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Table of Contents
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form
10-K
 
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE FISCAL YEAR ENDED February 2, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
FOR THE TRANSITION PERIOD FROM
                    
TO
                    
Commission File No.
 001-35664
 
Dave & Buster’s Entertainment, Inc.
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
35-2382255
(State of Incorporation)
 
(I.R.S. Employer ID)
 
 
 
2481 Mañana Drive, Dallas, Texas, 75220
 
(214)
357-9588
(Address of principal executive offices) (Zip Code)
 
(Registrant’s telephone number)
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
         
Title of each class
 
Trading
Symbol(s)
 
Name of each exchange
on which registered
Common Stock $0.01 par value
 
PLAY
 
NASDAQ Global Select Market
Preferred Stock Purchase Rights
 
PLAY
 
NASDAQ Global Select Market
 
 
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     Yes  
    No  
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.     Yes  
    No  
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
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  
    No  
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.
             
Large accelerated filer
 
 
Accelerated filer
 
 
 
 
 
 
 
 
Non-accelerated filer
 
 
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging Growth Company
 
 
 
 
 
 
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  
The aggregate market value of common stock held by
non-affiliates,
based on the closing price of the last day of the registrant’s most recently completed second fiscal quarter as reported on the NASDAQ Global Select Market was $1.3 billion.
The number of shares of Registrant’s Common Stock outstanding as of March 30, 2020 was 30,606,840.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the registrant’s 2020 Annual Meeting of Shareholders have been incorporated by reference into Part III of this Annual Report on Form
10-K.
 
 

Table of Contents
DAVE & BUSTER’S ENTERTAINMENT, INC.
ANNUAL REPORT ON FORM
10-K
FOR FISCAL YEAR ENDED FEBRUARY 2, 2020
TABLE OF CONTENTS
             
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 1.
 
 
 
3
 
ITEM 1A.
 
 
 
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ITEM 1B.
 
 
 
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ITEM 2.
 
 
 
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ITEM 3.
 
 
 
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ITEM 4.
 
 
 
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ITEM 6.
 
 
 
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ITEM 7.
 
 
 
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ITEM 7A.
 
 
 
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ITEM 8.
 
 
 
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ITEM 9.
 
 
 
37
 
ITEM 9A.
 
 
 
37
 
ITEM 9B.
 
 
 
37
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
ITEM 10.
 
 
 
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ITEM 11.
 
 
 
38
 
ITEM 12.
 
 
 
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ITEM 13.
 
 
 
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ITEM 14.
 
 
 
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ITEM 15.
 
 
 
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2

Table of Contents
FORWARD-LOOKING STATEMENTS
Matters discussed in this report and in other public disclosures, both written and oral, include “forward-looking” statements as defined in the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended (the “Exchange Act”). Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. The often include words such as “believes,” “estimates,” “anticipates,” “expects,” “intends,” “plans,” “seeks,” or words of similar meaning, or future or conditional verbs, such as “may,” “will” “should” “could,” “aims,” “intends,” or “projects,” and similar expressions, whether in the negative or the affirmative. You should not place undue reliance on forward-looking statements, which speak only as of the date of the report. These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties. Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risk and uncertainties discussed under “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all forward-looking statements contained in this report and other public statements made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provision the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus
(“COVID-19”).
The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United States economy. In the interest of public health and safety, jurisdictions (national, state and local) where our stores are located, required mandatory store closures or capacity limitations or other restrictions for those that continued to operate. As of the date of this report, all of our 137 operating stores were closed (including our one new store that opened on March 16, 2020). As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash flows. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding
COVID-19
will change including the timing of lifting any restrictions or closure requirements, when our stores will reopen, staffing levels for reopened stores and customer
re-engagement
with our brand. As a result, the Company is leveraging its balance sheet and has fully drawn its $500,000 revolving credit facility to increase its cash position and help preserve its financial flexibility.
PART I
ITEM 1. Business
Dave & Buster’s Entertainment, Inc. (“D&B Entertainment”) is a leading owner and operator of high-volume entertainment and dining venues (“stores”) that operate under the name “Dave & Buster’s”. We offer our customers the opportunity to “Eat Drink Play and Watch” all in one location. We provide our guests the most social, shareable fun, with high-quality food and beverages as well as interactive entertainment options for adults and families to enjoy together. We opened the first Dave & Buster’s store in Dallas, Texas in 1982, and as of February 2, 2020 (the last day of fiscal 2019), we owned and operated 136 stores located in 39 states, Puerto Rico and one Canadian province. Unless otherwise provided in this report, references to “Dave & Buster’s,” “we,” “us,” “our” or the “Company” refer to D&B Entertainment and its wholly-owned subsidiaries and any predecessor entities.
Our fiscal year consists of 52 or 53 weeks ending 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. Fiscal 2017 contained 53 weeks. Fiscal 2019, 2018, 2016, and 2015 each contained 52 weeks. We refer to our fiscal years as 2019, 2018, 2017, 2016, and 2015 throughout this report. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.
Eat Drink Play and Watch - All Under One Roof
We have developed a distinctive brand based on our customer value proposition: “Eat Drink Play and Watch.” The interaction between dining, enjoying our full-service bar, playing games, and watching sports and other entertainment is the defining feature of the Dave & Buster’s customer experience. We believe this combination creates an experience at a single location that cannot be easily replicated elsewhere. Our stores are also designed to accommodate premium sports viewing events, private parties, business functions and other corporate-sponsored events. We believe we appeal to a diverse customer base by creating a highly customizable experience in a dynamic and fun setting.
3

Table of Contents
Eat
We strive to differentiate our food with quality, flavorful offerings. We have made improvements to many of our food items and have renewed our focus on cooking technique and execution. We have also significantly reduced the number of menu items to enable better execution. While our menu appeals to a broad spectrum of customers, we continue to evolve it to reflect the changing tastes of our target guests, with options for full meals as well as grabbing an appetizer to share with friends. We deliver high-quality offerings, including a wide variety of starters,
one-of-a-kind
burgers, choice-grade steaks, and health-conscious options comparable to those of other
higher-end
casual dining operators. We believe our broad menu offers something for everyone and is appropriate for many different occasions. To ensure that we stay
on-trend,
we roll out menus that feature new food items two times a year. Our food revenues, which include
non-alcoholic
beverages, accounted for approximately 68% of our food and beverage revenues and approximately 28% of our total revenues during fiscal 2019.
Drink
Each of our locations also offers full bar service, including a variety of beers, hand-crafted cocktails, and premium spirits. We have
re-crafted
recipes and switched to more fresh juices and purees and house-made mixers and reduced the number of featured cocktails in our beverage menu to improve focus and execution by our bartender staff. Beverage service is typically available throughout the entire store, allowing for multiple point of sale opportunities. We believe that our high margin beverage offering is complementary to each of the Eat, Play and Watch aspects of our brand. Our alcoholic beverage revenues accounted for approximately 32% of our total food and beverage revenues and approximately 13% of our total revenues during fiscal 2019.
Play
The games in our Midway are a key aspect of the Dave & Buster’s entertainment experience, which we believe is the core differentiating feature of our brand. The Midway in each of our stores is an area where we offer a wide array of amusement and entertainment options, some of which are exclusive to Dave & Buster’s on a permanent or temporary basis. Each of our stores typically has 150 redemption and simulation games as well as our proprietary virtual reality platform that we introduced in fiscal 2018. Most of our games are activated by game play credits on cards or other RFID devices (collectively, “Power Cards”). A customer purchases the game play credits or “chips” at an automated kiosk, through a mobile application or from an employee. Our amusement and other revenues accounted for approximately 59% of our total revenues during fiscal 2019. Redemption games, which represented approximately 71% of our amusement and other revenues in fiscal 2019, offer our customers the opportunity to win tickets that are redeemable at a retail-style space in our stores that we have branded WIN!, with prizes ranging from branded novelty items to
high-end
electronics. We believe this “opportunity to win” creates a fun and highly energized social experience that is an important aspect of the Dave & Buster’s
in-store
experience and cannot be easily replicated at home. Many of our
non-redemption
games, which include our virtual reality, video and simulation offerings, can be played by multiple customers simultaneously and include some of the latest high-tech games that are commercially available. These games represented approximately 26% of our amusement and other revenues in fiscal 2019. Other traditional amusements, such as billiards and bowling, represented the remainder of our amusement revenues in fiscal 2019.
Watch
Sports-viewing is another key component of the entertainment experience at Dave & Buster’s. All of our stores have multiple large screen televisions and high-quality audio systems providing customers with a venue for watching live sports and other televised events. Our “D&B Sports” areas provide an immersive viewing environment that provides customers with large, high definition televisions, to watch community-focused programming and enjoy our full bar and extensive food menu. We believe that we have created an attractive and comfortable environment that includes a differentiated and interactive viewing experience that offers a reason for customers to visit Dave & Buster’s. Through continued development of the D&B Sports concept in new stores and additional renovations of existing stores, our goal is to build awareness of D&B Sports as “the best place to watch sports” and the “only place to watch the games and play the games.”
In fiscal 2019, we enhanced the Watch experience of our dining rooms in some of our existing stores through the installation of “Wow Walls”, LED television displays that create high-energy, contemporary, sports and entertainment-oriented dining areas. This cutting-edge visual technology, which has been deployed across 50 stores as of the end of fiscal 2019, is designed to differentiate Dave & Buster’s for delivering sport content relative to our competitors and to provide opportunities around our programming and marketing relative to the Wow Wall to build awareness and drive traffic.
4

