Dave & Buster's Entertainment (PLAY) 10-Q2023 Q2 Quarterly report

Item 1.    Financial Statements

The accompanying 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. 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.

On June 29, 2022, the Company acquired Main Event for net cash and contingent consideration. Main Event is also focused on food, drinks, and entertainment, largely for the demographic target of families with young children. The acquisition is expected to put the Company in a strategic position for accelerated, profitable growth in both brands as well as create cost synergies with our Dave & Buster’s brand. We finalized our accounting for the Main Event Acquisition during the twenty-six weeks ended July 30, 2023.

To reflect the Acquisition as if it had occurred on January 31, 2022, the unaudited pro forma results include adjustments to reflect, among other things, the interest expense from debt financings obtained to partially fund the cash consideration transferred. Pro forma adjustments were tax effected at the Company’s historical statutory rates in effect for the respective periods. The unaudited pro forma amounts are not necessarily indicative of the combined results of operations that would have been realized had the acquisitions and related financings occurred on the aforementioned dates, nor are they meant to be indicative of any anticipated combined results of operations that the Company will experience after the transaction. In addition, the amounts do not include any adjustments for actions that may be taken following the completion of the transaction, such as expected cost savings, operating synergies, or revenue enhancements that may be realized subsequent to the transaction.

Accrued liabilities consist of the following as of the end of each period:

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, slip-and-fall 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.

The effective tax rate for the twenty-six weeks ended July 30, 2023, was 22.4%, compared to 23.3% for the twenty-six weeks ended July 31, 2022. The current year tax provision includes a favorable state apportionment impact resulting from the acquisition of Main Event and legal entity restructuring as well as lower permanent differences, primarily non-deductible transaction costs as compared to the prior year.

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 28, 2023. Amounts included in the following discussion, except for operating weeks and per share amounts, are rounded in millions.

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.

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 “Dave & Buster’s” and “Main Event” brands. The core of our concept is to offer our customers quality dining and various forms of entertainment all in one location. Our entertainment offerings provide an extensive assortment of attractions centered around playing games, bowling, and watching live sports and other televised events. Our brands appeal to a relatively balanced mix of male and female adults, as well as families and

Our Dave & Buster’s stores average 40,000 square feet and range in size between 16,000 and 70,000 square feet. Our Main Event stores average 54,000 square feet and range in size between 37,500 and 78,000 square feet. Generally, our stores are open seven days a week, with normal hours of operation generally from between 10:00 to 11:30 a.m. until midnight, with stores typically open for extended hours on weekends.

We monitor and analyze several key performance measures to manage our business and evaluate financial and operating performance, including:

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, Credit Adjusted EBITDA, 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 titled 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 certain 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 do not directly relate to the ongoing operations of the currently underlying business of our stores and therefore complicate comparison of the underlying business between periods. Nevertheless, because of the limitations described above, management does not view Adjusted EBITDA, Adjusted EBITDA Margin, Credit Adjusted EBITDA, Store Operating Income Before Depreciation and Amortization or Store Operating Income Before Depreciation and Amortization Margin in isolation and also uses other measures, such as revenues, gross margin, operating income and net income to measure operating performance.

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.

We define “Store Operating Income Before Depreciation and Amortization” as operating income (loss), plus depreciation and amortization expense, general and administrative expenses and 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, 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, loss on debt refinancing 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.

We operate on a 52-week 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 second quarter of 2023 relate to the 13-week period ended July 30, 2023. All references to the second quarter of 2022 relate to the 13-week period ended July 31, 2022. Fiscal 2023 consists of 53 weeks and fiscal 2022 consists of 52 weeks. All dollar amounts are presented in millions, unless otherwise noted, except per share amounts.

We operate stores varying in size and have experienced significant variability among stores in volumes, operating results and net investment costs.

The following table reconciles (in millions of dollars and as a percent of total revenues) Operating income to Store Operating Income Before Depreciation and Amortization for the periods indicated:

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”).

The total cost of products was $83.6 million for the second quarter of 2023 compared to $75.6 million for the second quarter of 2022. The total cost of products as a percentage of total revenues decreased to 15.4% for the second quarter of 2023 compared to 16.1% for the second quarter of 2022.

Total operating payroll and benefits was $127.0 million in the second quarter of 2023 compared to $113.6 million in the second quarter of 2022. The total cost of operating payroll and benefits as a percentage of total revenues was 23.4% in the second quarter of 2023 compared to 24.3% in the second quarter of 2022. This decrease is primarily due to labor management efficiencies, partially offset by hourly wage rate and manager salary increases.

