DAVE & BUSTER'S ENTERTAINMENT, INC.
10-Ks and 10-Qs
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED
May 1,
2022
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM
TO
Commission File
No.
001-35664
(Exact name of registrant as specified in its charter)
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(State of Incorporation)
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(I.R.S. Employer ID)
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(
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(Address of principal executive offices) (Zip Code)
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(Registrant’s telephone number)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading Symbol(s)
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Name of each exchange
on which registered |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
Yes
☒ No ☐
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2
of the Exchange Act.
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☒ | Accelerated filer | ☐ | |||
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Non-accelerated
filer
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☐ | Smaller reporting company |
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| Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by checkmark whether the registrant is a shell company (as defined in
☒
Rule 12b-2
of the Exchange Act). Yes ☐ No
As of May 31, 2022, the registrant ha
d
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DAVE & BUSTER’S ENTERTAINMENT, INC.
FORM
10-Q
FOR QUARTERLY PERIOD ENDED MAY 1, 2022
TABLE OF CONTENTS
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Page
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PART I
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FINANCIAL INFORMATION
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Item 1.
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3
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Item 2.
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13
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Item 3.
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22
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Item 4.
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22
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PART II
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OTHER INFORMATION
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Item 1.
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22
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Item 1A.
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22
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Item 2.
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24
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Item 6.
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25
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26
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2
PART I – FINANCIAL INFORMATION
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Item 1.
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Financial Statements
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DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
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May 1,
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January 30,
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2022
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2022
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(unaudited)
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(audited)
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ASSETS
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Current assets:
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Cash and cash equivalents
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$ |
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$ |
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Inventories
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Prepaid expenses
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Income taxes receivable
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Other current assets
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Total current assets
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Property and equipment (net of $
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Operating lease right of use assets
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Deferred tax assets
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Tradenames
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Goodwill
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Other assets and deferred charges
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Total assets
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$ |
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$ |
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Accrued liabilities
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Income taxes payable
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Total current liabilities
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Deferred income taxes
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Operating lease liabilities
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Other liabilities
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Long-term debt, net
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Commitments and contingencies
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Stockholders’ equity:
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Common stock, par value $
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Preferred stock,
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Paid-in
capital
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Treasury stock,
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(
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(
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Accumulated other comprehensive loss
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(
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Retained earnings
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Total stockholders’ equity
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Total liabilities and stockholders’ equity
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$ |
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$ |
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See accompanying notes to consolidated financial statements
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3
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
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Thirteen Weeks
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Thirteen Weeks
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Ended
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Ended
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May 1, 2022
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May 2, 2021
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Food and beverage revenues
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$ |
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$ |
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Amusement and other revenues
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Total revenues
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Cost of food and beverage
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Cost of amusement and other
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Total cost of products
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Operating payroll and benefits
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Other store operating expenses
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General and administrative expenses
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Depreciation and amortization expense
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Pre-opening
costs
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Total operating costs
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Operating income
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Interest expense, net
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Income before provision for income taxes
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Provision for income taxes
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Net income
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Unrealized foreign currency translation gain (loss)
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Unrealized gain on derivatives, net of tax
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Total other comprehensive income
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Total comprehensive income
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$ |
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$ |
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Net income per share:
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Basic
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$ |
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$ |
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Diluted
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$ |
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$ |
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Weighted average shares used in per share calculations:
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Basic
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Diluted
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See accompanying notes to consolidated financial statements
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4
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
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Thirteen Weeks Ended May 1, 2022
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Common Stock
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Paid-In
Capital |
Treasury Stock
At Cost
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Accumulated
Other Comprehensive
Loss
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Retained
Earnings
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Total
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Shares
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Amt.
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Shares
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Amt.
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Balance January 30, 2022
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$ |
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$ |
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$ |
(
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(
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$ |
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Net income
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— | — | — | — | — | — |
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Unrealized foreign currency translation loss
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— | — | — | — | — |
(
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(
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Unrealized gain on derivatives, net of tax
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— | — | — | — | — |
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— |
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Share-based compensation
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— | — | — | — |
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Issuance of common stock
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— | — | — | — |
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Repurchase of common stock
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(
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Balance May 1, 2022
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$ |
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$ |
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$ |
(
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(
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$ |
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Thirteen Weeks Ended May 2, 2021
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Common Stock
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Paid-In
Capital |
Treasury Stock
At Cost
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Accumulated
Other Comprehensive Loss |
Retained
Earnings |
Total
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Shares
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Amt.
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Shares
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Amt.
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Balance January 31, 2021
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$ |
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$ |
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$ |
(
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(
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$ |
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Net income
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— | — | — | — | — | — |
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Unrealized foreign currency translation gain
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— | — | — | — | — |
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— |
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Unrealized gain on derivatives, net of tax
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— | — | — | — | — |
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— |
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Share-based compensation
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— | — |
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— | — | — | — |
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Issuance of common stock
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— | — | — | — |
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Repurchase of common stock
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(
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Balance May 2, 2021
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$ |
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$ |
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$ |
(
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(
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$ |
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See accompanying notes to consolidated financial statements.
5
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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Thirteen Weeks
Ended
May 1, 2022
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Thirteen Weeks
Ended
May 2, 2021
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Cash flows from operating activities:
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Net income
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation and amortization expense
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Non-cash
interest expense
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Deferred taxes
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Loss on disposal of fixed assets
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Share-based compensation
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Other, net
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Changes in assets and liabilities:
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Inventories
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(
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Prepaid expenses
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Income tax receivable
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Other current assets
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(
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Other assets and deferred charges
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Accounts payable
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Accrued liabilities
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Income taxes payable
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Other liabilities
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(
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Net cash provided by operating activities
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Cash flows from investing activities:
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Capital expenditures
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Proceeds from sales of property and equipment
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Net cash used in investing activities
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Cash flows from financing activities:
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Proceeds from debt
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Payments of debt
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Proceeds from the exercise of stock options
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Repurchases of common stock to satisfy employee withholding tax obligations
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Net cash provided by (used in) financing activities
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Increase in cash and cash equivalents
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Beginning cash and cash equivalents
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Ending cash and cash equivalents
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$ |
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$ |
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Supplemental disclosures of cash flow information:
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Increase in fixed asset accounts payable
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$ |
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$ |
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Cash paid (refund received) for income taxes, net
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$ |
(
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(
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Cash paid for interest, net
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$ |
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$ |
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See accompanying notes to consolidated financial statements.
6
DAVE & BUSTER’S ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 1: Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts of Dave & Buster’s Entertainment, Inc. (referred to herein as the “Company”, “we,” “us” and “our”), any predecessor companies and its wholly-owned subsidiaries, Dave & Buster’s Holdings, Inc. (“D&B Holdings”), which owns
100
%
of the outstanding common stock of Dave & Buster’s, Inc. (“D&B Inc”), the operating company. All intercompany
balances and transactions have been eliminated in consolidation.
one
operating and
one
reportable segment. During the thirteen weeks ended May 1, 2022, we opened
one
new store located in Sioux Falls, South Dakota. As of May 1, 2022, we owned and operated
145
stores located in
41
states, Puerto Rico and
one
Canadian province.