Table of Contents
Competitive Positioning
The
out-of-home
entertainment market is highly competitive. We compete for customers’ discretionary entertainment dollars with providers of
out-of-home
entertainment, including localized attraction facilities such as movie theaters, sporting events, bowling alleys, sports activity centers, arcades and entertainment centers, night clubs and restaurants as well as theme parks. We also face competition from local, regional and national establishments that offer entertainment experiences similar to ours and restaurants that are highly competitive with respect to price, quality of service, location, ambience and type and quality of food. Some of these establishments may exist in multiple locations, and we may also face competition on a national basis in the future from other concepts that are similar to ours. We also face competition from increasingly sophisticated home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery.
The key elements that drive our total customer experience and help position us from a competitive standpoint, include the following:
Strong, distinctive brand with broad customer appeal
. We believe that the multi-faceted customer experience of “Eat Drink Play and Watch” at Dave & Buster’s, supported by our national marketing, has helped us create a widely recognized brand. Nationally, over 80% of casual dining customers are aware of our brand as a dining and entertainment venue. Our customer research also shows that our brand appeals to a relatively balanced mix of male and female adults, as well as families and teenagers, in low to middle-income households.
Multi-faceted customer experience highlights our value proposition.
We believe that our combination of interactive games, attractive television viewing areas, high-quality dining and full-service beverage offerings, delivered in a highly-energized atmosphere, provides a multi-faceted customer experience that cannot be easily replicated at home or elsewhere without having to visit multiple destinations. We aim to offer our customers a value proposition comparable or superior to many of the separately available dining and entertainment options. We are continuously working with game manufacturers and others to create new games and attractions that include content that is exclusively available at Dave & Buster’s on a permanent or temporary basis. Our new games in combination with new food and beverage offerings and focused attention to the customer experience help us to retain and generate customer traffic. Our value proposition is enhanced by marketing initiatives, including free game play that often features the introduction of our new games, Super Charge Power Card offerings (when purchasing or adding value to a Power Card, the customer is given the opportunity to add more chips to the Power Card at a lower cost per chip amount), and Half-Price Game Play (every Wednesday, from open to close, we reduce the price of every game in the Midway by
one-half).
In addition, we expanded the “All You Can Eat” wings limited time promotional offer in fiscal 2019. We believe these initiatives encourage customers to participate more fully across our broad range of food, beverage and entertainment offerings.
Vibrant, contemporary store design that integrates entertainment and dining.
We continue to enhance the Dave & Buster’s brand through our store design, including our D&B Sports concept. Our core store design provides a contemporary, engaging atmosphere for our customers with clearly differentiated spaces designed to convey the components of our customer value proposition: “Eat Drink Play and Watch.” Our core store design in all our formats includes a modern approach to the finishes and layout of the store, which we believe encourages participation across each of the store’s elements. The oversized graphics and images throughout the store are intended to communicate our brand personality by being fun, contemporary and larger-than-life. The dining room décor includes booth and table seating and colorful artwork, often featuring local landmarks. Our WIN! area provides a retail-like environment where customers can redeem their tickets for prizes. We believe our D&B Sports area provides an attractive opportunity to market our broader platform to new and existing customers through a year-round calendar of programming and promotions tied to popular sporting events and sport-related activities. The large television screens, comfortable seating, a full menu of food and beverages and artwork often featuring images of local sports teams and sports icons help create what we believe to be an exciting environment for watching sports programming.
Strong history of growth.
We have a proven track record of improving operating results and expanding the footprint of our brand and over the past five fiscal years, we have increased our net income by $92,627, EBITDA margins by approximately 130 basis points and our Adjusted EBITDA Margins (both defined in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Non-GAAP
Financial Measures”) by approximately 120 basis points. During times of normal operations, we expect our continued focus on operating performance at individual stores and leveraging general and administrative expense and advertising expense will positively impact operating margins and will partially offset pressure from wage inflation and occupancy costs, although there is no guarantee that our efforts will be successful.
Store model generates favorable store economics and strong returns.
We believe our store model offering entertainment, food and beverages provides certain benefits in comparison to traditional restaurant concepts, as reflected by our fiscal 2019 average annual comparable store revenues of $10,500, average comparable store operating income margins of 19.4% and comparable Store Operating Income Before Depreciation and Amortization Margins (defined in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Non-GAAP
Financial Measures”) of 28.5%.
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Our entertainment offerings have low variable costs and produced gross margins of 89.2% for fiscal 2019. With approximately 59% of our revenues from entertainment, we have less exposure than traditional restaurant concepts to food costs, which represented only 8% of our total revenues in fiscal 2019. Our business model generates strong cash flow that we can use to execute our growth strategy. We believe the combination of our operating income margins, our Store Operating Income Before Depreciation and Amortization Margins, our refined new store formats and the fact that our stores typically open with high volumes that drive margins in year one will help us achieve our targeted average year one
cash-on-cash
returns of approximately 35% and five-year average
cash-on-cash
returns in excess of 25% for both our large format and small format store openings. Historical
cash-on-cash
returns through fiscal 2019 have been well above target, however, there is no guarantee such results will continue with future store openings. We define and calculate
cash-on-cash
returns for an individual store as (a) Store Operating Income Before Depreciation and Amortization, excluding
pre-opening
expenses, national marketing expense allocation,
non-cash
charges related to asset disposals, currency transactions and changes in
non-cash
deferred amusement revenue, divided by (b) our net development costs. Net development costs include equipment, building, leaseholds and site costs, net of tenant improvement allowances and other landlord payments, excluding
pre-opening
costs and capitalized interest.
Commitment to customer satisfaction.
We aim to enhance our combination of food, beverage and entertainment offerings through our service philosophy of providing a high quality and consistent customer experience through dedicated training and development of our team members and a corporate culture that encourages employee engagement. In 2019, 86.0% of respondents to our Guest Satisfaction Survey rated us “Top Box” (score of 5 out of a possible 5) in “Overall Experience” and 87.2% of respondents rated us “Top Box” in “Intent to Recommend.” By comparison, in 2012, 80.6% of respondents rated us “Top Box” in “Overall Experience” and 83.6% of respondents rated us “Top Box” in “Intent to Recommend.” Through our loyalty program, we email offers and coupons to members and notify them of new games, food, drinks and local events. In addition, members can earn game play credits based on the dollar amount of qualifying purchases at our stores. We expect that as our loyalty program grows it will be an important method of maintaining customers’ connection with our brand and further drive customer satisfaction.
Strategy
During fiscal 2019, we focused on refreshing our strategy and customer experience to set us up for the next phase of growth. As part of this initiative, we commissioned external consultants to provide insight and review opportunities to assist in refreshing our strategy built on the following key components:
Drive our comparable store sales.
We intend to differentiate our brand from other food and entertainment alternatives and drive our comparable sales, in an increasingly competitive landscape, through the following strategies:
 
Offer the latest entertainment to enjoy together.
We believe that our Midway games are the core differentiating feature of the Dave & Buster’s brand and staying current with the latest offerings creates new content and excitement to allow our guests to play with friends and meet new people, including the latest multiplayer games and challenges. We plan to continually update our games each year through development of innovative and proprietary games and the purchase of new games that will resonate with our customers and drive brand relevance due to a variety of factors, including their large scale,
eye-catching
appearance, virtual reality features, association with recognizable brands or the fact that they cannot be easily replicated at home. We also intend to continue leveraging our investments in the best and latest audio-visual technology for guests’ watching experience. We intend to be our guests’
top-of-mind
destination for inspiring and engaging community-focused programming at the best place to watch exactly what they want and how they want.
 
 
 
Continually enhance our food and beverage offerings.
We intend to provide food and beverage offerings that our guests want and crave. Our menu has a variety of items, from hamburgers to steaks to salads that represent our “Crafting Craveability” mantra, and our strategy is to create unique food and beverage options that spark the social experience. We aim to ensure a pipeline for two new menu launches each year, as well as two to three limited time offers. This strategy has been well received by our customers as the percentage of customers rating our food quality as “Excellent” was 86.1% in fiscal 2019. Similarly, the percentage of customers rating our beverage quality as “Excellent” in fiscal 2019 was 89.9%.
 
 
 
Align team and integrated experience.
We intend to create social collisions within our team and our stores that bring our experience to life for our guests. We plan to systematically revitalize and refresh our existing store base with guest-facing best practices and evolve the store layout to drive social collisions across an integrated experience. We will refresh our commitment to serving guests through an improved hiring, training and service model, and our team will help create fun and bring our new strategies to life.
 
 
 
Drive guest engagement.
We believe that there is potential to increase customer frequency by enhancing the
in-store
and
out-of-store
customer experience via digital and mobile strategic initiatives. We continue to optimize our search, programmatic media and paid social media to create customer engagement and drive recurring customer visitation. In addition, we will continue to leverage our customer relationship management program and our growing loyalty database, by delivering more targeted individualized offers and creative content.
 
