Business Context and Reporting Period
Dave & Buster’s Entertainment, Inc. operates high-volume entertainment and dining venues in North America under the Dave & Buster’s brand. The company operated 100 stores in 34 states and one Canadian province as of July 30, 2017, and reports one operating and reportable segment.
The supplied filing is a Form 10-Q for the 13-week and 26-week periods ended July 30, 2017, compared with the corresponding periods ended July 31, 2016. The request metadata identifies “2016 Q2,” but the filing itself is for fiscal 2017 second quarter.
Key Financial Metrics
| Metric | 13 Weeks Ended July 30, 2017 | 13 Weeks Ended July 31, 2016 | 26 Weeks Ended July 30, 2017 | 26 Weeks Ended July 31, 2016 |
|---|---|---|---|---|
| Total revenue | $280.8 million | $244.3 million | $584.9 million | $506.3 million |
| Operating income | $39.2 million | $36.0 million | $103.4 million | $87.2 million |
| Net income | $30.4 million | $21.5 million | $73.2 million | $52.7 million |
| Diluted EPS | $0.71 | $0.50 | $1.69 | $1.22 |
| Net margin | 10.8% | 8.8% | 12.5% | 10.4% |
| Adjusted EBITDA | $70.6 million | $62.4 million | $166.1 million | $138.8 million |
| Adjusted EBITDA margin | 25.1% | 25.5% | 28.4% | 27.4% |
| Cash flow from operations | Not separately provided | Not separately provided | $158.1 million | $121.7 million |
Second-quarter revenue increased 14.9%, while net income increased 41.1%. For the first 26 weeks, revenue increased 15.5% and net income increased 38.9%. The effective tax rate declined to 18.2% in the quarter and 26.5% year to date, primarily because excess tax benefits from share-based payments were recognized through income tax expense.
Comparable-store sales increased 1.1% in the quarter and 1.7% year to date. Comparable amusement and other revenue increased 4.7% in the quarter and 5.6% year to date, while comparable food and beverage sales declined.
Liquidity, Capital Spending, and Debt
- Cash and cash equivalents were $20.6 million at July 30, 2017, compared with $20.1 million at January 29, 2017.
- Net working capital was negative $108.3 million. Management stated that the business can operate with negative working capital because customer cash receipts generally precede payments to suppliers, employees, and service providers.
- Total debt outstanding was $302.0 million, consisting of $135.0 million under the term loan and $167.0 million under the revolving facility. The stated weighted-average interest rate was 2.73%, and the effective rate was 2.96%.
- Borrowing availability under the existing facility was $177.8 million, with $5.2 million of letters of credit outstanding. The company was in compliance with its debt covenants.
- Operating cash flow was $158.1 million, capital expenditures were $99.8 million, and financing activities used $58.7 million during the first 26 weeks.
- The company repurchased 1.54 million shares for $98.3 million during the first 26 weeks, leaving approximately $72.9 million of authorization under the $200 million program.
- As of July 30, 2017, future operating lease payments totaled approximately $1.220 billion, including $92.8 million due within one year.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by 24 non-comparable stores, which contributed 345 additional operating store weeks year to date; the company opened eight stores in the first 26 weeks versus five in the prior-year period.
- The store base increased to 100 stores from 86 at the end of the comparable prior-year period, while the comparable-store base increased to 76 from 66 stores.
- Product costs declined as a percentage of revenue to 16.7% from 17.8% year to date, helped by lower amusement costs. The company recorded a $2.5 million favorable settlement related to a Texas use-tax audit.
- Operating payroll and benefits increased 16.2% year to date, partly reflecting approximately 5% hourly wage-rate increases and labor inefficiencies at newer stores.
- Second-quarter general and administrative expenses included a $2.55 million net charge for an ERISA litigation settlement, consisting of $7.5 million of gross costs less $4.95 million of insurance recoveries.
- Capital expenditures increased to $99.8 million from $84.8 million year to date, primarily because of new-store construction.
- The company adopted new share-based-payment accounting guidance in fiscal 2017, recording a $0.8 million cumulative adjustment to retained earnings and recognizing $10.1 million of excess tax benefits through income tax expense during the first 26 weeks.
Guidance, Outlook, Risks, and Unusual Items
- Management anticipated opening 14 new stores in fiscal 2017 and reported a long-term objective of opening new stores at an annual rate of at least 10% of the existing store base.
- The company expected fiscal 2017 capital additions of $218 million to $228 million, or $182 million to $192 million net of tenant improvement allowances. It expected $180 million to $190 million for new-store construction and operating initiatives.
- Management expected cash from operations, cash on hand, and revolving-credit availability to fund working capital, capital expenditures, debt service, and share repurchases in the foreseeable future.
- In August 2017, after quarter-end, the company entered into a new senior secured credit facility with a $300 million term loan and a $500 million revolving facility maturing August 17, 2022. The proceeds refinanced the prior facility, which had approximately $291 million outstanding. The new term loan requires $15 million of annual principal payments beginning December 31, 2017.
- The business is exposed to consumer spending, competition, seasonality, weather, food and commodity prices, wage and minimum-wage increases, occupancy costs, 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 $0.8 million.
- The company had estimated undiscounted future lease commitments of approximately $1.220 billion. It also had 19 additional signed leases for future sites whose obligations were not included because landlord construction-access conditions had not yet been satisfied.
- Management stated that no material changes had occurred in previously disclosed risk factors and that disclosure controls and procedures were effective.
Most Important Facts to Verify
- Confirm that the intended period is fiscal 2017 second quarter, because the filing covers July 30, 2017 rather than 2016.
- Assess the sustainability of earnings growth given that much of the revenue increase came from new stores and that comparable-store sales growth was modest.
- Separate the recurring operating improvement from the favorable $2.5 million tax-audit settlement and the unusually favorable tax effects from share-based compensation.
- Review the post-quarter-end refinancing, new debt amortization requirements, variable-rate exposure, and covenant terms.
- Evaluate liquidity after substantial capital spending, share repurchases, lease commitments, and the planned store expansion program.
- Monitor food and beverage cost inflation, wage increases, occupancy costs, and the effect of newer stores losing their initial “honeymoon” sales leverage.
- Confirm the final court-approved amount and cash impact of the ERISA litigation settlement.