Dave & Buster's Entertainment, Inc. annual report, FY2015

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

Reporting period: The supplied filing is the fiscal 2015 Form 10-K for the year ended January 31, 2016, not 2014 Q4. Fiscal 2015 contained 52 weeks. Dollar amounts are in thousands except per-share data.

Business Context and Reporting Period

Dave & Buster’s owns and operates high-volume dining and entertainment venues offering food, beverages, games, sports viewing and special events. The Company operated 81 stores across 30 states and Canada at year-end, after opening ten stores during fiscal 2015. It operates as one reportable segment.

Comparable-store data covered 59 stores and excluded certain closed or relocated locations. The Company subsequently opened a Rochester, New York location on March 7, 2016.

Key Financial Metrics

Metric	Fiscal 2015	Fiscal 2014	Change
Total revenue	$866,982	$746,751	16.1% increase
Food and beverage revenue	$405,841	$359,125	13.0% increase
Amusement and other revenue	$461,141	$387,626	19.0% increase
Operating income	$110,036	$73,861	49.0% increase
Operating margin	12.7%	9.9%	280 basis-point expansion
Net income	$59,619	$7,636	Substantial increase
Diluted EPS	$1.39	$0.21	Substantial increase
Adjusted EBITDA	$215,432	$165,127	30.5% increase
Adjusted EBITDA margin	24.8%	22.1%	270 basis-point expansion
Net cash provided by operating activities	$186,983	$86,715	Increase of $100,268
Capital expenditures	$162,892	$129,688	25.6% increase

Revenue mix in fiscal 2015 was approximately 31.6% food, 15.2% beverage, 52.4% amusement and 0.8% other. Comparable-store sales increased 8.9%, including an 11.7% increase in comparable amusement and other revenue.

Store-level EBITDA increased to $253,857 from $198,804, and store-level EBITDA margin increased to 29.3% from 26.6%. Average comparable-store revenue was $11,801 and average comparable-store EBITDA margin was 31.0%.

At January 31, 2016, cash and cash equivalents were $25,495, working capital was negative $46,567, total debt was $338,250 and stockholders’ equity was $346,338. Total assets were $1,004,535.

Material Changes Versus the Prior Comparable Period

Revenue growth reflected an 8.9% comparable-store sales increase and significant contributions from ten fiscal 2015 openings and prior-year openings.
Operating leverage improved: total operating costs declined to 87.3% of revenue from 90.1%, while payroll and benefits declined to 23.1% from 23.5% and other store operating expenses declined to 28.8% from 30.2%.
Amusement product costs improved to 12.6% of amusement and other revenue from 14.0%, partly due to electronic tickets and a shift toward non-redemption games.
Interest expense declined to $11,464 from $34,789 following debt refinancing and prior debt repayment.
The Company recorded a $6,822 loss on debt retirement in fiscal 2015, compared with a $27,578 charge in fiscal 2014.
Income tax expense increased to $32,131 from $3,858 as pretax income increased; the effective tax rate was 35.0% versus 33.7%.
Cash flow from operations increased materially, while investing outflows rose because of new-store construction and other capital investments.
General and administrative expense increased 20.2% to $53,600, reflecting higher corporate labor, stock-based compensation, public-company costs, international development and legal expenses.

Debt, Liquidity and Capital Allocation

In May 2015, the Company entered into a senior secured credit facility consisting of a $150,000 term loan and a $350,000 revolving facility, maturing in May 2020. At year-end, borrowings included $146,250 under the term loan and $192,000 under the revolver, with $5,185 of letters of credit and $152,815 of remaining borrowing availability.

The facility carried a stated weighted-average interest rate of 2.17% at year-end and is subject to variable LIBOR-based rates, financial covenants and restrictions on additional debt, dividends, acquisitions and asset sales. The Company was in compliance with its covenants at January 31, 2016. It purchased an interest-rate cap covering a $200,000 notional amount when one-month LIBOR exceeds 3.0%.