 
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Invest in new stores.
We believe that the Dave & Buster’s brand has significant growth opportunities, as internal studies and third-party research suggests a total store potential in the United States and Canada in excess of 230 stores (including our 136 stores as of the end of fiscal 2019). We opened sixteen stores in fiscal 2019. While our near-term objective is to continue to pursue disciplined store growth in both new and existing markets, the actual number of openings for fiscal 2020 will depend on many factors, including our ability to locate appropriate sites, negotiate acceptable purchase or lease terms, generate sufficient operating cash flows or utilize available cash to finance construction of leasehold improvements and pre-opening costs, obtain necessary local governmental permits, and recruit and train management and hourly personnel.
We believe that the location of stores is critical to our long-term success. The experience and relationships of our current development team has enabled us to focus our attention on the most relevant network of real estate brokers, which has given us access to a larger pool of qualified potential store sites. In addition, we believe the more contemporary look of our stores has been one of the key drivers in attracting new developers and building our new store pipeline. We devote significant time and resources to strategically analyze each prospective market, trade area and site. We continually identify, evaluate and update our database of potential locations for expansion. We base new site selection on an analytical evaluation of a set of drivers we believe increase the probability of successful, high-volume stores, including site visibility, accessibility and traffic volume, and trade area demographics.
We currently operate stores varying in size from 16,000 to 70,000 square feet. To optimize sales per square foot and further enhance our store economics we currently utilize three basic formats when designing new stores. The target size of our future large format stores is expected to be between 30,001 and 45,000 square feet, the target size of our future medium format stores is expected to be between 25,001 and 30,000 square feet while our small format stores are below 25,000 square feet. At February 2, 2020, we operated 109 large format stores, 17 medium format stores and 10 small format stores.
We utilize smaller format stores to penetrate less densely populated markets and backfill existing markets. The smaller format has reduced the back-of-house space and optimized the sales area dedicated to video and redemption games. We believe that the smaller format maintains the dynamic customer experience that is the foundation of our brand and allows us flexibility in our site selection process. We also believe that the smaller store format allows us to take less capital investment risk per store. Our fiscal 2019 new store openings included thirteen large format stores and three medium format stores.
Advertising and Marketing
We use advertising and marketing to build awareness and strengthen our brand relevance. We spent approximately $44,834 in marketing efforts in fiscal 2019, $40,767 in fiscal 2018, and $37,876 in fiscal 2017. To drive traffic and increase visit frequency and average check size, the bulk of our advertising budget is allocated to national cable television media. To enhance that effort, we also conduct digital initiatives including search engine marketing, mobile campaigns, programmatic marketing and social media, maintain and optimize the website for search, implement periodic promotions and create
in-store
point-of-purchase
materials, and create local marketing plans to address specific objectives in individual stores or markets. We work with external advertising, digital, media and design agencies in the development and execution of these programs.
During fiscal 2019, we continued our investment in developing and implementing new technology platforms that will allow us to digitally engage with our customers and team members and strengthen our marketing and analytics capabilities in an increasingly connected society. We launched a new mobile application during the second half of fiscal 2019 to enhance existing customer satisfaction and attract new ones by providing periodic exclusive offers and discounts and providing a convenient way to purchase Power Cards. We also intend to leverage the new mobile application to build our loyalty program in the future.
We utilize a number of other initiatives to continually improve our market effectiveness, including refining our marketing strategy to better reach both young adults and families, creating new advertising campaigns, investing in menu research and development to differentiate our food offerings from our competition and improve key product attributes (quality, consistency, value and overall customer satisfaction) and execution, developing product/promotional strategies to attract new customers and increase spending/length of stay, and reflecting a consistent brand identity that represents our positioning and commitment to quality.
Our special event marketing programs are managed by our sales department, which provides direction, training, and support to the special events managers and their teams within each store. They are supported by a special event call center located at our corporate office, targeted print and online media plans, as well as promotional incentives at appropriate times during the year. In addition, we have online booking for social parties in order to provide additional convenience in booking events for our customers.
Management
We believe we are led by a strong senior management team averaging over 20 years of experience with national brands in all aspects of casual dining, entertainment and other consumer centric operations. We believe that our management team’s prior experience combined with its experience at Dave & Buster’s provides us with insights into our customer base and enables us to create the dynamic environment that is core to our brand.
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Our typical store team consists of a General Manager supported by an average of eight additional management positions. There is a defined structure of development and progression of job responsibilities from Area Operations Manager through various positions up to the General Manager role. This structure ensures that an adequate succession plan exists within each store. Each management member handles various departments within the store including responsibility for hourly employees. A typical store employs approximately 110 hourly employees, most of whom work part time. The General Manager and the management team are responsible for the
day-to-day
operation of that store, including the hiring, training and development of team members, as well as financial and operational performance. Each store is overseen by a Regional Operations Manager, Regional Operations Director or Vice President of Operations (collectively, “Regional Management”) who directly or indirectly report to our Chief Operating Officer. Our stores are generally open seven days a week, from 11:30 a.m. to midnight on Sunday through Thursday and 11:30 a.m. to 2:00 a.m. on Friday and Saturday.
Training
We strive to maintain quality and consistency in each of our stores through the careful training and supervision of our team members and the establishment of, and adherence to, high standards relating to personnel performance, food and beverage preparation, game playability and maintenance of our stores. We provide all new team members with complete orientation and
one-on-one
training for their positions to help ensure they are able to meet our high standards. All of our new team members are trained by partnering with a certified trainer to assure that the training and information they receive is complete and accurate. Team members are certified for their positions by passing a series of tests, including alcohol awareness training.
We require our new store managers to complete an eight-week training program that includes
front-of-house
service, kitchen, amusements and management responsibilities. Newly trained managers are then assigned to their home store where they receive additional training with their General Manager. We place a high priority on our continuing management development programs in order to ensure that qualified managers are available for our future openings. We conduct semi-annual evaluations with each manager to discuss prior performance and future performance goals. We hold an annual General Manager conference in which our General Managers share best practices and also receive an update on our business plan.
When we open a new store, we provide varying levels of training to team members in each position to ensure the smooth and efficient operation of the store from the first day it opens to the public. Prior to opening a new store, our dedicated training and opening team travels to the store to prepare for an intensive
two-week
training program for all team members hired for the new store opening. Part of the training team stays on site during the first week of operation. We believe this additional investment in our new stores is important, because it helps us provide our customers with a quality experience from day one. After a store has been opened and is operating smoothly, the store managers supervise the training of new team members.
Recruiting and Retention
We seek to hire experienced managers and team members and offer competitive wage and benefit programs. Our store managers all participate in a performance-based incentive program that is based on sales and profit goals. In addition, our salaried and hourly employees are also eligible to participate in a 401(k) plan, medical/dental/vision insurance plans and receive vacation/paid time off based on tenure. Additionally, General Managers are eligible for long-term incentive awards depending upon operating performance.
Information Technology and Cyber Security
We utilize a number of proprietary and third-party management information systems. These systems are designed to enable our games’ functionality, improve operating efficiencies, provide us with timely access to financial and marketing data and reduce store and corporate administrative time and expense. We believe our management information systems are sufficient to support our business plans. Information systems projects are prioritized based upon strategic, financial, regulatory and other business advantage criteria.
Our managers have daily routines focused on driving consistent execution in food, beverage and gaming. We utilize a customized food and beverage analysis program that determines the theoretical food and beverage costs for each store and provides additional tools and reports to help us identify opportunities, including waste management. In addition to our own routines, we leverage a third-party vendor to help ensure quality beverage operations, responsible alcohol service and loss prevention. A mobile salesmanship application with daily sales contests is used by our management team to evaluate sales performance by shift and to drive staff engagement. We have developed tools to forecast sales and schedule labor to assist our managers in optimizing hourly labor based on anticipated sales volumes. This program was enhanced during fiscal 2018 with the introduction of a new workforce management platform which offers real time data that allows management to quickly add or reduce labor based on business needs. Our amusement team uses a proprietary system that is supported by a mobile application that identifies gaming issues and needed repairs to help ensure our games are operational and meeting our ideal playing standard. Complementing this program is our routine preventative maintenance program, designed to prevent game failure and extend the functionality of our midway games. To maximize
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the performance of our new store openings, we have a “New Store Gold Card” process that defines a clear path and timeline to bring each new store in line with our established store efficiencies. Consolidated reporting tools for the key drivers of our business are provided to our Regional Management to identify and troubleshoot any systemic issues.
During 2019, we invested in connectivity and data infrastructure to modernize and upgrade the capacity of our store systems, continued work on new, customer facing digital experiences, such as the launch of our new mobile application that supports
in-store
and
off-premise
amusement entertainment, and deployed hand-held
point-of-sale
devices to a limited group of stores.
We accept electronic payment cards from our customers for payment in our stores. We also receive and maintain certain personal information about our customers and employees. We have systems and processes in place that focus on the protection of our customers’ credit card information and other private information we are required to protect, such as our employees’ personal information. Our existing cyber security policy includes cyber security techniques, tactics and procedures, including continuous monitory and detection programs, network protections, employee training and awareness and incident response preparedness. In addition, we periodically scan our environment for any vulnerability, perform penetration testing and engage third parties to assess effectiveness of our data security practices.
Food Preparation, Quality Control and Purchasing
We strive to maintain high food quality standards. To ensure our quality standards are met, we negotiate directly with independent producers of food products. We provide detailed quality and yield specifications to suppliers for our purchases. Our systems are designed to protect the safety and quality of our food supply throughout the procurement and preparation process. Within each store, the Kitchen Manager is primarily responsible for ensuring the timely and correct preparation of food products, per the recipes we specify. We provide each of our stores with various tools and training to facilitate these activities.
Foreign Operations
We own and operate two stores outside of the United States, in the Canadian province of Ontario. These stores generated revenues of approximately $18,649, $18,848 and $20,075 in fiscal 2019, 2018 and 2017, respectively, representing approximately 1.4%, 1.5%, and 1.8%, respectively, of our consolidated revenues. As of February 2, 2020, less than 2.0% of our long-lived assets were located outside of the United States.
The foreign activities of these stores are subject to various risks of doing business in a foreign country, including currency fluctuations, changes in laws and regulations and economic and political stability. We do not believe there is any material risk associated with the Canadian operations or any dependence by the domestic business upon the Canadian operations.
Store-Level Quarterly Fluctuations and Seasonality
Our revenues are influenced by seasonal shifts in consumer spending. Typically, we have higher revenues associated with the spring and
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
fall season, has historically had lower revenues as compared to other quarters.
Suppliers
The principal goods used by us are redemption game prizes and food and beverage products, which are available from a number of suppliers. We currently purchase a significant amount of our amusement merchandise through a direct import program, a program in which we purchase WIN! merchandise and certain glassware, plateware and furniture directly from offshore manufacturers. We are a large buyer of traditional and amusement games and as a result believe we receive discounted pricing arrangements. Federal and state health care mandates and mandated increases in the minimum wage and other macro-economic pressures could have the repercussion of increasing expenses, as suppliers may be adversely impacted and seek to pass on higher costs to us.
Intellectual Property
We have registered the trademarks Dave & Buster’s
®
, Power Card
®
, Eat & Play Combo
®
, Eat Drink Play
®
, and Eat Drink Play Watch
®
, and have registered or applied to register certain additional trademarks with the United States Patent and Trademark Office and in various foreign countries. We consider our tradename and our logo to be important features of our operations and seek to actively monitor and protect our interest in this property in the various jurisdictions where we operate. We also have certain trade secrets, such as our recipes, processes, proprietary information and certain software programs that we protect by requiring all of our employees to sign a code of ethics, which includes an agreement to keep trade secrets confidential.
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Government Regulation
We are subject to a variety of federal, state and local laws affecting our business. For a discussion of the risks and potential impact on our business of a failure by us to comply with applicable laws and regulations, see “Item 1A. Risk Factors”. Each of our stores is subject to permitting and licensing requirements and regulations by a number of government authorities, which may include, among others, alcoholic beverage control, health and safety, sanitation, environmental, labor and zoning. The development and construction of new stores is subject to compliance with applicable zoning, land use and environmental regulations. We must comply with laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. We are also subject to federal, state and local laws that govern health benefits, employment practices and working conditions, including minimum wage rates, wage and hour practices, gratuities, overtime, various family leave mandates, discrimination and harassment, immigration, workplace safety and other areas. In California, we are subject to the Private Attorneys General Act, which authorizes employees to file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for labor code violation. We must comply with laws relating to information security, consumer credit protection and fraud, and data privacy laws and standards for the protection of personal and health information.
Employees
As of February 2, 2020, we employed 15,908 persons, 269 of whom served at our corporate headquarters, 1,255 of whom served as management personnel and the remainder of whom were hourly personnel. However, due to the impacts of the
COVID-19
pandemic, all but approximately 165 of our store and corporate employees are currently on furlough.
None of our employees are covered by collective bargaining agreements and we have never experienced an organized work stoppage, strike or labor dispute. We believe working conditions and compensation packages are competitive with those offered by competitors and consider our relations with our employees to be good.
Available Information
Our annual reports on Form
10-K,
quarterly reports on Form
10-Q,
current reports on Form
8-K
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our internet website, at www.daveandbusters.com, as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Such reports may also be obtained on the SEC’s website at www.sec.gov. Information on our corporate governance principles and practices can also be found on our website.
ITEM 1A. Risk Factors
Various risks and uncertainties could affect our business. In addition to the information contained elsewhere in this report and other filings that we make with the SEC, the risk factors described below could have a material impact on our business, financial condition, results of operation, cash flows or the trading price of our common stock. It is not possible to identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.
