Filing Context and Reporting Period
Company: Dave & Buster’s Entertainment, Inc. (NASDAQ: PLAY). The supplied filing is a Form 10-K for the 52-week fiscal year ended February 2, 2020 (fiscal 2019), filed April 3, 2020. The request metadata references “2018 Q4,” but the source document is an annual fiscal 2019 filing, not a 2018 quarterly filing.
The company operates high-volume dining and entertainment venues. It had 136 stores at fiscal year-end across 39 states, Puerto Rico and Ontario, Canada, after opening 16 stores and closing one during fiscal 2019.
Financial Highlights
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Total revenue | $1,354.7 million | $1,265.3 million | +7.1% |
| Food and beverage revenue | $563.6 million | $536.5 million | +5.1% |
| Amusement and other revenue | $791.1 million | $728.8 million | +8.5% |
| Operating income | $148.1 million | $161.0 million | -8.0% |
| Operating margin | 10.9% | 12.7% | -180 basis points |
| Net income | $100.3 million | $117.2 million | -14.5% |
| Diluted EPS | $2.94 | $2.93 | Approximately flat |
| Adjusted EBITDA | $308.2 million | $311.1 million | -0.9% |
| Adjusted EBITDA margin | 22.8% | 24.6% | -180 basis points |
| Cash flow from operations | $288.9 million | $337.6 million | -14.4% |
| Capital expenditures | $228.1 million | $216.3 million | +5.5% |
Amusement and other activities represented approximately 58.4% of revenue, while food and beverage represented approximately 41.6%. Comparable store sales declined 2.6%, driven primarily by lower customer volumes.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents at February 2, 2020 were $24.7 million; working capital was a deficit of $211.9 million.
- Total debt outstanding was $648.3 million, consisting of $266.3 million of term debt and $382.0 million drawn on the revolver. The credit facility matures in August 2022.
- At year-end, the company reported $109.9 million of borrowing availability and compliance with its debt covenants.
- As of March 31, 2020, management reported approximately $99.6 million of cash and $752.5 million of funded debt. The company subsequently drew substantially all remaining revolving-credit availability.
- Fiscal 2019 share repurchases totaled approximately $297.3 million, covering 7.1 million shares at an average price of $41.78. Dividends declared totaled $20.6 million.
- Share repurchases and dividend payments were indefinitely suspended following the COVID-19 disruption.
- The company adopted lease accounting under ASC 842, recognizing operating lease right-of-use assets of approximately $1.0 billion and operating lease liabilities of approximately $1.2 billion at year-end.
Material Changes Versus Fiscal 2018
- Revenue grew because of new store openings, but comparable store sales fell 2.6%, reflecting lower customer traffic, calendar effects, transfers of sales to new stores and increased competition.
- Operating margin contracted from 12.7% to 10.9%. Management cited approximately 4.1% hourly wage inflation, higher occupancy costs at newer stores and deleveraging from lower comparable sales.
- Operating payroll and benefits increased 8.8% to $323.0 million, while other store operating expenses increased 11.8% to $429.4 million.
- Interest expense increased to $20.9 million from $13.1 million because of higher average debt balances.
- Cash flow from operations decreased by $48.7 million, while capital expenditures increased as the company continued store expansion and operating investments.
- Net income declined despite nearly flat diluted EPS because the weighted-average diluted share count fell by approximately 5.9 million shares, primarily due to repurchases.
Outlook, Risks and Unusual Items
The most significant subsequent event was the COVID-19 pandemic. By March 20, 2020, all 137 operating stores, including a store opened March 16, 2020, were closed due to government restrictions. The company expected a material adverse effect on revenue, profitability, cash flow and financial condition.
- Management furloughed nearly all employees except essential personnel, reduced remaining compensation and benefits, cut capital spending and halted planned store openings.
- The company was seeking rent and vendor concessions, lender covenant relief and additional financing from potential investors.
- Management determined that substantial doubt existed regarding the company’s ability to continue as a going concern over the following twelve months. KPMG included a going-concern explanatory paragraph, although the financial statements were prepared assuming continuation as a going concern.
- Failure to obtain covenant waivers or sufficient liquidity could result in acceleration of debt, termination of remaining revolver commitments, cash-collateral requirements and potentially a voluntary Chapter 11 filing.
- The company’s lenders waived an event of default associated with the going-concern audit language, but the filing states that further relief was not assured.
- The company adopted a 364-day shareholder rights plan on March 18, 2020, with an exercise price of $45 per right, intended to deter an accumulation of control.
- Other key risks include competition for discretionary spending, long-term lease obligations, wage and commodity inflation, cyber and data-security incidents, legal claims including California employment cases, licensing requirements and potential impairment of goodwill, tradenames and long-lived assets.
- The filing reports no material impairment charges for goodwill, tradenames or long-lived assets in fiscal 2019, but COVID-19-related impairment charges remained a potential future risk.
Investor Verification Priorities
- Verify the actual timing and extent of store reopenings, capacity restrictions and customer traffic recovery after fiscal year-end.
- Review subsequent filings for liquidity, covenant waivers, financing transactions, debt amendments and any bankruptcy or restructuring developments.
- Reconcile post-year-end cash balances and revolver borrowings with the March 31, 2020 amounts disclosed in this filing.
- Assess whether comparable store sales, labor costs, occupancy expense and store-level margins recover as new stores mature.
- Evaluate the company’s ability to fund lease obligations, debt maturities and maintenance capital while stores operate below historical volumes.
- Review potential impairment testing for goodwill, tradenames, property and equipment and lease right-of-use assets.
- Consider the effect of suspended dividends and repurchases, the shareholder rights plan and the substantial reduction in common equity from prior repurchases.
- Review deferred amusement revenue of $75.1 million and the assumptions for future use of game credits and redemption of tickets, identified by the auditor as critical audit matters.