Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Business context and reporting period
The filing is for the thirteen weeks ended April 30, 2017, Dave & Buster’s fiscal first quarter of 2017. The comparable prior period ended May 1, 2016. Although the request identifies “2016 Q1,” the supplied filing is the 2017 Q1 report. The company operates high-volume dining and entertainment venues in North America as one reportable segment.
- 96 company-owned stores in 33 states and one Canadian province at quarter-end, versus 84 stores in the prior-year period.
- Four stores opened during the quarter; management anticipated twelve fiscal 2017 openings and four additional openings in the second quarter.
- Comparable-store base: 76 stores, with comparable-store sales up 2.2%.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $304.1 million | $262.0 million | Up 16.1% |
| Food and beverage revenue | $129.8 million | $117.1 million | Up 10.8% |
| Amusement and other revenue | $174.3 million | $144.9 million | Up 20.3% |
| Operating income | $64.2 million | $51.2 million | Up 25.5% |
| Operating margin | 21.1% | 19.5% | Up 160 basis points |
| Net income | $42.8 million | $31.2 million | Up 37.3% |
| Net margin | 14.1% | 11.9% | Up 220 basis points |
| Diluted EPS | $0.98 | $0.72 | Up 36.1% |
| Adjusted EBITDA | $95.6 million | $76.4 million | Up 25.0% |
| Adjusted EBITDA margin | 31.4% | 29.2% | Up 220 basis points |
Amusement and other revenue represented 57.3% of total revenue, compared with 55.3% in the prior-year quarter. Comparable-store revenue increased 2.2%; amusement and other comparable-store revenue increased 6.4%, while comparable food and beverage revenue declined because of lower customer volumes.
Total product costs declined to 16.1% of revenue from 17.6%. Amusement product cost improved to 9.3% of amusement revenue from 11.4%, partly due to a $2.5 million favorable settlement of a multi-year Texas use-tax audit. Operating payroll and benefits were 21.4% of revenue, and other store operating expenses were 27.1%.
Cash flow, capital spending, debt and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Cash flow from operating activities | $95.8 million | $76.7 million |
| Cash used in investing activities | $(45.7) million | $(38.1) million |
| Cash used in financing activities | $(50.3) million | $(35.9) million |
| Capital expenditures | $45.7 million | $38.1 million |
| Ending cash | $19.9 million | $28.1 million |
- Total debt outstanding was $244.9 million at April 30, 2017, consisting of $136.9 million under the term loan and $108.0 million under the revolver. This compared with $264.8 million at January 29, 2017.
- Borrowing availability under the credit facility was $236.8 million, after $5.2 million of outstanding letters of credit. The weighted-average stated interest rate was 2.49%, and the effective rate was 2.85%.
- The credit facility matures May 15, 2020 and includes financial and other restrictive covenants. The company was in compliance at quarter-end.
- Working capital was negative $117.5 million. Management stated that cash from operations, cash on hand and revolver availability should be sufficient for foreseeable needs.
- The company repurchased 529,176 shares for $31.1 million, at an average price of $58.82 per share, during the quarter. The total repurchase authorization was increased to $200 million after quarter-end and expires at the end of fiscal 2018.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by twenty non-comparable stores and 167 additional operating store weeks, with a smaller contribution from comparable-store sales.
- Margin expansion reflected improved amusement economics, product-cost leverage and operating leverage, partially offset by higher pre-opening costs and store-level costs from newer locations.
- Interest expense declined by $0.3 million because of lower average debt, despite slightly higher interest rates.
- The effective tax rate fell to 31.4% from 36.5%, primarily because of the adoption of new share-based compensation tax accounting guidance. The adoption produced a $3.3 million tax benefit and a $0.8 million retained-earnings adjustment.
- Debt declined by $19.9 million during the quarter, while the company also funded $31.1 million of share repurchases and $45.7 million of capital expenditures.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2017 capital additions of $199 million to $209 million, or approximately $166 million to $176 million net of tenant improvement allowances.
- Expected fiscal 2017 capital spending included approximately $161 million to $171 million for new stores and operating initiatives, $15 million for game refreshment and $23 million for maintenance capital.
- The company’s long-term plan is to open new stores at an annual rate of at least 10% of the existing store base. It also signed a seven-store licensed development agreement covering six Middle Eastern countries and targeted its first non-Canadian international opening in 2018.
- Key risks include variable-rate debt, commodity prices, wage and minimum-wage increases, consumer spending, severe or unusual weather, competition, store-opening execution, and the seasonality of entertainment and dining demand.
- Operating lease commitments totaled $1.16 billion, including $90.3 million due within one year. The company also reported approximately $1.15 billion of undiscounted future minimum lease commitments in connection with upcoming lease accounting changes.
- Management reported no material impairment charges, no material changes to previously disclosed risk factors and no legal matters expected to materially affect financial condition or results.
Important facts for investors to verify
- Confirm that the relevant reporting period is Q1 fiscal 2017, not Q1 fiscal 2016.
- Assess how much reported revenue and profit growth came from new stores versus the 2.2% comparable-store sales increase.
- Review the sustainability of the quarter’s margin improvement, particularly the benefit from the $2.5 million Texas use-tax settlement and the lower tax rate.
- Evaluate liquidity after planned capital additions, debt service, lease payments, taxes and continued share repurchases.
- Monitor variable-rate debt exposure, covenant compliance and the substantial 2020 debt maturity concentration.
- Consider the scale of operating lease obligations and the future balance-sheet impact of lease accounting adoption.