufficient to fund continuing operating losses and obligations.
- Track future impairment charges, lease and development-project liabilities, California litigation exposure and the company’s going-concern assessment.