Other store operating expenses was $169.1 million in the second quarter of 2023 compared to $142.5 million in the second quarter of 2022. The increase is primarily due to the additional store operating hours related to our Main Event stores, the impact of Dave & Buster’s new store openings, and higher occupancy costs, utilities, maintenance, security, cleaning services and marketing costs. Other store operating expense as a percentage of total revenues increased to 29.8% in the second quarter of 2023 compared to 29.0% in the second quarter of 2022. This increase in basis points was due primarily to increased occupancy costs, security, cleaning services, and marketing costs.

General and administrative expenses decreased to $32.2 million in the second quarter of 2023 compared to $37.7 million in the second quarter of 2022. The decrease in general and administrative expenses was driven primarily by synergies subsequent to the Main Event acquisition, partially offset by higher stock based compensation expense and system implementation costs. General and administrative expenses as a percentage of total revenues decreased to 5.9% in the second quarter of 2023 compared to 8.0% in the second quarter of 2022 due primarily to sales leverage.

Depreciation and amortization expense increased to $49.1 million in the second quarter of 2023 compared to $38.6 million in the second quarter of 2022, primarily due to the addition of Main Event.

Pre-opening costs increased to $4.0 million in the second quarter of 2023 compared to $3.9 million in the second quarter of 2022 primarily due to pre-opening costs related to Main Event stores, partially offset by a decrease in costs related to the timing of Dave & Buster's store openings in 2023.

Interest expense, net increased to $32.9 million in the second quarter of 2023 compared to $17.1 million in the second quarter of 2022 due primarily to an increase in average outstanding debt. See further discussion of the Company's debt activity at Note 6 to the consolidated financial statements.

Loss on debt refinancing increased to $11.2 million in the second quarter of 2023 compared to $1.5 million in the second quarter of 2022 due primarily to debt refinancing in June of 2023 and June of 2022, respectively. See further discussion of the Company's debt activity at Note 6 to the consolidated financial statements.

The effective tax rate for the second quarter of 2023 was 21.5%, compared to 23.2% for the second quarter of 2022. The second quarter of 2023 includes a favorable state apportionment impact resulting from the acquisition of Main Event and legal entity restructuring as well as lower permanent differences, primarily non-deductible transaction costs as compared to the prior year.

The following table reconciles (in millions of dollars and as a percent of total revenues) Operating income to Store Operating Income Before Depreciation and Amortization for the periods indicated:

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”).

The total cost of products was $173.9 million for the twenty-six weeks ended July 30, 2023 and $145.6 million for the twenty-six weeks ended July 31, 2022. The total cost of products as a percentage of total revenues decreased to 15.3% for the twenty-six weeks ended July 30, 2023 compared to 15.8% for the twenty-six weeks ended July 31, 2022.

Total operating payroll and benefits increased to $257.6 million in the twenty-six weeks ended July 30, 2023 compared to $207.0 million in the twenty-six weeks ended July 31, 2022. The total cost of operating payroll and benefits as a percentage of total revenues was 22.6% in the twenty-six weeks ended July 30, 2023 compared to 22.5% in the twenty-six weeks ended July 31, 2022. This increase is primarily due to hourly wage rate and manager salary increases, partially offset by labor management efficiencies.

Other store operating expenses increased to $339.1 million in the twenty-six weeks ended July 30, 2023 compared to $266.9 million in the twenty-six weeks ended July 31, 2022. The increase is primarily due to the additional store operating hours related to our Main Event stores, the impact of Dave & Buster’s new store openings, and higher occupancy costs, utilities, maintenance, security, cleaning services and marketing costs. Other store operating expense as a percentage of total revenues increased to 29.8% in the twenty-six weeks ended July 30, 2023 compared to 29.0% in the twenty-six weeks ended July 31, 2022. This increase in basis points was due primarily to increased security, cleaning services, and marketing costs.

General and administrative expenses decreased to $63.6 million in the twenty-six weeks ended July 30, 2023 compared to $66.0 million in the twenty-six weeks ended July 31, 2022. The decrease in general and administrative expenses was driven primarily by $18.3 million of transaction and integration costs during the prior year period, partially offset by higher stock based compensation expense and system implementation costs. General and administrative expenses as a percentage of total revenues decreased to 5.6% in the twenty-six weeks ended July 30, 2023 compared to 7.2% in the twenty-six weeks ended July 31, 2022 due primarily to the reasons noted above.