Short-term liquidity requirements included expected fiscal 2016 capital additions of approximately $120,000 to $130,000 net of landlord contributions, $14,863 of scheduled debt service, $71,953 of lease payments and approximately $38,000 of cash income tax payments. Management stated that cash from operations, cash on hand and revolver availability should be sufficient for anticipated needs in the foreseeable future.

The Company did not pay dividends and stated that it intends to retain funds for growth and debt reduction. Contractual obligations totaled approximately $1,152,744, including $338,250 of debt, $30,508 of estimated interest and $783,986 of operating lease obligations.

Guidance, Outlook, Commentary and Unusual Items

Management expected to continue opening stores at approximately 10% of the existing store base annually, subject to site availability and execution.
The Company estimated fiscal 2016 capital additions of $164,000 to $174,000, or $120,000 to $130,000 net of tenant improvement allowances and other landlord payments.
Fiscal 2016 new-store construction and operating-improvement spending was expected to be approximately $132,000 to $142,000, including six remodels.
Management targeted year-one cash-on-cash returns above 35% and five-year average returns above 25% for new large- and small-format stores, but cautioned that these targets are not guaranteed.
In October 2015, the Company signed a seven-store franchise agreement covering six Middle Eastern countries and targeted its first non-Canadian international opening in 2017.
New stores may experience a “honeymoon” effect; management expected year-two revenue to be 10% to 20% below year-one run-rate levels and store-level EBITDA margins to be up to four percentage points lower.
Unusual items included the $6,822 debt-retirement charge, $11,561 of pre-opening costs, $4,109 of share-based compensation and a $493 gain from early collection of a note receivable.
No impairment charges were recognized in fiscal 2015, and goodwill and tradenames were determined not to be impaired.

Principal Risks and Contingencies

Results depend on discretionary consumer spending and are exposed to recession, consumer confidence, weather and broader economic conditions.
Growth depends on finding suitable sites, obtaining leases and permits, hiring staff and achieving targeted returns at new stores; new-market and international expansion carry additional execution risks.
The business faces intense competition from restaurants, entertainment venues, home-based entertainment and potentially similar national concepts.
All operating stores are leased, creating substantial fixed rental obligations and renewal risk. Rent expense was approximately $67,537 in fiscal 2015.
Variable-rate debt creates interest-rate exposure; a hypothetical 25-basis-point increase in one-month LIBOR was estimated to increase annualized interest expense by approximately $865.
Food, labor, commodity, minimum-wage and healthcare-cost increases could pressure margins if not offset by pricing or productivity improvements.
Legal and regulatory risks include liquor licensing, amusement-game regulation, food safety, employment claims, dram-shop claims, gift-card and Power Card escheat issues, and pending ordinary-course litigation.
The Company remains subject to an FTC settlement requiring an ongoing information-security program. Management stated that related legal proceedings were not expected to materially affect results, but cybersecurity, data breaches and system outages remain identified risks.
Seasonality is significant: first and fourth quarters are generally stronger, while the third quarter is historically weaker.

Facts Investors Should Verify

Confirm that the relevant period is fiscal 2015 ended January 31, 2016, rather than 2014 Q4.
Reconcile GAAP net income and operating cash flow with Adjusted EBITDA, including the debt-retirement charge, pre-opening costs, ticket-liability adjustments and stock compensation.
Assess whether comparable-store sales growth remains durable after separating traffic, average check, amusement performance and special-events revenue.
Evaluate the funding requirements and expected returns for the planned fiscal 2016 store openings, remodels and game investments.
Monitor leverage, revolver usage, covenant compliance, variable interest rates and the large debt maturity concentration in 2020.
Review lease obligations, renewal terms and fixed-cost exposure, particularly for stores without remaining renewal options.
Evaluate regulatory developments affecting liquor licenses, redemption games, minimum wages, healthcare costs, gift cards and Power Cards.
Review the filing’s audited financial statements and notes for tax contingencies, legal claims, amusement revenue liabilities and cybersecurity obligations.