The Company, headquartered in Coppell, Texas, is a leading operator of high-volume entertainment and dining venues (“stores”) in North
America for adults and families under the name “Dave & Buster’s”. The Company operates its business as
The Company operates on a 52 or
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period reported has 13 weeks. Fiscal 2022 and 2021, which end on January 29, 2023 and January 30, 2022, respectively, contain 52 weeks.
The Company’s financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information as prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes thereto for the year ended January 30, 2022, included in our Annual Report on Form
10-K
as filed with the SEC.
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements and for the period then ended. Actual results could differ from those estimates. Operating results for the thirteen weeks ended May 1, 2022 are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 29, 2023.
Cash and cash equivalents
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, and other current liabilities approximate fair value because of their short-term nature. The fair value of the Company’s interest rate swap is determined based upon Level Two inputs which includes valuation models as reported by our counterparties and third-party valuation specialists. These valuation models are based on the present value of expected cash flows using forward rate curves. The fair value of our senior secured notes was $
455,387
and $
456,204
as of May 1, 2022 and January 30, 2022, respectively. The fair value of the Company’s debt is determined based on a discounted cash flow method, using a sector-specific yield curve based on market-derived, trade price data as of the measurement date, and is classified as a Level Two input within the fair value hierarchy.
The Company also measures certain
(“ROU”) assets, goodwill, tradenames, and other assets) at fair value on a
no
impairments recognized.
non-financial
assets (primarily property and equipment,
right-of-use
non-recurring
basis in connection with its periodic evaluations of such assets for potential impairment. During the first quarter of fiscal 2022, there were
7
Interest rate swaps
Effective February 28, 2019, the Company entered into three interest rate swap agreements to manage our exposure to interest rate movements on our variable rate credit facility. The notional amount of the swap agreements, which mature August 17, 2022, totals
$
and the fixed rate of interest for all agreements is
%. Effective
April 14, 2020, the Company amended its existing credit facility agreement to obtain relief from its financial covenants, and as a result, the variable interest rate terms were modified to create an interest rate floor of 1.00%. Accordingly, the Company discontinued the hedging relationship as of April 14, 2020 (de-designation date). Given the continued existence of the hedged interest payments, the Company is reclassifying its accumulated other comprehensive loss of
$
de-designation
date into “Interest expense, net” using a straight-line approach over the remaining life of the originally designated hedging relationship, and the unamortized balance of $
as of May 1, 2022 will be fully amortized at maturity. Effective with the de-designation, any gain or loss on the derivatives are recognized in earnings in the period in which the change occurs. For the thirteen weeks ended May 1, 2022 and May 2, 2021, a gain of
$
The fair value of outstanding interest rate swap derivatives liability was $
1,172
and $
3,823
as of May 1, 2022 and January 30, 2022, respectively, and the balance is included in “Accrued liabilities” in the Consolidated Balance Sheets.
The following table summarizes the activity in accumulated other comprehensive loss related to our derivative instruments:
|
Thirteen weeks ended
|
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May 1, 2022
|
May 2, 2021
|
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Loss reclassified or amortized into interest expense
|
$ |
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$ |
|
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Income tax effect
|
$ |
(
|
) | $ |
(
|
) | ||
Revenue recognition
In jurisdictions where we do not have a legal obligation to remit unredeemed gift card balances to a legal authority, we recognize revenue on unredeemed gift cards in proportion to the pattern of redemption by the customers. During the thirteen weeks ended May 1, 2022, we recognized revenue of approximately $
2,100
related to the amount in deferred gift card revenue as of the end of fiscal 2021, of which approximately $
290
was breakage revenue.
Stockholders’ equity
Earnings per share
basic
weighted average number of common shares outstanding for the reporting period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the diluted net income per share calculation. For the thirteen weeks ended May 1, 2022 and May 2, 2021, the Company excluded anti-dilutive awards from the calculation of approximatel
respectively.
8
|
Thirteen weeks ended
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May 1, 2022
|
May 2, 2021
|
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Basic weighted average shares outstanding
|
|
|
||||||
|
Weighted average dilutive impact of awards
|
|
|
||||||
|
Diluted weighted average shares outstanding
|
|
|
||||||
Note 2: Accrued Liabilities
Accrued liabilities consist of the following as of the end of each period:
|
May 1, 2022
|
January 30, 2022
|
|||||||
|
Deferred amusement revenue
|
$ |
|
$ |
|
||||
|
Current portion of operating lease liabilities, net (1)
|
|
|
||||||
|
Compensation and benefits
|
|
|
||||||
|
Current portion of deferred occupancy costs
|
|
|
||||||
|
Deferred gift card revenue
|
|
|
||||||
|
Property taxes
|
|
|
||||||
|
Current portion of long-term insurance
|
|
|
||||||
|
Customer deposits
|
|
|
||||||
|
Utilities
|
|
|
||||||
|
Sales and use taxes
|
|
|
||||||
|
Current portion of derivatives
|
|
|
||||||
|
Accrued interest
|
|
|
||||||
|
Other
|
|
|
||||||
|
|
|
|
|
|||||
|
Total
s
|
$ |
|
$ |
|
||||
|
|
|
|
|
|||||
| (1) |
The balance of leasehold incentive receivables of $
.
|
Note 3: Debt
Long-term debt consists of the following:
|
May 1, 2022
|
January 30, 2022
|
|||||||
|
Senior secured notes
|
$ |
|
$ |
|
||||
|
|
|
|
|
|||||
|
Total debt outstanding
|
|
|
||||||
|
Less debt issuance costs
|
(
|
) |
(
|
) | ||||
|
|
|
|
|
|||||
|
Long-term debt, net
|
$ |
|
$ |
|
||||
|
|
|
|
|
|||||
On October 27, 2020, the Company issued $
550,000
aggregate principal amount of
7.625
% senior secured notes (the “Notes”). Interest on the Notes is payable in arrears on
November 1 and May 1 of each year
. The Notes mature on
November 1, 2025
,
110,000
3,300
2,300
unless earlier redeemed, and are subject to the terms and conditions set forth in the related indenture. The Notes were issued by D&B Inc and are unconditionally guaranteed by D&B Holdings and certain of D&B Inc’s existing and future wholly owned material domestic subsidiaries, which is substantially the same as the guarantors of the Company’s existing credit facility. During fiscal 2021, the Company redeemed a total of
$
outstanding principal amount of the Notes in two separate transactions, and paid prepayment premiums of
$
, plus accrued and unpaid interest to the date of redemptions. The early redemptions of the Notes resulted in a loss on extinguishment of approximately
$
related to a proportional amount of unamortized issuance costs. Beginning October 27, 2022, the Company may elect to further redeem the Notes, in whole or in part, at certain specified redemption prices, plus accrued and unpaid interest, at the redemption date.