Macroeconomic Risks
COVID-19 has had an adverse effect that is material on our business and may continue to do so.
During March 2020, the World Health Organization declared the rapidly growing coronavirus outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. Federal, state and local governments took a variety of actions to contain the spread of COVID-19. Many jurisdictions where our stores are located required mandatory store closures or imposed capacity limitations and other restrictions affecting our operations. As of March 20, 2020, all of our 137 operating stores were temporarily closed, including our newest store that opened on March 16, 2020. These developments have caused a material adverse impact on the Company’s results of operations, financial condition and cash flows.
Our business continuity team also led our crisis response efforts to ensure continuity of operations as we closed stores and the corporate office. We reduced expenses broadly, including by furloughing nearly all of workforce except a small team of essential personnel, reducing pay and benefits for remaining employees, cutting back capital spending, and halting all planned store openings. We also suspended our share repurchase program and our dividend, and fully drew down the remaining credit available under our $500,000 revolving credit facility as of the date of this filing.
We cannot predict how soon we will be able to reopen our stores and, as, our ability to reopen will depend in part on the actions of a number of governmental bodies over which we have no control. Moreover, once restrictions are lifted, it is unclear how quickly customers will return to our stores, which may be a function of continued concerns over safety and/or depressed consumer sentiment due to adverse economic conditions, including job losses. Considering the significant uncertainty as to when we can reopen some or all of our stores and the uncertain customer demand environment, in addition to the actions described above, we:
  have begun discussions with our landlords, vendors, and other business partners to reduce our lease and contract payments and obtain other concessions;
  are in discussion with our lenders to obtain covenant relief to avoid events of default; and
  are in active dialogue with multiple potential investors to secure additional sources of financing.
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While our lenders have granted a waiver of any event of default associated with receiving an auditor’s report indicating a substantial doubt about the Company’s ability to continue as a going concern in connection with our year-end audit, and some landlords and business partners have agreed to certain concessions, there can be no assurance that we will be successful in obtaining all of the relief we are seeking. Failure to obtain such a waiver would have a material adverse effect on the liquidity, financial condition and results of operations and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan. The outbreak of COVID-19 has caused significant disruptions to the Company’s ability to generate profitability and cash flows, and uncertainty regarding the length of the disruption may adversely impact our ability to raise additional capital. The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows will depend on our ability to have sufficient liquidity until such time as our stores can again generate revenue and profits capable of supporting our ongoing operations, all of which remain highly uncertain at this time.
As a result of the impact of the COVID-19 pandemic, our financial statements contain a statement regarding a substantial doubt about the Company’s ability to continue as a going concern
Our audited financial statements as of and for the year ended February 2, 2020 were prepared on the assumption that we would continue as a going concern. As a result of the factors described above under “COVID-19 has had an adverse effect that is material on our business and may continue to do so,” our management has determined that there is a substantial doubt about our ability to continue as a going concern over the next twelve months and our independent auditors have included a “going concern” explanatory paragraph in their report on our financial statements as of and for the year ended February 2, 2020. Assuming we are able to obtain financial covenant waivers from our lenders (as to which there currently is no assurance), our ability to continue as a going concern over the next twelve months will depend upon a series of factors, including the duration of our store shutdowns; the speed with which, and the extent to which, customers return to our stores once they open; our success in obtaining rent and other concessions from our landlords; and our ability to raise additional capital.
Risks Related to our Business and Industry
If we are unable to successfully design and execute a business strategy plan, our revenues and profitability may be adversely affected.
Our ability to increase revenues and profitability is dependent on designing and executing effective business strategies. If we are delayed or unsuccessful in executing our strategies or if our strategies do not yield the desired results, our business, financial condition and results of operations may suffer. Our ability to meet our business strategy plan is dependent upon, among other things, our ability to:
  increase gross sales and operating profits at our existing stores with game, food and beverage options desired by our customers;
  evolve our marketing and branding strategies to appeal to our customers;
  innovate and implement technology initiatives to provide a unique digital customer experience;
  identify adequate sources of capital to fund and finance strategic initiatives, including new store openings, remodeling existing stores and new game development;
  grow and expand operations, including identifying available, suitable and economically viable sites for new stores; and
  improve the speed and quality of our service.
The success of our growth strategy depends on our ability to open and operate new stores profitably.
Our ability to timely and efficiently open new stores and to operate these stores on a profitable basis is dependent on numerous factors, many of which are beyond our control, including our ability to:
  find quality locations;
  reach acceptable agreements regarding the lease or purchase of locations;
  comply with applicable zoning, licensing, land use and environmental regulations;
  raise or have available an adequate amount of cash or currently available financing for construction and opening costs;
  timely hire, train and retain the skilled management and other employees necessary to meet staffing needs;
  obtain, for acceptable cost, required permits and approvals, including liquor and amusement licenses;
  efficiently manage the amount of time and money used to build and open each new store;
  in new markets in which we open, attract customers who may be unfamiliar with our stores or concept or may have different consumer tastes and discretionary spending patterns than our existing stores;
  open a new store in an existing market without significantly reducing revenues at our existing stores; and
  meet or exceed our performance targets, including target
cash-on-cash
returns.
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The timing of new store openings may result in significant fluctuations in our quarterly performance. We typically incur most cash
pre-opening
costs for a new store within the two months immediately preceding, and the month of, the store’s opening. In addition, the labor and operating costs for a newly opened store during the first three to six months of operation are materially greater than what can be expected after that time, both in aggregate dollars and as a percentage of revenues. Additionally, a portion of a current fiscal year new store capital expenditures is related to stores that are not expected to open until the following fiscal year. Due to these substantial
up-front
financial requirements to open new stores, the investment risk related to any single store is much larger than that associated with many other restaurants or entertainment venues.
We may not be able to compete favorably in the highly competitive
out-of-home
and home-based entertainment and restaurant markets, which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home
entertainment market is highly competitive. We compete for customers’ discretionary entertainment dollars with providers of
out-of-home
entertainment, including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses are larger and have significantly greater financial resources, a greater number of stores, have been in business longer, have greater name recognition and are better established in the markets where our stores are located or are planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed in attracting customers who would otherwise come to our stores. The legalization of casino gambling in geographic areas near any current or future store and the expanded availability of online sports betting would create the possibility for entertainment alternatives, which could have a material adverse effect on our business and financial condition. We also face competition from local, regional and national establishments that offer similar entertainment experiences to ours and restaurants that are highly competitive with respect to price, quality of service, location, ambience and type and quality of food. We also face competition from increasingly sophisticated home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. Our failure to compete favorably in the competitive
out-of-home
and home-based entertainment and restaurant markets could have a material adverse effect on our business, results of operations and financial condition.
Information technology system failures or interruptions may impact our ability to effectively operate our business.
We rely heavily on various information technology systems, including
point-of-sale,
kiosk and amusement operations systems in our stores, data centers that process transactions, communication systems and various other software applications used throughout our operations. Some of these systems have been internally developed or we rely on third party providers and platforms for some of these information technology systems and support. Although we have operational safeguards in place, those technology systems and solutions could become vulnerable to damage, disability or failures due to theft, fire, power outages, telecommunications failure or other catastrophic events. Any failure of these systems could significantly impact our operations. We rely on third-party service providers for certain key elements of our operations including credit card processing, telecommunications and utilities. Our reliance on systems operated by third parties also present the risk faced by the third party’s business, including the operational, security and credit risks of those parties. If those systems were to fail or otherwise be unavailable, and we were unable to timely recover, we could experience an interruption in our operations.
Cyber security breaches or other privacy or data security incidents that expose confidential customer, personal employee or other material, confidential information that is stored in our information systems or by third parties on our behalf may impact our business.
A cyber incident generally refers to any intentional attack or an unintentional event that results in unauthorized access to systems to disrupt operations, corrupt data or steal or expose confidential information or intellectual property. Many of our information technology systems (and those of our third-party business partners, whether cloud-based or hosted in proprietary servers), including those used for
point-of-sale,
web and mobile platforms, mobile payment systems and administrative functions, contain personal, financial or other information that is entrusted to us by our customers and employees. Many of our information technology systems also contain proprietary and other confidential information related to our business, such as business plans and initiatives. A cyber incident that compromises the information of our customers or employees could result in widespread negative publicity, damage to our reputation, a loss of customers, and disruption of our business.
The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. Compliance with these requirements can be costly and time-consuming and the costs could adversely impact our results of operations due to necessary system changes and the development of new administrative processes. The California Privacy Act of 2018, which became effective on January 1, 2020, provides a new private right of action for data breaches and requires companies that process information about California residents to make new disclosures to consumers about their data collection, use and sharing practices and allow consumers to opt out of certain data sharing with third parties. Security breaches could also result in a violation of applicable privacy and other laws, and subject us to private consumer, business partner or securities litigation and governmental investigations and proceedings, any of which could result in our exposure to material civil or criminal liability. We are required to maintain the highest level of Payment Card Industry (“PCI”) Data Security Standard compliance
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at our corporate office and stores. If we do not maintain the required level of PCI compliance, we could be subject to costly fines or additional fees from the card brands that we accept or lose our ability to accept those payment cards. Additionally, an increasing number of government and industry groups have established laws and standards for the protection of personal and health information.
Our existing cyber security policy includes cyber security techniques, tactics and procedures, including continuous monitoring and detection programs, network protections, employee training and awareness and incident response preparedness. In addition, we periodically scan our environment for any vulnerabilities, perform penetration testing and engage third parties to assess effectiveness of our security measures. We began utilizing a voluntary tool to help manage privacy risk by independently benchmarking our cyber security program to a national framework, which provides privacy protection strategies to organizations, like us, looking to improve their approach to using and protecting personal data. Although we employ security technologies and practices and have taken other steps to try to prevent a breach, there are no assurances that such measures will prevent or detect cyber security breaches, and we may nevertheless not have the resources or technical sophistication to prevent rapidly evolving types of cyberattacks. We maintain a separate insurance policy covering cybersecurity risks and such insurance coverage may, subject to policy terms and conditions, cover certain aspects of cyber risks, but this policy is subject to a retention amount and may not be applicable to a particular incident or otherwise may be insufficient to cover all our losses beyond any retention. Further, considering recent court rulings, there is uncertainty as to whether traditional commercial general liability policies will be construed to cover the expenses related to cyberattacks and breaches if credit and debit card information is stolen.
We have been and likely will continue to be, the target of cyber and other security threats. In fiscal 2007, there was an external breach of our credit card processing systems, which led to fraudulent credit card activity and resulted in the payment of fines and reimbursements for the fraudulent credit card activity. As part of a settlement with the Federal Trade Commission, we have implemented a series of corrective measures in order to ensure that our computer systems are secure and that our customers’ personal information is protected. If in the future, we experience another security breach, we could become subject to claims, lawsuits or other proceedings for purportedly fraudulent transactions arising out of the theft of credit or debit card information, compromised security and information systems, failure of our employees to comply with applicable laws, the unauthorized acquisition or use of such information by third parties, or other similar claims. In addition, such breach could put us in violation of our settlement agreement with the Federal Trade Commission.
Changes in consumer preferences and buying patterns could negatively affect our results of operations.
The success of our stores depends in large part on leased locations. Our locations are primarily located near high density retail areas such as regional malls, lifestyle centers, big box shopping centers and entertainment centers. We depend on a high volume of visitors at these centers to attract customers to our locations. As demographic and economic patterns change, current locations may or may not continue to be attractive or profitable.
E-commerce
or online shopping continues to increase and negatively impact consumer traffic at traditional “brick and mortar” retail sites located in regional malls, lifestyle centers, big box shopping centers and entertainment centers. A decline in development or closures of businesses in these settings or a decline in visitors to retail areas near our locations could negatively affect our sales. In addition, desirable locations for the relocation of existing locations may not be available at an acceptable cost, due in part, to the inability to easily terminate a long-term lease.
Consumers have continually changing health or dietary preferences. As a result, we are challenged to evolve our food and beverage menu offerings to appeal to these changing customer preferences, while maintaining our brand character and retaining popular menu items. New information or changes in dietary, nutritional, allergen or health guidelines or environmental or sustainability concerns, whether issued by governmental agencies, academic studies, advocacy organizations or similar groups, may cause some groups of consumers to select foods other than those that are offered by our store. Additionally, it is unclear currently if the
COVID-19
pandemic may have a lasting impact on consumer demand. If we fail to anticipate changing trends or other consumer preferences, our business, financial condition and results of operations would be adversely affected.
Advances in technologies or certain changes in consumer behavior driven by such technologies could have a negative effect on our business. Technology and consumer offerings continue to develop, and we expect new or enhanced technologies and consumer offerings will be available in the future. As part of our marketing efforts, we use a variety of digital platforms including search engines, mobile, online videos and social media platforms such as Facebook
®
, Twitter
®
and Instagram
®
to attract and retain customers. We also test new technology platforms to improve our level of digital engagement with our customers and employees to help strengthen our marketing and related consumer analytics capabilities. These initiatives may not prove to be successful and may result in expenses incurred without the benefit of higher revenues or increased engagement.
Unfavorable publicity or a failure to respond effectively to adverse publicity, could harm our business.
