Dave & Buster's Entertainment, Inc. annual report, FY2017

Dave & Buster’s Entertainment, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended February 4, 2018 (“fiscal 2017”), comprising 53 weeks. The requested metadata references “2016 Q4,” but the supplied filing is the fiscal 2017 annual report, including a 14-week fourth quarter. Prior comparable fiscal year ended January 29, 2017 comprised 52 weeks.

Business context

Dave & Buster’s owns and operates high-volume entertainment and dining venues offering food, beverages, arcade and redemption games, sports viewing, and special events. At year-end, the Company operated 106 stores across 36 states, Puerto Rico, and Ontario, Canada, including 14 stores opened during fiscal 2017. Amusement and other revenue represented 56.6% of total revenue; food and beverage represented 43.4%.

Financial performance and key metrics

Metric	Fiscal 2017	Fiscal 2016	Change
Total revenue	$1,139.8 million	$1,005.2 million	13.4% increase
Operating income	$165.8 million	$150.5 million	10.1% increase
Operating margin	14.5%	15.0%	Down 50 basis points
Net income	$120.9 million	$90.8 million	33.2% increase
Diluted EPS	$2.84	$2.10	35.2% increase
Adjusted EBITDA	$302.7 million	$261.5 million	15.8% increase
Adjusted EBITDA margin	26.6%	26.0%	Up 60 basis points
Cash flow from operations	$264.7 million	$231.3 million	14.4% increase
Capital expenditures	$219.9 million	$180.6 million	21.8% increase

Comparable store sales declined 0.9% on a 52-week-adjusted basis, following a 3.3% increase in fiscal 2016. Fourth-quarter comparable sales declined 5.9% on a 13-week-adjusted basis. Food and beverage comparable sales decreased, while comparable amusement revenue increased 2.1%, primarily due to higher revenue per Power Card sold.

Food and beverage revenue increased to $494.8 million, while amusement and other revenue increased to $645.0 million. Total cost of products improved to 17.3% of revenue from 17.9%, but other store operating expenses increased to 29.4% of revenue from 28.6%. Pre-opening costs rose to $23.7 million from $15.4 million.

Liquidity, debt, and capital allocation

Cash and cash equivalents were $18.8 million at February 4, 2018, compared with $20.1 million a year earlier.
Working capital was negative $112.9 million, compared with negative $102.2 million in fiscal 2016.
Total debt outstanding was $367.3 million, consisting of a $296.3 million term loan and $71.0 million drawn on the revolving facility.
The senior secured credit facility includes a $300.0 million term loan and a $500.0 million revolving facility maturing August 17, 2022. Borrowing availability was $424.3 million, with $4.7 million of letters of credit outstanding.
The stated weighted-average interest rate was 2.82%; debt is primarily variable-rate and based on LIBOR plus a margin.
Operating cash flow exceeded capital expenditures by $44.8 million before financing and other investing items.
The Company repurchased 2.64 million shares for approximately $151.9 million during fiscal 2017. Approximately $119.3 million remained under the $300.0 million authorization at year-end.
The Company paid no cash dividends and expects to fund operations, development, debt service, and repurchases through operating cash flow, cash on hand, borrowings, and landlord contributions.

Material changes versus the prior comparable period

Revenue growth was driven primarily by 14 new store openings and 718 additional operating store weeks, including the extra fiscal week. Excluding the estimated $19.7 million benefit from the 53rd week, revenue growth was 11.4%.
Operating margin declined because of occupancy pressure from recently opened stores and higher pre-opening costs, partly offset by lower product costs and payroll costs as a percentage of sales.
Net income benefited from improved operating results and a substantially lower effective tax rate of 22.7%, compared with 36.7%. The reduction reflected new stock-compensation tax accounting and a provisional benefit from the Tax Cuts and Jobs Act.
The Company refinanced its debt in August 2017 and recorded a $0.7 million loss on debt retirement.
General and administrative expense included a $2.6 million net litigation settlement charge during the second quarter.
A favorable Texas use-tax audit settlement reduced amusement product costs by approximately $2.7 million.
Marketing expense increased to $37.9 million from $33.8 million, including $30.0 million of national television and radio advertising.

Guidance, outlook, and management commentary

Management expects to continue opening stores at an annual rate of 10% or more of the existing store base, subject to site availability, financing, construction, permits, staffing, and customer acceptance.
Management estimates potential for more than 230 stores in the United States and Canada, compared with 106 stores at fiscal 2017 year-end.
Fiscal 2018 capital additions were expected to be $217.0 million to $227.0 million, or $170.0 million to $180.0 million net of tenant improvement allowances and other landlord payments.
Management targets approximately 35% year-one cash-on-cash returns for traditional large and small formats and approximately 25% for the new 17K format, but cautions that actual results may differ.
Comparable-store performance remains a key risk, with management citing lower customer volumes, competition, cannibalization from new stores, and weather-related interruptions.
The Company expects to expand its smaller 17K format and is assessing international opportunities while maintaining a conservative approach.

Risks, contingencies, and unusual items

The business depends on discretionary consumer spending and is exposed to economic slowdowns, competition from restaurants and alternative entertainment, and increasingly sophisticated home-based entertainment.
Rising wages, food and commodity costs, lease expenses, and regulatory requirements could pressure margins. The Company does not use financial instruments to hedge commodity risk.
Variable-rate debt creates interest-rate exposure; management estimated that a 25-basis-point increase in one-month LIBOR would increase annualized interest expense by approximately $1.0 million.
The Company had approximately $1.57 billion of undiscounted operating lease commitments, including $109.0 million due within one year.
Legal proceedings arise in the ordinary course. The ERISA settlement was subject to court approval, and the ultimate payment could differ from the recorded $2.6 million net charge.
The Company disclosed risks involving food safety, liquor and amusement licensing, labor availability, information security, cyberattacks, gift-card and Power Card escheat obligations, and adverse weather or natural disasters.
The Tax Cuts and Jobs Act accounting was provisional in certain respects and subject to completion during fiscal 2018.
No material off-balance-sheet arrangements or material impairment charges were reported. Management and KPMG concluded that internal control over financial reporting was effective.

Most important facts for investors to verify

Confirm the applicable period: the supplied filing is fiscal 2017 ended February 4, 2018, not fiscal 2016 Q4.
Separate growth from the 53rd-week benefit and new-store additions from underlying comparable-store performance.
Assess whether the 0.9% adjusted comparable-sales decline, particularly the 5.9% fourth-quarter decline, persists.
Evaluate the effect of occupancy costs, labor inflation, commodity prices, and pre-opening expenses on operating margins.
Review debt covenants, scheduled amortization, variable interest-rate exposure, and the Company’s planned share repurchases alongside substantial lease commitments.
Monitor the final tax accounting for the Tax Cuts and Jobs Act and the outcome of the ERISA settlement.
Assess the returns and cash requirements of new stores, including the 17K format and the 30 signed future-store leases.