The interest rates per annum applicable to loans under our existing credit facility are based on a defined LIBOR rate plus an applicable margin, based on a total leverage ratio, as defined. The first amendment to the existing credit facility, effective April 14, 2020, increased the interest rate spread on variable rate debt to
2.00
% and set a LIBOR floor of
1.00
%. Concurrent and subject to the issuance of the Notes, the Company entered into a second amendment to its existing credit facility, which extended the maturity of the $
500,000
revolving portion of the facility from August 17, 2022, to August 17, 2024, and during the financial covenant suspension increased pricing period, increased the interest rate spread to
4.00
% and instituted a
1.00
% utilization fee. Shortly after the end of the Company’s first quarter of fiscal 2022, the interest rate spread will range from
1.25
% to
3.00
% and the utilization fee, which is due at maturity, will cease. At the end of the first quarter of fiscal 2022, we had letters of credit outstanding of $
7,505
and an unused commitment balance of $
492,495
under the revolving credit facility.
9
Amortization of debt issuance costs associated with the issuance of the Notes and credit facility was
$
and $
for the first quarter of fiscal 2022 and fiscal 2021, respectively, and is included in “Interest expense, net” in the Consolidated Statements of Comprehensive Income. For the thirteen weeks ended May 1, 2022, and May 2, 2021, respectively, the Company’s weighted average effective interest rate on our total debt facilities (before capitalized interest amounts) wa
s
% and
%, respectively.
Our credit facility and Notes contain restrictive covenants that, among other things, place certain limitations on our ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, pay dividends, acquire other businesses or sell assets. As of the end of the first quarter of fiscal 2022, the Company was in compliance with the financial covenants of our credit facility and all the restrictive covenants of the Notes and credit facility.
Note 4: Leases
We currently lease most of the buildings or sites for our stores, store support center, and warehouse space under facility operating leases. These leases typically have initial terms ranging from ten to twenty years and include one or more options to renew. When determining the lease term, we include option periods for which renewal is reasonably certain. Most of the leases require us to pay property taxes, insurance, and maintenance of the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating leases also includes certain equipment leases that have a term in excess of one year. Certain facility leases also have provisions for additional contingent rentals based on revenues.
Operating lease cost, variable lease cost and short-term lease cost related primarily to our facilities is included in “Other store operating expenses” for our operating stores,
“Pre-opening
costs” for our stores not yet operating, or “General and administrative expenses” for our corporate office and warehouse, in the Consolidated Statements of Comprehensive Income.
The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and property taxes, are as follows for the fiscal year ended:
|
Thirteen Weeks Ended
|
||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||
|
Operating lease cost
|
$ |
|
|
|||||
|
Variable lease cost
|
|
|
||||||
|
Short-term lease cost
|
|
|
||||||
|
|
|
|
|
|||||
|
Total
|
$ |
|
$ |
|
||||
|
|
|
|
|
|||||
During fiscal 2020 and the first half of fiscal 2021, the Company entered into rent relief agreements with our respective landlords. The Company elected to apply an available practical expedient to account for lease concessions and deferrals resulting directly from the COVID-19 pandemic as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and not account for the concessions as lease modifications unless the concession results in a substantial increase in the Company’s obligations. A total of 208 of our 225 rent relief agreements qualified for this accounting election, and the remaining agreements were treated as lease modifications, primarily due to a significant extension of the lease term. The Company has bifurcated our current operating lease liabilities into the portion that remains subject to accretion and the portion that is accounted for as a deferral of payments. The current portion of deferred occupancy costs is included in “Accrued liabilities” and the balance, or
$
Note 5: Commitments and Contingencies
We are subject to certain legal proceedings and claims that arise in the ordinary course of our business, including claims alleging violations of federal and state law regarding workplace and employment matters, discrimination,
and other customer-related incidents and similar matters. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability, with respect to such legal proceedings and claims will not materially affect the consolidated results of our operations or our financial condition. Legal costs related to such claims are expensed as incurred.
slip-and-fall
The Company is a defendant in several lawsuits filed in courts in California alleging violations of California Business and Professions Code, industry wage orders,
laws and rules and regulations pertaining primarily to the failure to pay proper regular and overtime wages, failure to pay for missed meals and rest periods, pay stub violations, failure to pay all wages due at the time of termination and other employment related claims (the “California Cases”). Some of the California Cases purport or may b
wage-and-hour
e
10
determined to be class actions or Private Attorneys General Act representative actions and seek substantial damages and penalties. During fiscal 2020, the Company settled a portion of the cases at the approximate amount estimated and accrued. For the remaining cases, the Company’s assessments are based on assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Management’s assessment of these California Cases, as well as other lawsuits, could change because of future determinations or the discovery of facts that are not presently known. Accordingly, the ultimate costs of resolving these cases may be substantially higher or lower than estimated. The Company continues to aggressively defend
the
remaining
cases.
Note 6: Share-Based Compensation
Compensation expense related to stock options and restricted stock units is included in “General and administrative expenses” in the Consolidated Statements of Comprehensive Income and is as follows:
|
Thirteen Weeks Ended
|
||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||
|
Stock options
|
$ |
|
|
|||||
|
Restricted stock units
|
|
|
||||||
|
|
|
|
|
|||||
|
Share-based compensation expense
|
$ |
|
$ |
|
||||
|
|
|
|
|
|||||
Transactions related to stock option awards during the thirteen weeks ended May 1, 2022 were as follows:
|
|
|
2014 Stock Incentive Plan
|
|
|
2010 Stock Incentive Plan
|
|
||||||||||
|
|
|
Number
|
|
|
Wtd. Avg.
|
|
|
Number
|
|
|
Wtd. Avg.
|
|
||||
|
|
|
of Options
|
|
|
Exercise Price
|
|
|
of Options
|
|
|
Exercise Price
|
|
||||
|
Outstanding at January 30, 2022
|
|
$ |
|
|
$ |
|
||||||||||
|
Granted
|
|
|
— | — | ||||||||||||
|
Exercised
|
(
|
) |
|
(
|
) |
|
||||||||||
|
Forfeited
|
(
|
) |
|
— | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Outstanding at May 1, 2022
|
|
$ |
|
|
$ |
|
||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Exercisable at May 1, 2022
|
|
$ |
|
|
$ |
|
||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The total intrinsic value of options exercised during the thirteen weeks ended May 1, 2022 was $
2,287
. The unrecognized expense related to our stock option plan totaled approximately $
954
as of May 1, 2022 and will be expensed over a weighted average period of
3.0
years.
