Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the 13 and 26 weeks ended August 2, 2015, compared with August 3, 2014—not 2014 Q2 as indicated in the request metadata. The company operated 76 stores in the United States and Canada at quarter-end and reported one operating segment.
Business context and reporting period
- Dave & Buster’s operates high-volume dining and entertainment venues offering food, beverages, amusement games, sports viewing, and special events.
- Four stores opened during the first 26 weeks of fiscal 2015; the Farmingdale location was closed in February 2015. The Edina, Minnesota store opened on August 3, 2015, immediately after quarter-end.
- Comparable-store sales increased 11.0% in the quarter and 10.4% year to date, based on 60 comparable stores.
Financial results and key metrics
| Metric | Q2 2015 | Q2 2014 | 26 weeks 2015 | 26 weeks 2014 |
|---|---|---|---|---|
| Total revenue | $217.3 million | $181.4 million | $440.0 million | $376.2 million |
| Operating income | $26.8 million | $16.7 million | $62.5 million | $45.0 million |
| Operating margin | 12.3% | 9.2% | 14.2% | 12.0% |
| Net income (loss) | $12.6 million | $(13.9) million | $32.1 million | $(2.4) million |
| Net margin | 5.8% | (7.7)% | 7.3% | (0.6)% |
| Diluted EPS | $0.29 | $(0.42) | $0.76 | $(0.07) |
| Adjusted EBITDA | $52.7 million | $38.4 million | $114.6 million | $89.1 million |
| Adjusted EBITDA margin | 24.2% | 21.2% | 26.0% | 23.7% |
- Q2 revenue increased 19.8%, with food and beverage revenue of $99.2 million and amusement and other revenue of $118.1 million. Year-to-date revenue increased 17.0%.
- Food and beverage represented 45.6% of Q2 revenue; amusement and other represented 54.4%. Year-to-date mix was 46.1% and 53.9%, respectively.
- Q2 total product costs declined to 18.8% of revenue from 19.8%, while operating payroll declined to 23.0% from 23.3% and other store operating expenses declined to 29.5% from 31.8%.
- General and administrative expense increased to $13.5 million in Q2 from $9.6 million, primarily due to incentive compensation, stock-based compensation, incremental public-company costs, and offering-related costs.
- Cash provided by operating activities was $85.5 million for the first 26 weeks, compared with $10.5 million in the prior-year period. Capital expenditures were $78.0 million, producing negative operating cash flow after capital expenditures of approximately $7.4 million before financing effects.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $23.7 million at August 2, 2015, down from $70.9 million at February 1, 2015.
- Total debt outstanding was $361.0 million, consisting of a $150.0 million term loan and $211.0 million drawn on the revolving facility. Current installments were $7.5 million.
- The new senior secured credit facility, entered into May 15, 2015, matures in 2020 and provides a $150.0 million term loan and a $350.0 million revolver. Borrowing availability was $133.8 million after letters of credit of $5.2 million.
- The facility carried a stated interest rate of 2.19% and a weighted-average effective rate of 2.55% at quarter-end. Debt is secured by subsidiary assets and guaranteed by domestic wholly owned subsidiaries.
- The company reported a net working capital deficit of $46.1 million, but stated that its cash-sales model allows it to operate with negative working capital.
- Future contractual obligations included $361.0 million of debt principal, $36.5 million of interest requirements, and $732.1 million of operating lease payments.
Material changes versus the prior comparable period
- Comparable-store sales growth accelerated to 11.0% in Q2 from 5.7% in the prior-year quarter and to 10.4% year to date from 5.2%.
- Operating margin improved by 310 basis points in Q2 and 220 basis points year to date, reflecting revenue growth and store-level expense leverage.
- Interest expense fell to $2.2 million in Q2 from $11.7 million and to $6.9 million year to date from $23.7 million, primarily because of refinancing.
- The company recorded a $6.8 million loss on debt retirement in Q2 2015, compared with $26.0 million in Q2 2014. The 2015 charge primarily reflected the write-off of unamortized financing costs and discounts.
- Net income changed from a loss of $13.9 million to income of $12.6 million in Q2; year-to-date results changed from a loss of $2.4 million to income of $32.1 million.
- Capital expenditures increased to $78.0 million from $59.4 million, mainly due to new-store construction and expansion initiatives.
Guidance, outlook, risks, and unusual items
- Management planned to open three to four additional stores and relocate one existing store during fiscal 2015. Fiscal-year capital additions were expected to be $163 million to $173 million, or $132 million to $142 million net of tenant-improvement allowances.
- Management targeted long-term annual new-store growth of approximately 10% of the existing store base and was pursuing international expansion, with a first opening outside Canada targeted for 2017.
- Management expected operating cash flow, existing cash, and revolving-credit availability to fund anticipated working capital, capital expenditures, and debt-service needs in the foreseeable future, while noting dependence on future operating performance and financing conditions.
- Key risks include consumer spending and economic conditions, competition, seasonality, severe weather, commodity prices, minimum-wage increases, labor costs, lease obligations, variable interest rates, and the execution risk of rapid store expansion.
- The company estimates that a hypothetical 10% increase in interest rates on its credit facility would increase annual interest expense by approximately $0.8 million.
- Food and beverage costs remain exposed to fluctuations in proteins, seafood, produce, dairy products, and cooking oil; the company does not use financial instruments to hedge commodity risk.
- A $0.5 million gain arose from the early collection of a note receivable. The company also had $1.9 million of federal tax credit carryovers and $43.2 million of state net operating loss carryforwards.
- The company disclosed ordinary-course employment and other legal claims, but management did not expect them to materially affect financial condition or operations. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm that the intended period is Q2 2015, because the supplied filing is dated for the quarter ended August 2, 2015.
- Assess whether comparable-store sales growth and amusement revenue momentum can continue after the benefit of new games, advertising, promotions, and favorable consumer trends.
- Monitor execution of the planned store openings, remodels, relocations, and the associated capital-spending requirements.
- Evaluate leverage, variable-rate exposure, the $133.8 million of remaining revolver availability, and the concentration of debt maturities in 2020.
- Reconcile adjusted EBITDA to GAAP results and consider the effect of excluded pre-opening, stock-based compensation, debt-retirement, and deferred-liability adjustments.
- Review lease commitments, commodity and wage inflation, tax-credit utilization, and the potential impact of the company becoming a large accelerated filer after fiscal 2015.