Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting-period note: The supplied filing is for the second quarter of fiscal 2018, not fiscal 2017 Q2. The quarter ended August 5, 2018, with comparable periods ended July 30, 2017. Fiscal 2018 consisted of 52 weeks; fiscal 2017 consisted of 53 weeks.
Business context
Dave & Buster’s operates high-volume entertainment and dining venues under one reportable segment. As of August 5, 2018, it operated 117 stores across 38 states, Puerto Rico and one Canadian province, including 86 comparable stores.
Financial performance
| Metric | 13 weeks ended Aug. 5, 2018 | 13 weeks ended July 30, 2017 | Change |
|---|---|---|---|
| Total revenue | $319.2 million | $280.8 million | 13.7% increase |
| Operating income | $45.9 million | $39.2 million | 17.3% increase |
| Operating margin | 14.4% | 13.9% | 50 basis-point increase |
| Net income | $33.8 million | $30.4 million | 11.3% increase |
| Diluted EPS | $0.84 | $0.71 | 18.3% increase |
| Adjusted EBITDA | $82.4 million | $70.6 million | 16.7% increase |
| Adjusted EBITDA margin | 25.8% | 25.1% | 70 basis-point increase |
For the first 26 weeks, revenue increased 11.4% to $651.4 million, operating income increased 1.1% to $104.5 million, and net income increased 3.8% to $75.9 million. Diluted EPS rose to $1.88 from $1.69. Adjusted EBITDA increased to $178.3 million from $166.1 million, while its margin declined to 27.4% from 28.4%.
Quarterly comparable-store sales declined 2.4%, and first-half comparable-store sales declined 3.7%, after adjusting the prior-year comparison for the extra fiscal week. Management attributed the pressure primarily to increased competition, sales transfers to newer stores and fewer Power Cards sold. Food, beverage and amusement comparable revenues all declined.
Cash flow, liquidity and debt
- First-half operating cash flow was $184.9 million, compared with $158.1 million in the prior-year period.
- Capital expenditures were $116.6 million, compared with $99.8 million; net cash used in investing activities was $116.5 million.
- Net cash used in financing activities was $64.8 million, including $61.1 million of share repurchases and approximately $4.5 million of net debt repayments.
- Cash and cash equivalents were $22.4 million at August 5, 2018, versus $18.8 million at February 4, 2018.
- Total debt outstanding was $362.8 million, consisting of $288.8 million under the term loan and $74.0 million under the revolver. The weighted-average stated interest rate was 3.33%.
- Borrowing availability under the credit facility was $421.0 million after $5.0 million of outstanding letters of credit. The company was in compliance with its debt covenants.
- Working capital was negative $114.2 million. Management stated that operating cash flow, cash balances and revolver availability should be sufficient for anticipated working capital, capital expenditures, debt service and share repurchases.
Material changes and unusual items
- Revenue growth was driven primarily by 31 non-comparable stores, including 17 stores opened after the second quarter of fiscal 2017. The company opened 11 stores during the first half, compared with eight in the prior-year period.
- Product costs increased as a percentage of revenue, reflecting higher meat and commodity costs, redemption-ticket liabilities and the absence of a favorable $2.5 million Texas use-tax audit settlement recorded in the prior-year first half.
- General and administrative expense benefited from the absence of a $2.55 million litigation-settlement charge recorded in the prior-year quarter.
- Interest expense increased because of higher variable interest rates and higher average debt balances.
- The first-half effective tax rate declined to 22.9% from 26.5%, primarily because of the Tax Cuts and Jobs Act, partly offset by lower excess tax benefits from share-based compensation.
- The company had approximately $1.612 billion of undiscounted future operating lease payments. Adoption of the new lease standard was expected to materially increase reported assets and liabilities but have an insignificant effect on the income statement.
Guidance, outlook and risks
- Management anticipated opening 14 to 15 new stores in fiscal 2018 and continued to target long-term annual expansion of at least 10% of the existing store base.
- Fiscal 2018 capital additions were expected to total $229 million to $239 million, or $179 million to $189 million net of landlord payments.
- Key risks include declining comparable-store sales, competition, consumer spending, food and labor inflation, minimum-wage increases, commodity-price volatility, variable-rate debt, severe weather and substantial lease obligations.
- A hypothetical 25-basis-point increase in one-month LIBOR was estimated to increase annualized interest expense by approximately $0.9 million.
- The company reported no material changes to the risk factors disclosed in its prior Form 10-K and no material impairment charges in the quarter.
Subsequent events and governance
- On September 11, 2018, the board declared a quarterly dividend of $0.15 per share, payable October 10, 2018.
- The share-repurchase authorization was extended through fiscal 2020 and increased by $100 million, to a total authorization of $400 million.
- On August 5, 2018, Brian A. Jenkins became chief executive officer, succeeding Stephen M. King. Joe DeProspero became interim chief financial officer.
Investor verification checklist
- Confirm that the intended filing is fiscal 2018 Q2 rather than fiscal 2017 Q2.
- Assess whether comparable-store sales weakness persists despite continued new-store growth.
- Review the effect of store expansion on margins, capital expenditures, occupancy costs and future cash flow.
- Monitor food, labor and redemption-related cost inflation and the company’s ability to offset it through pricing.
- Evaluate leverage, variable-rate exposure, covenant compliance and the substantial operating-lease commitments.
- Reconcile adjusted EBITDA and other non-GAAP measures to GAAP results and consider the effect of pre-opening, depreciation and other excluded costs.