Transactions related to restricted stock units during the thirteen weeks ended May 1, 2022, were as follows:
|
|
|
|
|
|
Wtd. Avg.
|
|
||
|
Shares
|
Fair Value
|
|||||||
|
Outstanding at January 30, 2022
|
|
$ |
|
|||||
|
Granted
|
|
|
||||||
|
Performance adjusted units
|
|
|
||||||
|
Vested
|
(
|
) |
|
|||||
|
Forfeited
|
(
|
) |
|
|||||
|
|
|
|
|
|||||
|
Outstanding at May 1, 2022
|
|
$ |
|
|||||
|
|
|
|
|
|||||
Fair value of our time-based and performance-based restricted stock units is based on our closing stock price on the date of grant. The grant date fair value of stock options was determined using the Black-Scholes option valuation model. The unrecognized expense related to restricted stock units was $
27,575
as of May 1, 2022 and will be expensed over a weighted average period of
3.2
years.
During the thirteen weeks ended May 1, 2022 and May 2, 2021, excess tax expense (benefit) of $(
63
) and $(
1,135
),
respectively, were recognized in the “Provision for income taxes” in the Consolidated Statement of Comprehensive Income and classified as a source in operating activities in the Consolidated Statement of Cash Flows.
11
Note 7: Income Taxes
The effective tax rate for the thirteen weeks ended May 1, 2022, was
23.3
%, compared to
11.5
% for the thirteen weeks ended May 2, 2021. The previous quarter tax provision includes higher excess tax benefits associated with share-based compensation and credits associated with the reversal of certain tax valuation allowances.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. Intended to provide economic relief to those impacted by the
57,400
, of which approximately $
33,200
were received during the first quarter of fiscal 2022.
COVID-19
pandemic, the CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in fiscal 2018, 2019 and 2020 and technical amendments regarding the expensing of qualified improvement property. The application of the technical amendments made by the CARES Act to qualified improvement property resulted in additional tax net operating losses which were carried back from fiscal 2020 and fiscal 2019 to years with a higher federal corporate income tax rate. During the second quarter of fiscal 2021, the Company filed the fiscal 2020 carryback claims for federal tax refunds of approximately $
Note 8: Acquisition
On April 6, 2022, the Company announced its entry into an Agreement and Plan of Merger, pursuant to which the Company has agreed to acquire
of the equity interests of Ardent Leisure Holding US, Inc. (“Ardent US”), doing business as “Main Event”, in exchange for cash consideration of
$
million (to be adjusted for cash on hand, Ardent US transaction expenses, payments pursuant to Ardent US’s long term incentive plan, certain capital expenditures, and certain agreed upon working capital adjustments) less the indebtedness of Ardent US immediately prior to the closing of the transaction.
As of May 1, 2022, Ardent US owns and operates
family entertainment centers under the name “Main Event” and
family entertainment centers under the name “The Summit.” All
of
the centers are located in the United States.
The closing of the transaction is subject to customary closing conditions, including approval by the shareholders of Ardent Leisure Group, and the transaction is expected to close in the second quarter. We expect the full amount of the cash consideration paid will be funded by a new term loan facility.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the accompanying unaudited consolidated financial statements and the related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form
10-K
as filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022. Unless otherwise specified, the meanings of all defined terms in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are consistent with the meanings of such terms as defined in the Notes to Unaudited Consolidated Financial Statements. This discussion contains statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not a guarantee of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report as a result of various factors, including those set forth in the section entitled “Risk Factors” in our Annual Report on Form
10-K
filed with the SEC on March 29, 2022. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form
10-Q,
such results or developments may not be indicative of results or developments in subsequent periods.
Financial Highlights
| • |
Revenues totaled $451,101 in the first quarter of 2022 compared with $363,582 in the first quarter of 2019. A total of 145 and 127 stores were open and operating without restrictions at the end of the first quarter of 2022 and 2019, respectively. Revenues totaled $265,340 in the first quarter of 2021, which ended with 138 of 141 stores open and operating in limited capacity.
|
| • |
Overall comparable store sales increased 10.9% compared with the same period in 2019 and increased 71.1% compared with the same period in 2021, which ended with 110 of 113 comparable stores open and operating in limited capacity.
|
| • |
Net income totaled $66,984, or $1.35 per diluted share, compared with net income of $42,443, or $1.13 per diluted share in the same period of 2019. In the same period of 2021, we recorded net income of $19,635.
|
| • |
Adjusted EBITDA totaled $143,247, or 31.8% of revenues, compared with Adjusted EBITDA of $98,184 or 27.0% of revenues in the first quarter of 2019. The increase over fiscal 2019 in Adjusted EBITDA, as a percent of revenues, is largely driven by the higher mix of amusements, less discounting, lower hourly labor costs associated with labor efficiencies, and leveraging of certain fixed costs, including occupancy. Adjusted EBITDA was $76,705 or 28.9% of revenues in the first quarter of 2021.
|
| • |
Ended the quarter with $139,081 in cash and approximately $492,500 of liquidity available under the Company’s revolving credit facility. The Company’s total leverage ratio, as defined in the existing credit facility, was approximately 0.7x as of May 1, 2022.
|
General
We are a leading owner and operator of high-volume venues in North America that combine dining and entertainment for both adults and families under the name “Dave & Buster’s”. Founded in 1982, the core of our concept is to offer our customers the opportunity to “Eat Drink Play and Watch” all in one location. Eat and Drink are offered through a full menu of entrées and appetizers and a full selection of
non-alcoholic
and alcoholic beverages. Our Play and Watch offerings provide an extensive assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Our brand appeals to a relatively balanced mix of male and female adults, as well as families and teenagers. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.
13
Our stores, which average 40,000 square feet, range in size between 16,000 and 70,000 square feet. Generally, our stores are open seven days a week, with normal hours of operation generally from 11:30 a.m. to midnight, with stores typically open for extended hours on weekends.
Key Measures of Our Performance
We monitor and analyze several key performance measures to manage our business and evaluate financial and operating performance. These measures include:
Comparable store sales.
COVID-19
pandemic, the comparable store base for fiscal 2022 is defined as stores open for a full 18 months before the beginning of fiscal 2020 and excludes two stores that the Company elected not to reopen after they were closed in March 2020 due to local operating limitations and one store in Cary, North Carolina that was closed and relocated during the fourth quarter of fiscal 2021. For the first quarter of fiscal 2022, our comparable store base consisted of 113 stores.
New store openings.
Non-GAAP
Financial Measures
In addition to the results provided in accordance with generally accepted accounting principles (“GAAP”), we provide
non-GAAP
measures which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP and include Adjusted EBITDA, Adjusted EBITDA Margin, Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin (defined below). These
non-GAAP
measures do not represent and should not be considered as an alternative to net income or cash flows from operations, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Although we use these
non-GAAP
measures to assess the operating performance of our business, they have significant limitations as an analytical tool because they exclude certain material costs. For example, Adjusted EBITDA does not take into account a number of significant items, including our interest expense and depreciation and amortization expense. In addition, Adjusted EBITDA excludes
pre-opening
and other costs which may be important in analyzing our GAAP results. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Our calculations of Adjusted EBITDA adjust for these amounts because they vary from period to period and do not directly relate to the ongoing operations of the currently underlying business of our stores and therefore complicate comparison of underlying business between periods. Nevertheless, because of the limitations described above, management does not view Adjusted EBITDA or Store Operating Income Before Depreciation and Amortization in isolation and also uses other measures, such as revenues, gross margin, operating income and net income, to measure operating performance.