Our brand and our reputation are among our most important assets. Our ability to attract and retain customers depends, in part, upon the external perception of our Company, the quality of our food service and facilities and our integrity. Multi-store businesses, such as ours, can be adversely affected by unfavorable publicity resulting from poor food quality, food safety concerns, flu or other virus outbreaks and other public health concerns stemming from one or a limited number of our stores. Negative publicity may also
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result from crime incidents, data privacy breaches, scandals involving our employees or operational problems at our stores. Regardless of whether the allegations or complaints are valid, unfavorable publicity related to one or more of our stores could affect public perception of the entire brand. Even incidents at similar businesses such as restaurants, at our competitors, or in the supply chain generally could result in negative publicity that would indirectly harm our brand. If one or more of our stores were the subject of unfavorable publicity and we are unable to quickly and effectively respond to such reports, our overall brand could be adversely affected, which could have a material adverse effect on our business, results of operations and financial condition.
There has been a significant increase in the use of social media and similar platforms, including weblogs (blogs), social media websites and other forms of Internet-based communications which allow individuals’ access to a broad audience of consumers and other interested persons. Consumers value readily available information concerning goods and services that they have or plan to purchase and may act on such information without further investigation or authentication. Many social media platforms immediately publish the content their subscribers and participant’s post, often without filters or checks on accuracy of the content posted. The opportunity for dissemination of information, including inaccurate information, is seemingly limitless and readily available. Inaccurate or adverse information concerning our Company may be posted on such platforms at any time. The harm may be immediate without affording us an opportunity for redress or correction. Such platforms also may be used for dissemination of trade secret information, compromising valuable company assets. In summary, the dissemination of information via social media and similar platforms may harm our business, prospects, financial condition and results of operations, regardless of the information’s accuracy. The inappropriate use of social media vehicles by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
If we are not effective in addressing social and environmental responsibility matters or achieving relevant sustainability goals, consumer trust in our brand may suffer. Consumer demand for our products and our brand value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products, which would likely result in lower revenues.
Our operations are susceptible to the changes in cost and availability of commodities and other products, which could negatively affect our operating results.
Our profitability depends in part on our ability to anticipate and react to changes in commodity and other product costs. Various factors beyond our control, including adverse weather conditions, governmental regulation and monetary policy, product availability, recalls of food products, disruption of our supplier manufacturing and distribution processes due to health pandemics, and seasonality, may affect our commodity costs or cause a disruption in our supply chain. In an effort to mitigate some of this risk, we have multiple short-term supply contracts with a limited number of suppliers. If any of these suppliers do not perform adequately or otherwise fail to distribute products or supplies to our stores, we may be unable to replace the suppliers in a short period of time on acceptable terms, which could increase our costs, cause shortages of food and other items at our stores and cause us to remove certain items from our menu. Changes in the price or availability of commodities for which we do not have short-term supply contracts could have a material adverse effect on our profitability. Expiring contracts with our food suppliers could also result in unfavorable renewal terms and therefore increase costs associated with these suppliers or may necessitate negotiations with other suppliers. Other than short-term supply contracts for certain food items, we currently do not engage in futures contracts or other financial risk management strategies with respect to potential price fluctuations in the cost of food and other supplies. Also, the unplanned loss of a major distributor could adversely affect our business by disrupting our operations as we seek out and negotiate a new distribution contract. Further, a significant percentage of our WIN! merchandise inventory is directly or indirectly sourced outside the United States and changes in trade policy and tariffs could negatively impact our costs. If we have to pay higher prices for food or other product costs, our operating costs may increase, and, if we are unable to adjust our purchasing practices or pass any cost increases on to our customers, our operating results could be adversely affected.
Our procurement of new games and amusement offerings is contingent upon availability, and in some instances, our ability to obtain licensing rights.
Our ability to continue to procure new games, amusement offerings, and other entertainment-related equipment is important to our business strategy. The number of suppliers from which we can purchase games, amusement offerings and other entertainment-related equipment is limited. To the extent that the number of suppliers declines, we could be subject to the risk of distribution delays, pricing pressure, lack of innovation and other associated risks. We may not be able to anticipate and react to changing amusement offerings cost by adjusting purchasing practices or game prices, and a failure to do so could have a material adverse effect on our operating results. In addition, any decrease in availability of new amusement offerings that appeal to customers could lead to decreases in revenues as customers negatively react to lack of new game options.
We have successfully developed several proprietary amusement offerings that are not available to operations outside the Company. Our ability to develop future offerings is dependent on, among other things, obtaining rights to compelling game content and developing new amusement offerings that are accepted by our customers. There is no guarantee that additional licensing rights will be obtained by us or that our customers will accept the future offerings that we develop. The result could be increased expenses without increased revenues putting downward pressure on our results of operations and financial performance.
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We are subject to risks associated with leasing space subject to long-term,
non-cancelable
leases.
We typically do not own any real property. Payments under our
non-cancelable,
operating leases account for a significant portion of our operating expenses and we expect the new stores we open in the future will also be leased. The leases typically provide for a base rent plus additional rent based on a percentage of the revenue generated by the stores on the leased premises once certain thresholds are met. We generally cannot cancel these leases without substantial economic penalty. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligation under the applicable lease, including, among other things, paying the base rent for the remainder of the lease term. We depend on cash flow from operations to pay our lease obligations. If our business does not generate adequate cash flow from operating activities and sufficient funds are not otherwise available to us from borrowings under our existing credit facility, we may not be able to service our operating lease obligations, grow our business, respond to competitive challenges or fund other liquidity and capital needs, which would have a material adverse effect on us.
In addition, as each of our leases expires, we may choose not to renew, or may not be able to renew, such existing leases if the capital investment required to maintain the stores at the leased locations is not justified by the return required on the investment. If we are not able to renew the leases at rents that allow such stores to remain profitable as their terms expire, the number of such stores may decrease, resulting in lower revenue from operations, or we may relocate a store, which could subject us to construction and other costs and risks, and in either case, could have a material adverse effect on our business, results of operations and financial condition.
Our success depends upon our ability to recruit and retain qualified store management and operating personnel while also controlling our labor costs.
We must continue to attract, retain and motivate qualified management and operating personnel to maintain consistency in our service, hospitality, quality and atmosphere of our stores, in the United States and Canada and support future growth. Adequate staffing of qualified personnel is a critical factor impacting our customers’ experience in our stores. Qualified management and operating personnel are typically in high demand. The low level of unemployment in the United States is resulting in aggressive competition for talent, wage inflation and pressure to improve benefits and workplace conditions to remain competitive. If we are unable to attract and retain a satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new stores or adversely impact our existing stores. Any such delays, material increases in employee turnover rates in existing stores or widespread employee dissatisfaction could have a material adverse effect on our business and results of operations. Competition for qualified employees could require us to pay higher wages, which could result in higher labor costs and could have a material adverse effect on our results of operations.
Our financial performance and the ability to successfully implement our strategic direction could be adversely affected if we fail to retain, or effectively respond, to a loss of key management.
Our future success is substantially supported by the contributions and abilities of senior management, including key executives and other leadership team members. Changes in senior management could expose us to significant changes in strategic direction and initiatives. A failure to maintain appropriate organizational capacity and capability to support leadership excellence or a loss of key skill sets could jeopardize our ability to meet our business performance expectations and growth targets. Although we have employment agreements with all members of senior management, we cannot prevent members of senior management from terminating their employment with us. Losing the services of members of senior management could materially harm our business until a suitable replacement is found, and such replacement may not have equal experience and capabilities.
Our revenues and operating results may fluctuate significantly due to various risks and unforeseen circumstances, including increases in costs, seasonality, weather, acts of violence or terrorism and other factors outside our control.
Certain of the regions in which our stores are located have been, and may in the future be, subject to natural disasters, such as earthquakes, floods and hurricanes. Depending upon its magnitude, a natural disaster could severely damage our stores, which could adversely affect our business, results of operations or financial condition. Our corporate headquarters, company-owned distribution center, game repair facility and our data center, as well as our backup data facility, are all located in Dallas, Texas. A natural or
man-made
disaster could significantly impact our ability to provide services and systems to our stores and negatively impact store operations throughout our operations. We currently maintain property and business interruption insurance through the aggregate property policy for each of our stores.
Any act of violence at or threatened against our stores or the centers in which they are located, including active shooter situations and terrorist activities, may result in restricted access to our stores and/or store closures in the short-term and, in the long term, may cause our customers and employees to avoid visiting our stores. Any such situation could adversely impact cash flows and make it more difficult to fully staff our stores, which could materially adversely affect our business.
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The discontinuation of the London Interbank Offered Rate (“LIBOR”) after 2021 and the replacement with an alternative reference rate may adversely impact interest rates.
Our operating results may fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with the spring and
year-end
holidays. Our third quarter, which encompasses the
back-to-school
fall season, has historically had lower revenues as compared to other quarters. As a result, factors affecting peak seasons could have a disproportionate effect on our results. For example, the number of days between Thanksgiving and New Year’s Day and the days of the week on which Christmas and New Year’s Eve fall affect the volume of business we generate during the December holiday season and can affect our results for the full fiscal year. In addition, unfavorable weather conditions during the winter and spring seasons could have a significant impact on our results.
General Business and Regulatory Risks
Actual or threatened other epidemics, pandemics, outbreaks, or other health crises may adversely affect our business.
Our business could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the recent outbreak of coronavirus
(COVID-19).
To the extent that a virus or disease is food-borne, or perceived to be food-borne, future outbreaks may adversely affect the price and availability of certain food products and cause our customers to eat less of a product, or could reduce public confidence in food handling and/or public assembly. If a virus is transmitted by human contact, our employees or customers could become infected or could choose, or be advised, to avoid gathering in public places or avoid touching game or screen surfaces, any of which could adversely affect our store guest traffic and sales as well as our ability to adequately staff our stores, receive deliveries on a timely basis or perform functions at the corporate level. We could also be adversely affected if the World Health Organization and /or the Centers for Disease Control and/or other governmental agencies were to restrict travel to affected geographic areas where we source our products, thus possibly impacting the continuity of supply. Additionally, certain jurisdictions in which we operate may impose mandatory closures, seek voluntary closures or impose restrictions on operations. Even if our stores are not directly impacted, a health pandemic can result in a disruption of our supply chain if our suppliers’ ability to manufacture, transport or otherwise provide goods or services are adversely affected. Additionally, even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or significant health risk may adversely affect our business.
We believe that our stores have a larger guest-facing footprint and higher levels of customer traffic than other concepts in the dining and entertainment industry. Our stores are places where people can gather together for human connection. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings to halt or delay the spread of disease. The impact of a health pandemic on us might be disproportionately greater than on other dining and entertainment venues that have lower customer traffic and that depend less on the gathering of people.
We may not be able to operate our stores or obtain and maintain licenses and permits necessary for such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results of operations or financial condition.
We are subject to licensing and regulation by state and local authorities relating to the sale of alcoholic beverages, health, sanitation, safety, building and fire codes. Each store is required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. In some states, the loss of a license for cause with respect to one store may lead to the loss of licenses at all stores in that state and could make it more difficult to obtain additional licenses in that state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each store, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling and storage and dispensing of alcoholic beverages. We generally have not encountered any material difficulties or failures in obtaining and maintaining the required licenses, permits and approvals that could impact the continuing operations of an existing store, or delay or prevent the opening of a new store. Although we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a material adverse effect on operations and our ability to obtain such a license or permit in other locations.
We are also subject to amusement licensing and regulation by the states, counties and municipalities in which our stores are located, as a result of operating certain entertainment games and attractions, including skill-based games, that offer redemption prizes. These laws and regulations can vary significantly by state, county, and municipality and, in some jurisdictions, may require us to modify our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types of redemption games we offer. Furthermore, other states, counties and municipalities may make changes to existing laws to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws, could require our existing stores in these jurisdictions to alter the mix of games, modify certain games, limit the number of tickets that may be won by a customer from a redemption game, change the mix of prizes that we may offer at our WIN! area or terminate the use of specific games, any of which could adversely affect our operations. If we fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business and our financial results.
We are subject to extensive laws and regulations and failure to comply with existing or new laws and regulations could adversely affect our operational efficiencies, cost structure and talent availability.
Currently, all of our stores are unable to operate due to guidelines and restrictions put in place by federal, state and local governments in response to the
COVID-19
pandemic.
We are subject to various federal, state and local laws and regulations that govern numerous aspects of our business, including the following:
  the Fair Labor Standards Act and other federal, state and local laws and regulations that govern employment practices and working conditions, including minimum wage rates, wage and hour practices, gratuities, overtime, various family leave mandates, discrimination and harassment, immigration, workplace safety and other areas;
  the Americans with Disabilities Act and similar state laws that give civil rights protections to individuals with disabilities in the context of employment, public accommodations and other areas;
  the Patient Protection and Affordable Care Act as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (“PPACA”) and uncertainties surrounding future changes to or replacement of our health insurance system;
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  preparation, sale and labeling of food, including the federal regulations of the Food and Drug Administration, which oversees the safety of the entire food system, including inspection and mandatory food recalls, menu labeling and nutritional content, and additional requirements in certain states and local jurisdictions;
 
