Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 6, 2018, compared with thirteen weeks ended April 30, 2017. The request identifies “2017 Q1,” but the supplied filing is for fiscal 2018 first quarter. Dollar amounts are in thousands unless otherwise stated.
Business Context
Dave & Buster’s operates high-volume entertainment and dining venues under one reportable segment. As of May 6, 2018, it owned and operated 112 stores in 37 states, Puerto Rico and one Canadian province, versus 96 stores at the end of the comparable prior-year period. The company opened six stores during the quarter, compared with four in the prior-year quarter.
Financial Performance
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Total revenue | $332.2 million | $304.1 million | +9.2% |
| Food and beverage revenue | $139.8 million | $129.8 million | +7.7% |
| Amusement and other revenue | $192.4 million | $174.3 million | +10.4% |
| Operating income | $58.6 million | $64.2 million | -8.7% |
| Operating margin | 17.6% | 21.1% | -350 bps |
| Net income | $42.2 million | $42.8 million | -1.5% |
| Net margin | 12.7% | 14.1% | -140 bps |
| Diluted EPS | $1.04 | $0.98 | +6.1% |
| Adjusted EBITDA | $95.9 million | $95.6 million | +0.4% |
| Adjusted EBITDA margin | 28.9% | 31.4% | -250 bps |
Comparable-store sales declined 4.9%, including a 4.8% decline in comparable walk-in revenue and a 6.4% decline in special-events revenue. Revenue growth was driven primarily by new stores, which contributed approximately $44.3 million of incremental non-comparable revenue.
Margins deteriorated as total product costs increased to 17.2% of revenue from 16.1%, payroll and benefits increased to 21.9% from 21.4%, and other store operating expenses increased to 28.2% from 27.1%. Factors included higher food and commodity costs, approximately 4% wage-rate increases, occupancy deleverage, higher marketing spending and the absence of a favorable $2.5 million Texas use-tax audit settlement benefit recorded in the prior-year period.
Cash Flow, Liquidity and Debt
- Operating cash flow was $98.9 million, compared with $95.8 million in the prior-year period.
- Capital expenditures were $61.4 million, compared with $45.7 million, principally for new-store construction, games and maintenance.
- Financing cash outflow was $39.5 million, including $76.8 million of debt repayments, $27.4 million of share repurchases and $65.0 million of new borrowings.
- Cash and cash equivalents were $16.9 million at May 6, 2018, compared with $18.8 million at February 4, 2018.
- Total debt outstanding was $355.5 million, consisting of $292.5 million under the term loan and $63.0 million under the revolver. Net long-term debt was $339.6 million.
- Borrowing availability under the credit facility was $432.0 million after $5.0 million of letters of credit. The company was in compliance with its debt covenants.
- Net working capital was negative $122.8 million. Management stated that operating cash flow, cash on hand and revolver availability should satisfy foreseeable working-capital, capital-expenditure, debt-service and repurchase needs.
Guidance, Outlook and Unusual Items
- Management expected to open 14 to 15 new stores in fiscal 2018 and maintained a long-term expansion objective of at least 10% annual growth in the store base.
- Fiscal 2018 capital additions were expected to total $225 million to $235 million, or $179 million to $189 million net of landlord payments.
- The company recognized approximately $0.5 million of business-interruption insurance recoveries related to prior-year hurricanes and continued to pursue additional claims, with future recoveries not yet determined.
- The effective tax rate declined to 24.4% from 31.4%, primarily due to the Tax Cuts and Jobs Act.
- The company had approximately $1.55 billion of undiscounted future minimum lease commitments. Adoption of the new lease accounting standard in fiscal 2019 was expected to materially increase reported assets and liabilities.
- The company repurchased 606,308 shares during the quarter at an average price of $45.14, leaving approximately $91.9 million under its authorization, which expires at the end of fiscal 2018.
- Key risks include declining comparable-store sales, competitive pressure, commodity and wage inflation, variable-rate debt, consumer spending, weather, store-opening execution and substantial lease obligations. Management reported no material changes to previously disclosed risk factors.
Important Facts to Verify
- Whether the negative 4.9% comparable-store sales trend improves as the expanded store base matures.
- Whether new-store growth and the planned 14 to 15 openings can offset comparable-store weakness without further margin erosion.
- The effect of food, labor, occupancy and marketing cost inflation on operating and EBITDA margins.
- Interest-rate sensitivity on the company’s variable-rate debt; management estimated that a 25-basis-point increase in one-month LIBOR would increase annualized interest expense by approximately $1.0 million.
- Execution of the $225 million to $235 million fiscal 2018 capital program and funding capacity after debt service and share repurchases.
- Potential additional insurance recoveries, litigation settlement outcomes and the eventual balance-sheet impact of lease accounting adoption.