Adjusted EBITDA and Adjusted EBITDA Margin
pre-opening
costs, currency transaction (gains) losses and other costs. “Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by total revenues.
Adjusted EBITDA is presented because we believe that it provides useful information to investors and analysts regarding our operating performance. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin.
pre-opening
costs. “Store Operating Income Before Depreciation and Amortization Margin” is defined as Store Operating Income Before Depreciation and Amortization divided by total revenues. Store Operating Income Before Depreciation and Amortization Margin allows us to evaluate operating performance of each store across stores of varying size and volume.
We believe that Store Operating Income Before Depreciation and Amortization is another useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store-level,
14
and the costs of opening new stores, which are
non-recurring
at the store-level, and thereby enables the comparability of the operating performance of our stores for the periods presented. We also believe that Store Operating Income Before Depreciation and Amortization is a useful measure in evaluating our operating performance within the entertainment and dining industry because it permits the evaluation of store-level productivity, efficiency and performance, and we use Store Operating Income Before Depreciation and Amortization as a means of evaluating store financial performance compared with our competitors. However, because this measure excludes significant items such as general and administrative expenses and
pre-opening
costs, as well as our interest expense, net and depreciation and amortization expense, which are important in evaluating our consolidated financial performance from period to period, the value of this measure is limited as a measure of our consolidated financial performance.
Presentation of Operating Results
We operate on a 52 or
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period has 13 weeks, except in a
53-week
year when the fourth quarter has 14 weeks. All references to the first quarter of 2022 relate to the
13-week
period ended May 1, 2022. All references to the first quarter of 2021 relate to the
13-week
period ended May 2, 2021. All references to the first quarter of 2019 relate to the
13-week
period ended May 5, 2019. Fiscal 2022, fiscal 2021 and fiscal 2019 consist of 52 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.
Store-Level Variability, Quarterly Fluctuations, Seasonality and Inflation
We have historically operated stores varying in size and have experienced significant variability among stores in volumes, operating results and net investment costs.
Our new stores historically open with sales volumes in excess of their expected long-term
run-rate
levels, which we refer to as a “honeymoon” effect. We traditionally expect our new store sales volumes in year two to be 10% to 20% lower than our year one targets, and to grow in line with the rest of our comparable store base thereafter. As a result of the substantial revenues associated with each new store, the number and timing of new store openings may result in significant fluctuations in quarterly results.
In the first year of operation new store operating margins (excluding
pre-opening
expenses) typically benefit from honeymoon sales leverage on occupancy, management labor, and other fixed costs. This benefit is partially offset by normal inefficiencies in hourly labor and other costs associated with establishing a new store. In year two, operating margins may decline due to the loss of honeymoon sales leverage on fixed costs which is partially offset by improvements in store operating efficiency. Furthermore, rents in our new stores are typically higher than our comparable store base.
Our operating results fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with spring and
fall season, has historically had lower revenues as compared to the other quarters.
year-end
holidays which will continue to be susceptible to the impact of severe or unseasonably mild weather on customer traffic and sales during that period. Our third quarter, which encompasses the
back-to-school
We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increase or wage rate increases might be partially offset by selected menu price increases if competitively appropriate. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the
COVID-19
pandemic on us or our suppliers, third-party service providers, and/or customers.
15
Thirteen Weeks Ended May 1, 2022 Compared to Thirteen Weeks Ended May 2, 2021
Results of operations.
|
Thirteen Weeks
|
Thirteen Weeks
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||||||||||
|
Food and beverage revenues
|
$ | 151,912 | 33.7 | % | $ | 85,758 | 32.3 | % | ||||||||
|
Amusement and other revenues
|
299,189 | 66.3 | 179,582 | 67.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total revenues
|
451,101 | 100.0 | 265,340 | 100.0 | ||||||||||||
|
Cost of food and beverage (as a percentage of food and beverage revenues)
|
43,255 | 28.5 | 23,157 | 27.0 | ||||||||||||
|
Cost of amusement and other (as a percentage of amusement and other revenues)
|
26,766 | 8.9 | 16,614 | 9.3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total cost of products
|
70,021 | 15.5 | 39,771 | 15.0 | ||||||||||||
|
Operating payroll and benefits
|
93,361 | 20.7 | 50,279 | 18.9 | ||||||||||||
|
Other store operating expenses
|
124,425 | 27.5 | 84,445 | 31.9 | ||||||||||||
|
General and administrative expenses
|
28,297 | 6.3 | 17,091 | 6.4 | ||||||||||||
|
Depreciation and amortization expense
|
33,288 | 7.4 | 35,099 | 13.2 | ||||||||||||
|
Pre-opening
costs
|
2,997 | 0.7 | 1,659 | 0.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Total operating costs
|
352,389 | 78.1 | 228,344 | 86.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Operating income
|
98,712 | 21.9 | 36,996 | 14.0 | ||||||||||||
|
Interest expense, net
|
11,391 | 2.5 | 14,820 | 5.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Income before provision for income taxes
|
87,321 | 19.4 | 22,176 | 8.4 | ||||||||||||
|
Provision for income taxes
|
20,337 | 4.6 | 2,541 | 1.0 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Net income
|
$ | 66,984 | 14.8 | % | $ | 19,635 | 7.4 | % | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Change in comparable store sales (1)
|
71.1 | % | 56.5 | % | ||||||||||||
|
Company-owned stores at end of period (1)
|
145 | 141 | ||||||||||||||
|
Comparable stores at end of period (1)
|
113 | 114 | ||||||||||||||
|
(1)
|
As of the end of the first quarter of fiscal 2022, all our 145 stores were open and operating without any health restrictions. As of the end of the first quarter of fiscal 2021, 138 of our 141 stores were open and operating in limited capacity. Our comparable store count as of the end of the first quarter of fiscal 2022 excludes a store in Cary, North Carolina, which was closed and relocated during the fourth quarter of fiscal 2021.
|
16
Reconciliations of
Non-GAAP
Financial Measures
Adjusted EBITDA
The following table reconciles (in dollars and as a percent of total revenues) Net income to Adjusted EBITDA for the periods indicated:
|
Thirteen Weeks
|
Thirteen Weeks
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||||||||||
|
Net income
|
$ | 66,984 | 14.8 | % | $ | 19,635 | 7.4 | % | ||||||||
|
Interest expense, net
|
11,391 | 14,820 | ||||||||||||||
|
Provision for income taxes
|
20,337 | 2,541 | ||||||||||||||
|
Depreciation and amortization expense
|
33,288 | 35,099 | ||||||||||||||
|
|
|
|
|
|||||||||||||
|
EBITDA
|
132,000 | 29.3 | % | 72,095 | 27.2 | % | ||||||||||
|
Loss on asset disposal
|
216 | 145 | ||||||||||||||
|
Share-based compensation
|
3,555 | 2,971 | ||||||||||||||
|
Pre-opening
costs
|
2,997 | 1,659 | ||||||||||||||
|
Other costs (1)
|
4,479 | (165 | ) | |||||||||||||
|
|
|
|
|
|||||||||||||
|
Adjusted EBITDA
|
$ | 143,247 | 31.8 | % | $ | 76,705 | 28.9 | % | ||||||||
|
|
|
|
|
|||||||||||||
|
(1)
|
Primarily represents costs related to the pending acquisition of Main Event. Refer to Note 8 of the unaudited financial statements for more information.
|
Store Operating Income Before Depreciation and Amortization
The following table reconciles (in dollars and as a percent of total revenues) Operating income to Store Operating Income Before Depreciation and Amortization for the periods indicated:
|
Thirteen Weeks
|
Thirteen Weeks
|
|||||||||||||||
|
Ended
|
Ended
|
|||||||||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||||||||||
|
Operating income
|
$ | 98,712 | 21.9 | % | $ | 36,996 | 14.0 | % | ||||||||
|
General and administrative expenses
|
28,297 | 17,091 | ||||||||||||||
|
Depreciation and amortization expense
|
33,288 | 35,099 | ||||||||||||||
|
Pre-opening
costs
|
2,997 | 1,659 | ||||||||||||||
|
|
|
|
|
|||||||||||||
|
Store Operating Income Before Depreciation and Amortization
|
$ | 163,294 | 36.2 | % | $ | 90,845 | 34.2 | % | ||||||||
|
|
|
|
|
|||||||||||||
Capital Additions
The table below reflects accrual-based capital additions. Capital additions do not include any reductions for accrual-based leasehold improvement incentives or proceeds from sale-leaseback transactions (collectively, “Payments from landlords”).
|
Thirteen Weeks
|
Thirteen Weeks
|
|||||||
|
Ended
|
Ended
|
|||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||
|
New store and operating initiatives
|
$ | 35,131 | $ | 7,145 | ||||
|
Games
|
1,512 | 3,171 | ||||||
|
Maintenance capital
|
6,311 | 1,888 | ||||||
|
|
|
|
|
|||||
|
Total capital additions
|
$ | 42,954 | $ | 12,204 | ||||
|
|
|
|
|
|||||
|
Payments from landlords
|
$ | 713 | $ | — | ||||
17
Results of Operations
Revenues
In March 2020, a novel strain of coronavirus
(“COVID-19”)
outbreak was declared a global pandemic and a National Public Health Emergency. Shortly after the national emergency declaration, state and local officials began placing restrictions on businesses, some of which allowed
To-Go
or curbside service only while others limited capacity in the dining room or arcade “(Midway”). By March 20, 2020, all our 137 operating stores were temporarily closed. On April 30, 2020, our first store
re-opened
to the public, and by the end of fiscal 2020, 107 of our 140 stores were open and operating. These stores were operating with a combination of limited menus, reduced dining room seating, reduced game availability in the Midway, reduced operating hours and other restrictions referred to as “limited operations” or “operating in limited capacity.” As of the end of the first quarter of fiscal 2021, 138 of our 141 stores were operating in some limited capacity. The Company
re-opened
the remaining stores that had been temporarily closed by the end of the second quarter of fiscal 2021. During the first quarter of fiscal 2022 any remaining local
COVID-19
related operating restrictions on
re-opened
stores were removed.
Selected revenue and store data for the periods indicated are as follows:
|
Thirteen Weeks Ended
|
||||||||||||
|
May 1, 2022
|
May 2, 2021
|
Change
|
||||||||||
|
Total revenues
|
$ | 451,101 | $ | 265,340 | $ | 185,761 | ||||||
|
Total store operating weeks
|
1,876 | 1,633 | 243 | |||||||||
|
Comparable store revenues
|
$ | 368,477 | $ | 215,406 | $ | 153,071 | ||||||
|
Comparable store operating weeks
|
1,469 | 1,290 | 179 | |||||||||
|
Noncomparable store revenues
|
$ | 89,150 | 58,498 | $ | 30,652 | |||||||
|
Noncomparable store operating weeks
|
407 | 343 | 64 | |||||||||
|
Other revenues and deferrals
|
$ | (6,526 | ) | $ | (8,564 | ) | $ | 2,038 | ||||
Total revenues increased $185,761, or 70.0%, to $451,101 in the first quarter of fiscal 2022 compared to total revenues of $265,340 in the first quarter of fiscal 2021. The increase in revenue is attributable primarily to a 14.9% increase in store operating weeks compared to the first quarter of fiscal 2021, when some of our stores remained temporarily closed as a result of the
COVID-19
pandemic, as well as the removal of local
COVID-19
related operating restrictions on
re-opened
stores. Revenues during the first quarter of fiscal 2022 were also favorably impacted by an increase in the revenue per item sold and an increase in our special events business. The table below represents our revenue mix for the fiscal periods indicated. The shift in mix from amusement sales to food and beverage sales of 165 basis points is due, in part, to increased special events, beverage price increases during the first quarter of fiscal 2022, and food price increases effective midway through the third quarter of fiscal 2021.
|
Thirteen Weeks Ended
|
||||||||
|
May 1, 2022
|
May 2, 2021
|
|||||||
|
Food sales
|
22.5 | % | 22.2 | % | ||||
|
Beverage sales
|
11.2 | % | 10.1 | % | ||||
|
Amusement sales
|
65.9 | % | 67.5 | % | ||||
|
Other
|
0.4 | % | 0.2 | % | ||||
Comparable store revenue increased $153,071 or 71.1%, in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021, due to the reasons noted above, including a 13.9% increase in comparable store operating weeks. Comparable store sales in the first quarter of fiscal 2022 increased 10.9% compared to the first quarter of fiscal 2019.
Food sales at comparable stores increased by $35,502, or 76.1%, to $82,138 in the first quarter of fiscal 2022 from $46,636 in the first quarter of fiscal 2021. Beverage sales at comparable stores increased by $20,137, or 93.2%, to $41,734 in the first quarter of fiscal 2022 from $21,597 in the 2021 comparison period. Comparable store amusement and other revenues in the first quarter of fiscal 2022 increased by $97,432, or 66.2%, to $244,605 from $147,173 in the comparable period of fiscal 2021.
18
Non-comparable
store revenue increased $30,652 in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021, for the same reasons noted above, including 64 more store operating weeks.
Cost of products
The total cost of products was $70,021 for the first quarter of fiscal 2022 and $39,771 for the first quarter of fiscal 2021. The total cost of products as a percentage of total revenues increased 50 basis points to 15.5% for the first quarter of fiscal 2022 compared to 15.0% for the first quarter of fiscal 2021.