Depreciation and amortization expense increased to $98.0 million in the twenty-six weeks ended July 30, 2023 compared to $71.9 million in the twenty-six weeks ended July 31, 2022, primarily due to the acquired Main Event stores.

Pre-opening costs increased to $8.7 million in the twenty-six weeks ended July 30, 2023 compared to $6.9 million in the twenty-six weeks ended July 31, 2022 primarily related to growth in the pipeline of new store openings in the twenty-six weeks ended July 30, 2023 compared to the twenty-six weeks ended July 31, 2022.

Interest expense, net increased to $63.6 million in the twenty-six weeks ended July 30, 2023 compared to $28.5 million in the twenty-six weeks ended July 31, 2022 due primarily to an increase in average outstanding debt. See further discussion of the Company's debt activity at Note 6 to the consolidated financial statements.

Loss on debt refinancing increased to $11.2 million in the twenty-six weeks ended July 30, 2023 compared to $1.5 million in the twenty-six weeks ended July 31, 2022 due to the debt refinancing in June of 2023 and June of 2022, respectively. See further discussion of the Company's debt activity at Note 6 to the consolidated financial statements.

The effective tax rate for the twenty-six weeks ended July 30, 2023 was 22.4%, compared to 23.3% for the twenty-six weeks ended July 31, 2022. The current year tax provision includes a favorable state apportionment impact resulting from the acquisition of Main Event and legal entity restructuring as well as lower permanent differences, primarily non-deductible transaction costs as compared to the prior year.

In connection with the closing of the Main Event Acquisition on June 29, 2022, D&B Inc entered into a senior secured credit agreement, which refinanced the $500.0 million existing revolving facility, extended the maturity date to June 29, 2027, and added a new term loan facility in the aggregate principal amount of $850.0 million, with a maturity date of June 29, 2029 (“Credit Facility”). The proceeds of the term loan, net of an original issue discount of $42.5 million, were used to pay the consideration for the Acquisition. The revolving credit facility can expire before the stated maturity date if the aggregate outstanding principal amount of the 7.625% senior secured notes (described below) exceeds $100.0 million 91 days prior to November 1, 2025. A portion of the revolving facility not to exceed $35.0 million is available for the issuance of letters of credit.

On March 27, 2023, our Board of Directors approved a share repurchase program with an authorization limit of $100.0. During the twenty-six weeks ended July 30, 2023, the Company repurchased the full $100.0 authorized amount. On April 19, 2023, our Board of Directors approved an increase to the authorization limit of $200.0 for a total of $300.0 authorized under the program. During the twenty-six weeks ended July 30, 2023, the Company repurchased 5.70 million shares at an average of $35.12 per share. The remaining dollar value of shares that may be repurchased under the program is $100.0 as of July 30, 2023. The repurchase program expires at the end of fiscal 2023.

There were no dividends declared or paid during the thirteen and twenty-six weeks ended July 30, 2023. 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, compliance with debt agreements and other factors that the Board of Directors considers relevant.

As of July 30, 2023, the Company had cash and cash equivalents of $82.6 million. 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 non-current 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 capital allocation strategy, including capital expenditures, through at least the next twelve months.

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

Refer to Note 1 to the Unaudited Consolidated Financial Statements for information regarding new accounting pronouncements.

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.

In the second quarter of fiscal 2022, the Company elected SOFR as the alternative base rate for outstanding borrowings on the Credit Facility, which is based on variable rates. As of July 30, 2023, the Company had no balance outstanding on our revolving facility and an outstanding balance of $900.0 million on the term loan facility. The impact on our annual results of operations of a hypothetical one percentage point interest rate change on the outstanding balance of the credit facility as of July 30, 2023 would be approximately $9.0 million.

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.

Under the supervision and with the participation of our management, including the 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 Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

There were no changes to our internal control over financial reporting practices or processes that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during our second quarter ended July 30, 2023. The Main Event Acquisition had a material impact on internal control over financial reporting. The Company will include Main Event in our evaluation of internal control over financial reporting for the fiscal year ending February 4, 2024.

Item 1.    Legal Proceedings

Information regarding legal proceedings is incorporated by reference from Note 7 to our Unaudited Consolidated Financial Statements set forth in Part I of this report.

See discussion in “Risk Factors” in Item 1A of the Company's Annual Report on Form 10-K for the year ended January 29, 2023.

Information regarding repurchase of our common stock, in millions, except share amounts, during the twenty-six weeks ended July 30, 2023: