Dave & Buster’s Entertainment, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks and 39 weeks ended November 2, 2014, compared with November 3, 2013. Although the request metadata identifies “2013 Q3,” the filing is the third-quarter fiscal 2014 report. Dollar amounts are in thousands unless otherwise stated.
Business Context and Reporting Period
- Dave & Buster’s operates high-volume dining and entertainment venues in North America, including food, beverages, amusement games, sports viewing and special events.
- The company operated 70 company-owned stores at November 2, 2014, versus 64 at the comparable 2013 period end. Five stores opened during the first 39 weeks of fiscal 2014.
- The Bethesda, Maryland location permanently closed on August 12, 2014 following an adverse court ruling involving lease restrictions.
- The company completed its initial public offering in October 2014, with 6,764,705 shares issued at $16.00 per share. Oak Hill Funds retained approximately 79.2% ownership, making the company a controlled company under Nasdaq rules.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 39 Weeks 2014 | 39 Weeks 2013 |
|---|---|---|---|---|
| Total revenue | $163.5 million | $142.3 million | $539.7 million | $464.2 million |
| Revenue growth | 14.9% | — | 16.3% | — |
| Operating income | $0.9 million | $(0.9) million | $45.9 million | $32.7 million |
| Operating margin | 0.6% | (0.6)% | 8.5% | 7.1% |
| Net loss | $(4.6) million | $(10.2) million | $(7.0) million | $(2.7) million |
| Net loss per share | $(0.13) | $(0.31) | $(0.21) | $(0.08) |
| Adjusted EBITDA | $24.6 million | $19.8 million | $113.6 million | $94.6 million |
| Adjusted EBITDA margin | 15.0% | 13.9% | 21.1% | 20.4% |
| Comparable-store sales growth | 8.7% | 2.4% | 6.2% | 1.0% |
- Q3 revenue growth reflected a $10.7 million, or 8.7%, increase in comparable-store revenue and a $10.3 million increase from non-comparable stores.
- Q3 revenue mix was 31.8% food, 16.0% beverage and 52.2% amusement and other revenue.
- Q3 operating income improved despite higher general and administrative, depreciation and pre-opening costs. Store-level EBITDA margin increased to 20.6% from 18.3%.
- Net loss improved in Q3 primarily because of lower interest expense, partially offset by a $1.6 million loss on repayment of term debt.
- Year-to-date net loss increased because of a $27.6 million debt-retirement charge related to the July 2014 refinancing and the IPO-related term-loan repayment.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $58.9 million at November 2, 2014, compared with $38.1 million at February 2, 2014.
- Cash provided by operating activities was $36.7 million for the first 39 weeks, down from $86.3 million in the prior-year period. The decline primarily reflected debt-refinancing costs, payment of accreted interest and early-redemption premiums.
- Capital expenditures were $91.7 million year to date, compared with $75.3 million in the prior-year period. Management expected full-year fiscal 2014 capital additions of $125 million to $130 million, or $105 million to $110 million net of tenant allowances.
- Debt was refinanced in July 2014 with a new $530 million term loan and $50 million revolving facility. At November 2, 2014, $430 million was outstanding under the term loan, no revolving borrowings were outstanding, and $5.8 million of letters of credit were issued.
- The term loan matures July 25, 2020, with no scheduled principal payments before maturity. The term-loan interest rate was approximately 4.5% to 4.8% at the reporting date, based on LIBOR plus a margin.
- Borrowing availability under the revolving facility was $44.2 million. Management reported a net working capital deficit of $5.6 million and stated that operating cash flow, cash balances and available credit should fund foreseeable needs.
- Short-term liquidity requirements included approximately $114 million to $124 million of capital expenditures, $19.8 million of interest payments, $58.8 million of lease payments and approximately $29 million of cash taxes.
Material Changes, Outlook and Risks
- Management’s growth strategy is to open new stores at approximately 10% of the existing store base annually, increase comparable-store sales and expand internationally.
- Management targeted signing its first international partner by the end of fiscal 2014 and a first international opening outside Canada in fiscal 2016.
- Management expects lower interest expense following the refinancing and IPO-related debt repayment, but higher legal, accounting, insurance and compliance costs as a public company.
- Management expects new stores to experience a “honeymoon” effect, with second-year sales volumes 15% to 20% below year-one targets and store-level EBITDA margins two to five percentage points lower.
- The business is seasonal, with historically lower third-quarter revenue and higher first- and fourth-quarter revenue. Weather, consumer spending, competition, food costs, supplier pricing and minimum-wage increases could affect results.
- The company has substantial contractual commitments, including $430.0 million of term debt principal, $113.6 million of estimated interest requirements and $734.6 million of operating lease payments.
- The new credit facility contains restrictive covenants limiting additional debt, dividends, acquisitions, asset sales and certain capital expenditures. The company reported compliance with the covenants and no required financial-ratio test as of November 2, 2014.
- The company faces variable-rate interest exposure; management estimated that a hypothetical 10% increase in the term-facility interest rate would increase annual interest expense by approximately $0.4 million.
- Management stated that there were no material changes to previously disclosed risk factors. Disclosure controls and procedures were assessed as effective.
Investor Verification Checklist
- Verify the reporting period: the filing is for fiscal 2014 third quarter, not 2013 third quarter.
- Assess whether comparable-store sales growth and new-store openings can offset the company’s substantial lease, capital expenditure and debt obligations.
- Review the effect of the July refinancing and IPO on future interest expense, leverage and cash flow.
- Reconcile Adjusted EBITDA to GAAP results and consider the excluded debt, depreciation, pre-opening, stock compensation and other items.
- Monitor variable-rate debt exposure, credit-facility covenants and the July 2020 term-loan maturity.
- Evaluate the financial impact of the Bethesda closure, ongoing lease commitments and planned store openings.
- Consider controlled-company governance, related-party arrangements with Oak Hill entities and the concentration of voting ownership.