Cost of food and beverage products increased to $43,255 compared to $23,157 for the first quarter of fiscal 2021. Cost of food and beverage products, as a percentage of food and beverage revenues, increased 150 basis points to 28.5% for the first quarter of fiscal 2022 from 27.0% for the first quarter of fiscal 2021. The unfavorable impacts of commodity cost increases primarily in meat and dairy products during the first quarter of fiscal 2022 were partially offset by food and beverage price increases.
Cost of amusement and other increased to $26,766 in the first quarter of fiscal 2022 compared to $16,614 in the first quarter of fiscal 2021. The costs of amusement and other, as a percentage of amusement and other revenues, decreased 40 basis points to 8.9% for the first quarter of fiscal 2022 from 9.3% in the first quarter of fiscal 2021. This decrease was driven primarily by a change in prices at the game level implemented late in fiscal 2021.
Operating payroll and benefits
Total operating payroll and benefits increased by $43,082, or 85.7%, to $93,361 in the first quarter of fiscal 2022 compared to $50,279 in the first quarter of fiscal 2021. The total cost of operating payroll and benefits as a percentage of total revenues was 20.7% in the first quarter of fiscal 2022 compared to 18.9% in the first quarter of fiscal 2021. This increase is primarily due to an increase in hourly labor cost and an increase in labor hours worked as open positions are filled, offset slightly by favorable leveraging on management labor and benefits.
Other store operating expenses
Other store operating expenses increased by $39,980, or 47.3%, to $124,425 in the first quarter of fiscal 2022 compared to $84,445 in the first quarter of fiscal 2021. The increase is primarily due to the impact of increased store weeks during the first quarter of fiscal 2022 on costs such as utilities, supplies, maintenance, and other services. Other store operating expense as a percentage of total revenues decreased to 27.5% in the first quarter of fiscal 2022 compared to 31.9% in the first quarter of fiscal 2021. This decrease was due primarily to favorable sales leveraging on occupancy costs and utilities.
General and administrative expenses
General and administrative expenses increased by $11,206, or 65.6%, to $28,297 in the first quarter of fiscal 2022 compared to $17,091 in the first quarter of fiscal 2021. The increase in general and administrative expenses was driven primarily by higher incentive compensation, salaries and benefits, and share-based compensation as well as costs related to the potential acquisition of Main Event. General and administrative expenses, as a percentage of total revenues remained relatively unchanged at 6.3% in the first quarter of fiscal 2022 compared to 6.4% in the first quarter of fiscal 2021, due primarily to favorable leverage.
Depreciation and amortization expense
Depreciation and amortization expense was slightly down to $33,288 in the first quarter of fiscal 2022 compared to $35,099 in the first quarter of fiscal 2021. Increased depreciation due to our 2022 and 2021 capital expenditures for new stores, operating initiatives, games, and maintenance capital, was more than offset by other assets reaching the end of their depreciable lives.
Pre-opening
costs
Pre-opening
costs increased by $1,338 to $2,997 in the first quarter of fiscal 2022 compared to $1,659 in the first quarter of fiscal 2021 due to an increase in the number of planned new store openings in the next six months compared to the same time period of the previous year, when construction was reduced as a result of the impacts of the
COVID-19
pandemic.
Interest expense, net
19
Interest expense, net decreased by $3,429 to $11,391 in the first quarter of fiscal 2022 compared to $14,820 in the first quarter of fiscal 2021 due primarily to a decrease in average outstanding debt, due to the prepayment of $110,000 outstanding principal amount of the senior secured notes during the second half of fiscal 2021.
Provision for income taxes
The effective tax rate for the first quarter of fiscal 2022 was 23.3%, compared to 11.5% for the first quarter of fiscal 2021. The previous quarter tax provision includes higher excess tax benefits associated with share-based compensation and credits associated with the reversal of certain tax valuation allowances.
Liquidity and Capital Resources
Debt
We maintain a $500,000 unsecured revolving credit facility, which matures on August 17, 2024. Availability under the revolving credit facility is reduced by outstanding letters of credit, which are used to support our self-insurance programs. At the end of the first quarter of fiscal 2022, we had letters of credit outstanding of $7,505 and an unused commitment balance of $492,495 under the revolving credit facility.
The Company also issued $550,000 aggregate principal amount of 7.625% senior secured notes (the “Notes”) during fiscal 2020. Interest on the Notes is payable in arrears on November 1 and May 1 of each year. The Notes mature on November 1, 2025, unless earlier redeemed, and are subject to the terms and conditions set forth in the related indenture. During fiscal 2021, the Company redeemed a total of $110,000 outstanding principal amount of the Notes in two separate transactions, and paid prepayment premiums of $3,300, plus accrued and unpaid interest to the date of redemptions. The early redemptions are expected to reduce net cash interest on the Notes by approximately $8,400 annually. Beginning October 27, 2022, the Company may elect to further redeem the Notes, in whole or in part, at certain specified redemption prices, plus accrued and unpaid interest, at the redemption date.
The interest rates per annum applicable to loans under our existing credit facility are based on a defined LIBOR rate plus an applicable margin, based on a total leverage ratio, as defined. The first amendment to the existing credit facility, effective April 14, 2020, increased the interest rate spread on variable rate debt to 2.00% and set a LIBOR floor of 1.00%. Concurrent and subject to the issuance of the Notes, the Company entered into a second amendment to its existing credit facility, which extended the maturity of the $500,000 revolving portion of the facility, and during the financial covenant suspension increased pricing period, increased the interest rate spread to 4.00% and instituted a 1.00% utilization fee. Shortly after the end of the Company’s first quarter of fiscal 2022, the interest rate spread will range from 1.25% to 3.00% and the utilization fee, which is due at maturity, will cease.
For the thirteen weeks ended May 1, 2022, and May 2, 2021, respectively, the Company’s weighted average effective interest rate on our total debt facilities (before capitalized interest amounts) was 10.90% and 10.15%, respectively.
Our credit facility and Notes contain restrictive covenants that, among other things, place certain limitations on our ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, pay dividends, acquire other businesses or sell assets. As of May 1, 2022, the Company was in compliance with the financial covenants of our credit facility and all the restrictive covenants of the Notes and credit facility.
On April 6, 2022, the Company announced its entry into an Agreement and Plan of Merger, pursuant to which the Company has agreed to acquire 100% of the equity interests of Ardent Leisure Holding US, Inc. (“Ardent US”), doing business as “Main Event”, in exchange for cash consideration of $835 million (to be adjusted for cash on hand, Ardent US transaction expenses, payments pursuant to Ardent US’s long term incentive plan, certain capital expenditures, and certain agreed upon working capital adjustments) less the indebtedness of Ardent US immediately prior to the closing of the transaction. The closing of the transaction is subject to completion of customary closing conditions, including approval by the shareholders of Ardent Leisure Group, and the transaction is expected to close in the second quarter. We expect the full amount of the cash consideration paid will be funded by a new term loan facility.