  environmental laws and regulations governing, among other things, discharges of pollutants into the air and water as well as the presence, handling, release and disposal of and exposure to hazardous substances; and
 
  other environmental matters, such as climate change, the reduction of greenhouse gases, water consumption and animal health and welfare;
 
Compliance with these laws and regulations and future new laws or changes in these laws or regulations that impose additional requirements, can be costly. Any failure or perceived failure to comply with these laws or regulations could result in, among other things, revocation of required license, administrative enforcement actions, fines, civil and criminal liability, and/or closure of stores. We could also be strictly liable, without regard to fault, for certain environmental conditions at properties we formerly owned or operated as well as at our current properties. Additionally, more stringent and varied requirements of local and state governmental bodies with respect to zoning, land use and environmental factors could delay or prevent development of new stores in certain locations.
If new immigration legislation is enacted, such laws may contain provisions that could increase our costs in recruiting, training and retaining employees. Also, although our hiring practices comply with the requirements of federal law in reviewing employees’ citizenship or authority to work in the United States, increased enforcement efforts with respect to existing immigration laws by governmental authorities may disrupt a portion of our workforce or our operations at one or more of our stores, thereby negatively impacting our business.
Further, we expect continued increases in labor costs due to federal, state and local mandated increases in the minimum wage, and we are uncertain of the repercussions, if any, of increased minimum wages on other expenses. For example, our suppliers may be more severely impacted by higher minimum wage standards, which could result in increased costs to us. We may not be able to partially or fully offset cost increases resulting from changes in minimum wage rates by increasing menu or game prices, improving productivity, or through other adjustments, and our business, results of operations and financial condition could be adversely affected. Moreover, although none of our employees have been or are now represented by any unions, labor organizations may seek to represent certain of our employees in the future, and if they are successful, our payroll expenses and other labor costs may be increased in the course of collective bargaining, and/or there may be strikes or other work disruptions that may adversely affect our business.
We face potential liability with our gift cards under the property laws of some states.
Our gift cards, which may be used to purchase food, beverages, merchandise and game play credits in our stores, may be considered stored value cards. Certain states include gift cards under their abandoned and unclaimed property laws and require companies to remit to the state cash in an amount equal to all or a designated portion of the unredeemed balance on the gift cards based on certain card attributes and the length of time that the cards are inactive. To date we have not remitted any amounts relating to unredeemed gift cards to states based upon our assessment of applicable laws.
The analysis of the potential application of the abandoned and unclaimed property laws to our gift cards is complex, involving an analysis of constitutional, statutory provisions and factual issues. In the event that one or more states change their existing abandoned and unclaimed property laws or successfully challenge our position on the application of its abandoned and unclaimed property laws to our gift cards, our liabilities with respect to unredeemed gift cards may be materially higher than the amounts shown in our financial statements. If we are required to materially increase the estimated liability recorded in our financial statements with respect to unredeemed gift cards, our net income could be materially and adversely affected.
Our Power Cards may raise similar concerns to gift cards in terms of the applicability of state abandoned and unclaimed property laws. However, based on our analysis of abandoned and unclaimed property laws, we believe that our Power Cards are not stored value cards and such laws do not apply, although there can be no assurance that states will not take a different position.
Litigation, including allegations of illegal, unfair or inconsistent employment practices, may adversely affect our business, results of operations or financial condition.
Our business may be adversely affected by the risk of legal proceedings brought by or on behalf of our customers, employees, suppliers, shareholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. In recent years, a number of restaurant companies, including ours, have been subject to lawsuits, including class action lawsuits, alleging violations of federal and state law regarding workplace and employment matters, discrimination and similar matters, and a number of these lawsuits have resulted in the payment of substantial damages by the defendants. We have had from time to time and now have such lawsuits pending against us. In addition, from time to time, customers file complaints or lawsuits against us alleging that we are responsible for some illness or injury they suffered at or after a visit to a store. We are also subject to a variety of other claims in the ordinary course of business, including personal injury, lease and contract claims.
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We are also subject to “dram shop” statutes in certain states in which our stores are located. These statutes generally provide a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated individual. Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes. Because these cases often seek punitive damages, which may not be covered by insurance, such litigation could have an adverse impact on our business, results of operations or financial condition. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from operations and hurt our financial performance. A judgment significantly in excess of our insurance coverage or not covered by insurance could have a material adverse effect on our business, results of operations or financial condition. Also, adverse publicity resulting from these allegations may materially affect our stores and us.
Failure to adequately protect our intellectual property could harm our business.
We regard our intellectual property as having significant value and being important to our marketing efforts. We use a combination of intellectual property rights, such as trademarks and trade secrets, to protect our brand and certain other proprietary processes and information material to our business. The success of our business strategy depends, in part, on our continued ability to use our intellectual property rights to increase brand awareness and further develop our branded products in both existing and new markets. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. If third parties misappropriate or infringe our intellectual property, the value of our image, brand and the goodwill associated therewith may be diminished, our brand may fail to achieve and maintain market recognition, and our competitive position may be harmed, any of which could have a material adverse effect on our business, including our revenues. Policing unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent the violation or misappropriation of such intellectual property rights by others. To protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of management and adversely affect our revenue, financial condition and results of operations.
We cannot be certain that our products and services do not and will not infringe on the intellectual property rights of others. Any such claims, regardless of merit, could be time-consuming and expensive to litigate or settle, divert the attention of management, cause significant delays, materially disrupt the conduct of our business and have a material adverse effect on our financial condition and results of operations. As a consequence of such claims, we could be required to pay a substantial damage award, take a royalty-bearing license, discontinue the use of third-party products used within our operations and/or rebrand our products and services.
Failure of our internal control over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with generally accepted accounting principles in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting, including such a failure by third party service providers on whose controls we rely, could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could result in substantial cost to remediate and could cause a loss of investor confidence and decline in the market price of our stock.
Changes in tax laws and resulting regulations could result in changes to our tax provisions and subject us to additional tax liabilities that could materially adversely affect our financial performance.
We are subject to income, sales, use and other taxes in the United States and certain foreign jurisdictions. Changes in applicable U.S. or foreign tax laws and regulations, including the Tax Cuts and Jobs Act (“Tax Act”), or their interpretation and application, including the possibility of retroactive effect and changes to state tax laws that may occur in response to the Tax Act, could affect our effective income tax rate. In addition, the final determination of any tax audits or related litigation could be materially different from our historical tax provisions and accruals. Changes in our tax expense or an increase in our tax liabilities, whether due to changes in applicable laws and regulation, the interpretation or application thereof, or a final determination of tax audits or litigation, could materially adversely affect our financial performance.
Any future changes in financial accounting standards may significantly change our reported results of operations.
Generally accepted accounting principles in the U.S. are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the SEC and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations may have a significant effect on our reported financial results and may affect the reporting of transactions completed before the announcement of a change.
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Additionally, our assumptions, estimates and judgments related to complex accounting matters may significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, fair value of investments, impairment of long-lived assets, leases and related economic transactions, intangibles, self-insurance, income taxes, property and equipment, unclaimed property laws and litigation, and stock-based compensation contain estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us may significantly change our reported or expected financial performance.
We may acquire a business in the future that we fail to effectively integrate or operate.
In the future, we may consider opportunistic acquisitions as part of our expansion effort. We may not be able to identify attractive acquisition opportunities or successfully acquire identified targets on terms favorable to us. Competition for acquisition opportunities may be substantial and may cause us to refrain from making acquisitions. In addition, 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.
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.
 
 
Risks Related to our Common Stock
The market price of our common stock is subject to volatility.
The market price of our common stock may be significantly affected by a number of factors, including, but not limited to, actual or anticipated variations in our operating results or those of our competitors as compared to analyst expectations, changes in financial estimates by research analysts with respect to us or others in the restaurant and other entertainment industries, and announcement of significant transactions (including mergers or acquisitions, divestitures, joint ventures or other strategic initiatives) by us or others in the restaurant and other entertainment industries. In addition, the equity markets have experienced price and volume fluctuations that affect the stock price of companies in ways that have been unrelated to an individual company’s operating performance. The price for our common stock may continue to be volatile, based on factors specific to our company and industry, as well as factors related to the equity markets overall.
During March 2020, the coronavirus global pandemic and the significant uncertainties in the United States economy created as a result of the health crisis had a significant impact on the market price of our common stock.
Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a change of control of our company or changes in our management and, therefore, may depress the trading price of our stock.
Our certificate of incorporation and bylaws include certain provisions that could have the effect of discouraging, delaying or preventing a change of control of our Company or changes in our management, including, among other things:
  restrictions on the ability of our stockholders to fill a vacancy on the Board of Directors;
 
 
  our ability to issue preferred stock with terms that the Board of Directors may determine, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
 
 
  the inability of our stockholders to call a special meeting of stockholders;
 
 
  specify that special meetings of our stockholders can be called only upon the request of a majority of our Board of Directors or our Chief Executive Officer;
 
 
  the absence of cumulative voting in the election of directors, which may limit the ability of minority stockholders to elect directors; and
 
 
  advance notice requirements for stockholder proposals and nominations, which may discourage or deter a potential acquirer from soliciting proxies to elect a particular slate of directors or otherwise attempting to obtain control of us.
 
 
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These provisions in our certificate of incorporation and our bylaws may discourage, delay or prevent a transaction involving a change of control of our Company that is in the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
Effective March 18, 2020, the Board of Directors of the Company adopted a
364-day
duration Shareholder Rights Plan (the “Rights Plan”) and declared a dividend of one preferred share purchase right for each outstanding share of common stock to shareholder of record on March 30, 2020 to purchase from the Company one
one-ten
thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.01 per share, of the Company for an exercise price of $45.00, once the rights become exercisable, subject to adjustment as provided in the related rights agreement. The Rights Plan is intended to promote the fair and equal treatment of all the Company’s shareholders and ensure that no person or group can gain control of the Company through open market accumulation or other tactics potentially disadvantaging the interest of all shareholders.
Unsolicited takeover proposals, governance change proposals, proxy contests and certain proposals/actions by activist investors may create additional risks and uncertainties with respect to the Company’s financial position, operations, strategies and management, and may adversely affect our ability to attract and retain key employees. Any perceived uncertainties may affect the market price and volatility of our securities.
Public companies in the restaurant industry have been the target of unsolicited takeover proposals in the past. In the event that a third party, such as a competitor, private equity firm or activist investor makes an unsolicited takeover proposal, or proposes to change our governance policies or board of directors, or makes other proposals concerning the Company’s ownership structure or operations, our review and consideration of such proposals may be a significant distraction for our management and employees, and may require us to expend significant time and resources. Such proposals may create uncertainty for our employees’ additional risks and uncertainties with respect to the Company’s financial position, operations, strategies and management, and may adversely affect our ability to attract and retain key employees. Any perceived uncertainties as to our future direction also may affect the market price and volatility of our securities.
ITEM 1B. Unresolved Staff Comments
Not applicable.
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ITEM 2. Properties
We lease a 47,000 square foot office building and 30,000 square foot warehouse facility in Dallas, Texas for use as our corporate headquarters and distribution center. This lease expires in October 2021, with options to renew until October 2041. We also lease a 43,000 square foot warehouse facility in Dallas, Texas for use as additional warehouse space. This lease will expire in September 2022, with an option to renew until September 2027.
As of February 2, 2020, we lease the building or site of all but one of our 136 operating stores, and we own land related to two future sites. Our leases typically have initial terms ranging from ten to twenty years and most include options to extend the leases for one or more
5-year
periods.
The table below shows the locations of our operating stores as of February 2, 2020:
         
Location
 
Total
 
Alabama
   
2
 
Alaska
   
1
 
Arizona
   
4
 
Arkansas
   
2
 
California
   
16
 
Colorado
   
2
 
Connecticut
   
2
 
Florida
   
8
 
Georgia
   
4
 
Hawaii
   
1
 
Idaho
   
1
 
Illinois
   
5
 
Indiana
   
1
 
Kansas
   
3
 
Kentucky
   
2
 
Louisiana
   
1
 
Maryland
   
5
 
Massachusetts
   
3
 
Michigan
   
3
 
Minnesota
   
2
 
Missouri
   
1
 
 
 
         
Location
 
Total
 
Nebraska
   
1
 
Nevada
   
1
 
New Jersey
   
2
 
New Mexico
   
1
 
New York
   
11
 
North Carolina
   
4
 
Ohio
   
6
 
Oklahoma
   
2
 
Oregon
   
1
 
Pennsylvania
   
6
 
Rhode Island
   
1
 
South Carolina
   
3
 
Tennessee
   
3
 
Texas
   
14
 
Utah
   
1
 
Virginia
   
4
 
Washington
   
1
 
Wisconsin
   
2
 
Puerto Rico
   
1
 
Ontario, Canada
   
2
 
         
Total
   
136
 
 
 
As of the date of this report, all of our 137 operating stores (including our one store which opened on March 16, 2020) were closed due to guidelines and restrictions put in place by federal, state and local governments in response to the
COVID-19
pandemic.
ITEM 3. Legal Proceedings
We are subject to certain legal proceedings and claims that arise in the ordinary course of our business, including intellectual property disputes, miscellaneous premises liability, employment-related claims and dram shop claims. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability with respect to, or an adverse outcome in any such legal proceedings or claims will not materially affect our business, the consolidated results of our operations or our financial condition. Refer to Note 10 of Notes to Consolidated Financial Statements for a summary of legal proceedings.
ITEM 4. Mine Safety Disclosures
None.
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PART II
ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information and Dividend Policy
The Company’s common stock trades under the symbol PLAY and is listed on the NASDAQ Global Market (“NASDAQ”).
The number of shareholders of record of the Company’s common stock as of March 30, 2020 was estimated to be 278.
During the third and fourth quarters of fiscal 2019, our Board of Directors authorized and declared a quarterly cash dividend of $0.16 per share of common stock. The fourth quarter dividend was paid subsequent to the end of fiscal 2019. During the first and second quarters of fiscal 2019 and the last two quarters of fiscal 2018, our Board of Directors authorized and declared a quarterly cash dividend of $0.15 per share of common stock.
As a result of the impacts to our business arising from the COVID-19 pandemic, share purchases and dividend payments have been indefinitely suspended.
Issuer Purchases of Equity Securities
On July 12, 2019 the Company increased its share repurchase authorization to $800,000. The share repurchase authorization expires at the end of fiscal 2020. As of the end of fiscal 2019, there was approximately $172,820 of share repurchase authorization remaining. There were no repurchases of our common stock during the fourth quarter ended February 2, 2020.
Performance Graph
The following performance graph depicts the total returns to shareholders for the period from October 10, 2014 (the date when our common stock first started trading) through February 2, 2020, relative to the performance of the NASDAQ Composite Index, Standard & Poor’s (“S&P”) 600 Small Cap Index and S&P’s 600 Consumer Discretionary Index. All indices shown in the graph have been set at a base of 100 as of October 10, 2014 and assume an investment of $100 on that date and the reinvestment of dividends paid since that date. The stock price performance shown in the graph is not necessarily indicative of future price performance.
Comparison of Cumulative Total Return
Assumes Initial Investment of $100
 
 
                                                 
 
Period Ended
 
 
2/1/2015
   
1/31/2016
   
1/29/2019
   
2/4/2018
   
2/3/2019
   
2/2/2020
 
PLAY
  $
100.00
    $
126.20
    $
190.68
    $
165.97
    $
178.64
    $
153.65
 
S&P 600 Small Cap
  $
100.00
    $
95.31
    $
128.67
    $
146.79
    $
147.31
    $
157.07
 
S&P 600 Consumer Discretionary
  $
100.00
    $
88.69
    $
103.97
    $
123.49
    $
125.84
    $
131.48
 
NASDAQ Composite
  $
100.00
    $
99.54
    $
122.12
    $
156.22
    $
156.71
    $
209.97
 
 
 
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ITEM 6. Selected Financial Data
The following selected financial data is qualified in its entirety by the consolidated financial statements (and the related Notes thereto) contained in Item 8 and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. The statement of operations and cash flows data for each of the fiscal years ended February 2, 2020, February 3, 2019, and February 4, 2018 and the balance sheet data as of February 2, 2020 and February 3, 2019 were derived from our audited consolidated financial statements included elsewhere in this report. The statement of operations and cash flows data for the fiscal year ended January 29, 2017 and January 31, 2016 and the balance sheet data as of February 4, 2018, January 29, 2017, and January 31, 2016 were derived from our audited consolidated financial statements that are not included elsewhere in this report.
The Company’s fiscal year consists of 52 or 53 weeks ending 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 fiscal years presented herein consist of 52 weeks, except fiscal 2017 (ended February 4, 2018), which consists of 53 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.
                                         
 
Fiscal Year Ended
 
 
February 2,
2020
 
 
February 3,
2019
 
 
February 4,
2018
 
 
January 29,
2017
 
 
January 31,
2016
 
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
  $
1,354,691
    $
1,265,301
    $
1,139,791
    $
1,005,158
    $
866,982
 
Operating income
   
148,079
     
161,000
     
165,772
     
150,516
     
110,036
 
Net income
   
100,263
     
117,221
     
120,949
     
90,795
     
59,619
 
Balance sheet data (as of end of period):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
   
24,655
     
21,585
     
18,795
     
20,083
     
25,495
 
Working capital (deficit)
(1)
   
(211,888
)    
(153,297
)    
(112,918
)    
(102,193
)    
(46,567
)
Property and equipment, net
   
900,637
     
805,337
     
726,455
     
606,865
     
523,891
 
Total assets
(2)
   
2,370,139
     
1,273,187
     
1,197,030
     
1,052,733
     
1,003,701
 
Total debt, net
(2)
   
647,689
     
393,469
     
366,249
     
264,128
     
337,416
 
Stockholders’ equity
   
169,650
     
387,837
     
421,646
     
439,452
     
346,338
 
Other data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures
  $
228,091
    $
216,286
    $
219,901
    $
180,577
    $
162,892
 
Stores open at end of period
   
136
     
121
     
106
     
92
     
81
 
Stores closed during period
   
1
     
—  
     
—  
     
—  
     
2
 
Cash dividends declared per share
  $
0.62
     
0.30
     
—  
     
—  
     
—  
 
Net income per share of common stock:
   
     
     
     
     
 
Basic
  $
3.00
    $
3.00
    $
2.93
    $
2.16
    $
1.46
 
Diluted
  $
2.94
    $
2.93
    $
2.84
    $
2.10
    $
1.39
 
Weighted average number of shares outstanding:
   
     
     
     
     
 
Basic
   
33,450,217
     
39,047,106
     
41,276,314
     
41,951,770
     
40,968,455
 
Diluted
   
34,099,378
     
39,975,122
     
42,583,009
     
43,288,592
     
42,783,905
 
 
(1)
Defined as total current assets minus total current liabilities.
 
(2)
Fiscal 2016 and prior fiscal year balances have been revised to reflect the impact of adopting Accounting Standards Update No.
 2015-03,
Simplifying the Presentation of Debt Issuance Costs
.
 
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ITEM 7. 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 our audited consolidated financial statements and related notes included herein. 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 Consolidated Financial Statements.
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus
(“COVID-19”).
The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United States economy. In the interest of public health and safety, jurisdictions (national, state and local) where our stores are located, required mandatory store closures or capacity limitations or other restrictions for those that continued to operate. As of the date of this report, all of our 137 operating stores were closed (including our one new store that opened on March 16, 2020). As a result of these developments, the Company expects a material adverse impact on its revenues, results of operations and cash flows which raises substantial doubt about the Company’s ability to continue as a going concern. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding
COVID-19
will change including the timing of lifting any restrictions or closure requirements, when our stores will reopen, staffing levels for reopened stores, and customer
re-engagement
with our brand. As of March 31, 2020, we had approximiately $99,622 cash on hand and $752,500 funded debt on our credit facility.
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.
Our stores average 41,000 square feet, range in size between 16,000 and 70,000 square feet and are open seven days a week, with hours of operation typically from 11:30 a.m. to midnight on Sunday through Thursday and 11:30 a.m. to 2:00 a.m. on Friday and Saturday.
Strategy
During fiscal 2019, we continued to invest in new stores, and focused on refreshing our strategy and customer experience to set us up for the next phase of growth. Our refreshed strategy is built on four key components, including offering the latest entertainment to enjoy together, novel food & drink to bring people together, creating an aligned team and integrated experience, and driving guest engagement. For further information about our strategy, refer to “Item 1. Strategy”.
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.
Comparable store sales are a year-over-year comparison of sales at stores open at the end of the period that have been open for at least 18 months as of the beginning of each of the fiscal years. It is a key performance indicator used within the industry and is indicative of acceptance of our initiatives as well as local economic and consumer trends. Our comparable store base consisted of 99, 86, and 76 stores as of the end of fiscal 2019, 2018 and 2017, respectively.
New store openings.
Our ability to expand our business and reach new customers is influenced by the opening of additional stores in both new and existing markets. The success of our new stores is indicative of our brand appeal and the efficacy of our site selection and operating models. During fiscal 2019, we opened sixteen new stores, eight of which were in new markets.
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Table of Contents
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 the 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
. We define “Adjusted EBITDA” as net income plus interest expense, net, loss on debt refinancing, provision for income taxes, depreciation and amortization expense, loss on asset disposal, share-based compensation,
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.
We define “Store Operating Income Before Depreciation and Amortization” as operating income 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 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
The Company’s fiscal year consists of 52 or 53 weeks ending 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. Fiscal 2019 and 2018, which ended on February 2, 2020 and February 3, 2019, respectively, each contained 52 weeks. Fiscal 2017, which ended on February 4, 2018, contained 53 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.
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Overview
  Total revenues increased 7.1% to $1,354,691 in fiscal 2019 compared to $1,265,301 in fiscal 2018. Our revenue growth was primarily influenced by the number of new store openings partially offset by lower comparable store sales.
 
  Comparable store sales decreased 2.6% in fiscal 2019 compared to fiscal 2018, driven by lower customer volumes.
 
  Operating income decreased to $148,079 in fiscal 2019 compared to Operating income of $161,000 in fiscal 2018. Fiscal 2019 operating margin was 10.9% compared to 12.7% in fiscal 2018. The decline in operating margins was due, in part, to an increase in the average hourly labor rate of approximately 4.1% and higher occupancy costs associated with our
non-comparable
stores, as well as the deleveraging impact of lower comparable store sales on store management labor and occupancy.
 
  Diluted earnings per share (“EPS”) remained relatively flat at $2.94 per share in fiscal 2019 compared to $2.93 per share in fiscal 2018. Net income decreased to $100,263 in fiscal 2019 compared to Net Income of $117,221 in fiscal 2018, for the reasons noted above. However, the denominator of weighted average diluted shares decreased by approximately 5,800,000 shares, largely as a result of our share repurchase program. During fiscal 2019, we purchased 7,116,585 shares at an average cost of $41.78 per share.
 
  Cash flows from operations were $288,946 in fiscal 2019 compared to $337,616 in fiscal 2018. Lower operating margins were offset by growth in total revenues, with the decrease of approximately $49,000 driven by a decrease in working capital.
 
  Capital expenditures were $228,091 in fiscal 2019 compared to $216,286 in fiscal 2018. Share repurchases and dividend payments were $313,041 in fiscal 2019 compared to $160,695 in fiscal 2018. Net borrowings of debt during fiscal 2019 were $254,000.
 