Dividends and Share Repurchases
20
On December 6, 2021, our Board of Directors approved a share repurchase program with an authorization limit of $100,000, expiring at the end of fiscal 2022. Future decisions to pay cash dividends or repurchase shares continue to be at the discretion of the Board of Directors and will be dependent on our operating performance, financial condition, capital expenditure requirements and other factors that the Board of Directors considers relevant. There were no dividends declared or share repurchases during the first quarter of 2022.
Cash and Cash Equivalents
All the Company’s stores were open and operating as of the end of the first quarter of fiscal 2022, and as of May 1, 2022, the Company had cash and cash equivalents of $139,081. The Company can operate with a working capital deficit because cash from sales is usually received before related liabilities for product supplies, labor and services become due. Our operations do not require significant inventory or receivables and we continually invest in our business through the growth of stores and operating improvement additions, which are reflected as noncurrent assets and not a part of working capital. Based on our current business plan, we believe our cash and cash equivalents combined with expected cash flows from operations, available borrowings under our revolving credit facility and expected payments from landlords should be sufficient not only for our operating requirements but also to enable us, in the aggregate, to finance our
non-acquisition
related capital allocation strategy, including capital expenditures, through at least the next twelve months.
A comparison of our cash flow activity for the first quarter of fiscal 2022 to the same period of fiscal 2021 follows.
Operating Activities
Investing Activities
During the first quarter of fiscal 2022, the Company spent approximately $31,300 for new store construction and operating improvement initiatives ($30,600 net of payments from landlords), $1,400 for game refreshment and $7,400 for maintenance capital.
During the first quarter of fiscal 2021, the Company spent approximately $7,600 for new store construction and operating improvement initiatives, $2,100 for game refreshment and $700 for maintenance capital.
Financing Activities
Contractual Obligations and Commitments
There have been no material changes outside the ordinary course of business to our contractual obligations since January 30, 2022, as reported on
Form10-K
filed with the SEC on March 29, 2022.
Accounting policies and estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. These estimates and assumptions affect amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the consolidated financial statements. Our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis, and we adjust our assumptions and judgments when facts and circumstances dictate. Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates we used in preparing the accompanying consolidated financial statements. A complete description of our critical accounting policies and estimates is included in our annual consolidated financial statements and the related notes in our Annual Report on Form
10-K
filed with the SEC on March 29, 2022.
Recent accounting pronouncements
Refer to Note 1 to the Unaudited Consolidated Financial Statements for information regarding new accounting pronouncements.
21
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
Commodity Price Risk
We are exposed to market price fluctuation in food, beverage, supplies and other costs such as energy. Given the historical volatility of certain of our food product prices, including proteins, seafood, produce, dairy products, and cooking oil, these fluctuations can materially impact our food costs. While our purchasing commitments partially mitigate the risk of such fluctuations, there is no assurance that supply and demand factors such as disease or inclement weather will not cause the prices of the commodities used in our restaurant operations to fluctuate. Additionally, the cost of purchased materials may be influenced by tariffs and other trade regulations which are outside of our control. To the extent that we do not pass along cost increases to our customers, our results of operations may be adversely affected.
Interest Rate Risk
Outstanding borrowings on our revolving credit facility are based on variable rates, and we have historically elected to use LIBOR. Although our borrowing arrangements provide for alternative base rates other than LIBOR, those rates have historically been higher than those we paid based on LIBOR (which currently is subject to a floor of 1.00%). When LIBOR ceases to exist, we will likely need to agree upon a replacement index with our lenders, and the interest rate thereunder will likely change. As of May 1, 2022, there was no balance outstanding on our revolving credit facility.
Inflation
Severe increases in inflation could affect the United States or global economies and have an adverse impact on our business, financial condition and results of operation. If several of the various costs in our business experience inflation at the same time, such as commodity price increases beyond our ability to control and increased labor costs, we may not be able to adjust prices to sufficiently offset the effect of the various cost increases without negatively impacting consumer demand.
|
Item 4.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Interim Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Rules
13a-15
and
15d-15
promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Interim Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in the Exchange Act
Rules 13a-15(f)
and
15d-15(f))
that occurred during our first quarter ended May 1, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
|
Item 1.
|
Legal Proceedings
|
Information regarding legal proceedings is incorporated by reference from Note 5 to our Unaudited Consolidated Financial Statements set forth in Part I of this report.
|
Item 1A.
|
Risk Factors
|
The Company is supplementing the Risk Factors previously disclosed in Item 1A of the Annual Report on Form
10-K
for the fiscal year ended January 30, 2022, (the “Annual Report”). The following Risk Factor should be read in conjunction with the Risk Factors disclosed in the Annual Report.
We may acquire a business in the future that we fail to effectively integrate or operate.
We recently announced an agreement and plan of merger to acquire a business as part of our expansion effort. If the acquisition is finalized, we may not be successful in integrating future acquisitions into our existing operations, which may result in unforeseen operational difficulties, diminished financial performance or our inability to report financial results and may require a disproportionate amount of our management’s attention. If we fail to manage future acquisitions effectively, our results of operations could be adversely affected.
22
Our potential acquisition and any future acquisitions will be accompanied by the risks commonly encountered in acquisitions, including:
| • |
incorrect assumptions regarding the future results of acquired operations or assets or expected cost reductions or other synergies expected to be realized from acquiring operations or assets;
|
| • |
failure to integrate the operations or management of any acquired operations or assets successfully and timely;
|
| • |
potential loss of key employees and customers of the acquired companies;
|
| • |
potential lack of experience operating in a geographic market or product line of the acquired business;
|
| • |
an increase in our expenses, particularly overhead expenses, and working capital requirements;
|
| • |
the possible inability to achieve the intended objectives of the business combination; and
|
| • |
the diversion of management’s attention from existing operations or other priorities.
|
23
|
Item 2.
|
Unregistered Sales of Equity Securities
|
There were no repurchases of our common stock under our share repurchase plan during the thirteen weeks ended May 1, 2022.
24
|
Item 6.
|
Exhibits
|
| * |
Filed herein
|
25
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
DAVE & BUSTER’S ENTERTAINMENT, INC.,
a Delaware corporation
|
||||||
| Date: June 7, 2022 | By: | /s/ Kevin M. Sheehan | ||||
| Kevin M. Sheehan | ||||||
| Interim Chief Executive Officer | ||||||
| Date: June 7, 2022 | By: | /s/ Michael A. Quartieri | ||||
| Michael A. Quartieri | ||||||
| Chief Financial Officer | ||||||
26
TABLE OF CONTENTS
Part I Financial InformationItem 1. Financial StatementsNote 1: Summary Of Significant Accounting PoliciesNote 2: Accrued LiabilitiesNote 3: DebtNote 4: LeasesNote 5: Commitments and ContingenciesNote 6: Share-based CompensationNote 7: Income TaxesNote 8: AcquisitionItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity SecuritiesItem 6. Exhibits