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 typically open with sales volumes in excess of their expected long-term
run-rate
levels, which we refer to as a “honeymoon” effect. We 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 will 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.
Revenues are influenced by seasonal shifts in consumer spending. Typically, we have higher revenues associated with the spring and
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
fall season, has historically had lower revenues as compared to other quarters.
We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both consumer spending related to entertainment and dining alternatives and availability and cost of products and supplies. 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 increases or wage rate increases are expected to be partially offset by selected menu or game price increases where competitively appropriate.
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Table of Contents
Fiscal 2019 Compared to Fiscal 2018
Results of operations.
The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of comprehensive income.
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 2, 2020
   
February 3, 2019
 
Food and beverage revenues
  $
563,576
     
41.6
%   $
536,469
     
42.4
%
Amusement and other revenues
   
791,115
     
58.4
     
728,832
     
57.6
 
                                 
Total revenues
   
1,354,691
     
100.0
     
1,265,301
     
100.0
 
Cost of food and beverage (as a percentage of food and beverage revenues)
   
148,196
     
26.3
     
139,199
     
25.9
 
Cost of amusement and other (as a percentage of amusement and other revenues)
   
85,115
     
10.8
     
81,064
     
11.1
 
                                 
Total cost of products
   
233,311
     
17.2
     
220,263
     
17.4
 
Operating payroll and benefits
   
322,970
     
23.8
     
296,924
     
23.5
 
Other store operating expenses
   
429,431
     
31.8
     
384,155
     
30.4
 
General and administrative expenses
   
69,469
     
5.1
     
61,521
     
4.9
 
Depreciation and amortization expense
   
132,460
     
9.8
     
118,275
     
9.3
 
Pre-opening
costs
   
18,971
     
1.4
     
23,163
     
1.8
 
                                 
Total operating costs
   
1,206,612
     
89.1
     
1,104,301
     
87.3
 
                                 
Operating income
   
148,079
     
10.9
     
161,000
     
12.7
 
Interest expense, net
   
20,937
     
1.5
     
13,113
     
1.0
 
                                 
Income before provision for income taxes
   
127,142
     
9.4
     
147,887
     
11.7
 
Provision for income taxes
   
26,879
     
2.0
     
30,666
     
2.4
 
                                 
Net income
  $
100,263
     
7.4
%   $
117,221
     
9.3
%
                                 
Change in comparable store sales
   
     
(2.6
)%    
     
(1.6
)%
Company-owned stores open at end of period (1)
   
     
136
     
     
121
 
Comparable stores open at end of period (1)
   
     
99
     
     
86
 
 
(1)
Our store in Duluth (Atlanta), Georgia permanently closed on March 3, 2019, as we did not exercise the renewal option, and has been excluded from fiscal 2019 store counts and comparable store sales. The number of new store openings during the last two fiscal years were as follows:
 
                 
 
Fiscal Year Ended
 
 
Fiscal Year Ended
 
 
February 2, 2020
 
 
February 3, 2019
 
First Quarter
   
7
     
6
 
Second Quarter
   
3
     
5
 
Third Quarter
   
4
     
1
 
Fourth Quarter
   
2
     
3
 
                 
   
16
     
15
 
 
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:
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 2, 2020
   
February 3, 2019
 
Net income
  $
100,263
     
7.4
%   $
117,221
     
9.3
%
Interest expense, net
   
20,937
     
     
13,113
     
 
Provision for income tax
   
26,879
     
     
30,666
     
 
Depreciation and amortization expense
   
132,460
     
     
118,275
     
 
                                 
EBITDA
   
280,539
     
20.7
%    
279,275
     
22.1
%
Loss on asset disposal
   
1,813
     
     
1,121
     
 
Share-based compensation
   
6,857
     
     
7,422
     
 
Pre-opening
costs
   
18,971
     
     
23,163
     
 
Other costs (1)
   
42
     
     
136
     
 
                                 
Adjusted EBITDA
  $
308,222
     
22.8
%   $
311,117
     
24.6
%
                                 
 
(1)
Primarily represents costs related to currency transaction (gains) or losses.
 
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Table of Contents
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:
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 2, 2020
   
February 3, 2019
 
Operating income
  $
148,079
     
10.9
%   $
161,000
     
12.7
%
General and administrative expenses
   
69,469
     
     
61,521
     
 
Depreciation and amortization expense
   
132,460
     
     
118,275
     
 
Pre-opening
costs
   
18,971
     
     
23,163
     
 
                                 
Store Operating Income Before Depreciation and Amortization
  $
368,979
     
27.2
%   $
363,959
     
28.8
%
                                 
 
Capital Additions
The following table reflects accrual-based capital additions. Capital additions do not include any reductions for accrual-based tenant improvement allowances or proceeds from sale-leaseback transactions (collectively, “Payments from landlords”).
                 
 
Fiscal Year Ended
 
 
Fiscal Year Ended
 
 
February 3, 2020
 
 
February 3, 2019
 
New store and operating initiatives
  $
183,897
    $
162,763
 
Games
   
19,749
     
27,381
 
Maintenance capital
   
27,351
     
20,821
 
                 
Total capital additions
  $
230,997
    $
210,965
 
                 
Payments from landlords
  $
33,544
    $
52,099
 
 
Results of Operations
Revenues
Total revenues increased $89,390 or 7.1%, to $1,354,691 in fiscal 2019 compared to total revenues of $1,265,301 in fiscal 2018. For the year ended February 2, 2020, we derived 28.3% of our total revenue from food sales, 13.3% from beverage sales, 57.5% from amusement sales and 0.9% from other sources. For the year ended February 3, 2019 we derived 28.9% of our total revenue from food sales, 13.5% from beverage sales, 56.8% from amusement sales and 0.8% from other sources.
The net increase in revenues for fiscal 2019 compared to fiscal 2018 were from the following sources:
         
Comparable stores
  $
(28,408
)
Non-comparable
stores
   
117,592
 
Other
   
206
 
         
Total
  $
89,390
 
         
 
Comparable store revenue decreased $28,408 or 2.6%, in fiscal 2019 compared to fiscal 2018. Comparable store revenue compared to the prior fiscal year was, in part, negatively impacted by an unfavorable shift in the current year holiday/school break calendar, sales transfers to new stores that we opened in markets where we operate and increased competitive pressure. Comparable
walk-in
revenues, which accounted for 89.6% of comparable store revenue for fiscal 2019, decreased $29,304, or 3.0% compared to fiscal 2018. Comparable store special events revenues, which accounted for 10.4% of consolidated comparable store revenue for fiscal 2019, increased $896, or 0.8% compared to fiscal 2018.
Food sales at comparable stores decreased by $13,303, or 4.3%, to $296,389 for fiscal 2019 from $309,692 in fiscal 2018. Beverage sales at comparable stores decreased by $5,356, or 3.7%, to $139,446 for fiscal 2019 from $144,802 in the 2018 comparison period. The decrease in food and beverage unit sales at comparable stores was partially offset by an overall increase in menu prices. Comparable store amusement and other revenues in fiscal 2019 decreased by $9,749, or 1.6%, to $608,243 from $617,992 in fiscal 2018. The decrease in amusement sales was due in part to lower customer volumes partially offset by various pricing initiatives in the current year, including an increase in new card fees with the launch of our RFID power card.
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Table of Contents
Non-comparable
store revenue increased by $117,592 for fiscal 2019 compared to fiscal 2018. The increase in
non-comparable
store revenue was primarily driven by 811 additional operating store weeks contributed by our thirty-seven
non-comparable
stores, partially offset by a decrease in revenue due to the closure of our store in Duluth (Atlanta), Georgia on March 3, 2019. The year-over-year decline in average weekly non-comparable store sales during fiscal 2019 is driven primarily by a honeymoon effect on fiscal 2017 and 2018 opening sales volumes and larger than expected declines in two of those markets which were adversely impacted by slowdowns in their local economies following a natural disaster. Additionally, stores opened during fiscal 2019 experienced slightly lower opening volumes than our 2018 openings.
Cost of products
The total cost of products was $233,311 for fiscal 2019 and $220,263 for fiscal 2018. The total cost of products as a percentage of total revenues was 17.2% and 17.4% for fiscal 2019 and fiscal 2018, respectively. For the year ended February 2, 2020, the cost of food products was 27.2% of food revenue, the cost of beverage products was 24.3% of beverage revenue, and the amusement and other cost of products was 10.8% of amusement and other revenues. For the year ended February 3, 2019, the cost of food products was 26.8% of food revenue, the cost of beverage products was 24.2% of beverage revenue, and the amusement and other cost of products was 11.1% of amusement and other revenues.
Cost of food and beverage products increased to $148,196 in fiscal 2019 compared to $139,199 for fiscal 2018 due primarily to the increased sales volume related to new store openings. Cost of food and beverage products, as a percentage of food and beverage revenues, increased 40 basis points to 26.3% for fiscal 2019 from 25.9% for fiscal 2018. Higher meat costs resulting from our upgraded steak products, higher poultry costs due to our “All You Can Eat” wings promotion and higher bar consumable costs due to our shift to fresh juices at the bar as well as the impact of our larger
non-comparable
store group, were partially offset by declines in seafood costs and increases in food and beverage menu prices.
Cost of amusement and other increased to $85,115 in fiscal 2019 compared to $81,064 in fiscal 2018. The costs of amusement and other, as a percentage of amusement and other revenues, decreased 30 basis points to 10.8% for fiscal 2019 from 11.1% for fiscal 2018. The decrease in cost of amusement and other as a percentage of revenue was due primarily to a shift in game play to
non-redemption
games and an increase in the price of power cards.
Operating payroll and benefits
Total operating payroll and benefits increased by $26,046, or 8.8%, to $322,970 in fiscal 2019 compared to $296,924 in fiscal 2018. This increase was primarily due to labor associated with the additional operating store weeks of our
non-comparable
stores. The total cost of operating payroll and benefits, as a percentage of total revenues, increased 30 basis points to 23.8% in fiscal 2019 compared to 23.5% for fiscal 2018. This increase was due to an average hourly wage rate increase of approximately 4.1% and unfavorable leverage on decreased comparable store sales, partially offset by lower incentive compensation.
Other store operating expenses
Other store operating expenses increased by $45,276, or 11.8%, to $429,431 in fiscal 2019 compared to $384,155 in fiscal 2018, primarily due to new store openings. Other store operating expenses as a percentage of total revenues increased 140 basis points to 31.8% in fiscal 2019 compared to 30.4% in fiscal 2018. This increase was due primarily to higher occupancy costs associated with our
non-comparable
stores and the deleveraging impact of lower comparable store sales, the absence of hurricane-related business interruption proceeds recorded in the prior year and incremental legal costs.
General and administrative expenses
General and administrative expenses increased by $7,948, or 12.9%, to $69,469 in fiscal 2019 compared to $61,521 in fiscal 2018. The increase in general and administrative expenses was driven primarily by professional services at our corporate headquarters including costs related to shareholder activism. General and administrative expenses, as a percentage of total revenues, increased 20 basis points to 5.1% in fiscal 2019 compared to 4.9% in fiscal 2018, for the same reasons above offset by favorable leverage on revenue increases.
Depreciation and amortization expense
Depreciation and amortization expense increased by $14,185, or 12.0%, to $132,460 in fiscal 2019 compared to $118,275 in fiscal 2018. Increased depreciation due to our 2018 and 2017 capital expenditures for new stores, operating initiatives, including remodels, games and maintenance capital, was partially offset by other assets reaching the end of their depreciable lives.
Pre-opening
costs
Pre-opening
costs decreased by $4,192 to $18,971 in fiscal 2019 compared to $23,163 in fiscal 2018 due to the number and timing of new store openings and stores in development.
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Table of Contents
Interest expense, net
Interest expense, net increased by $7,824 to $20,937 in fiscal 2019 compared to $13,113 in fiscal 2018 due primarily to an increase in average outstanding debt partially offset by slightly lower interest rates.
Provision for income taxes
The effective income tax rate increased to 21.1% in fiscal 2019 compared to 20.7% in fiscal 2018. This increase primarily reflects lower excess tax benefits associated with share-based compensation, offset partially with higher tax credits.
Fiscal 2018 Compared to Fiscal 2017
Results of operations.
The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of comprehensive income.
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 3, 2019
   
February 4, 2018
 
Food and beverage revenues
  $
536,469
     
42.4
%   $
494,816
     
43.4
%
Amusement and other revenues
   
728,832
     
57.6
     
644,975
     
56.6
 
                                 
Total revenues
   
1,265,301
     
100.0
     
1,139,791
     
100.0
 
Cost of food and beverage (as a percentage of food and beverage revenues)
   
139,199
     
25.9
     
127,600
     
25.8
 
Cost of amusement and other (as a percentage of amusement and other revenues)
   
81,064
     
11.1
     
69,072
     
10.7
 
                                 
Total cost of products
   
220,263
     
17.4
     
196,672
     
17.3
 
Operating payroll and benefits
   
296,924
     
23.5
     
256,724
     
22.5
 
Other store operating expenses
   
384,155
     
30.4
     
334,546
     
29.4
 
General and administrative expenses
   
61,521
     
4.9
     
59,565
     
5.2
 
Depreciation and amortization expense
   
118,275
     
9.3
     
102,766
     
9.0
 
Pre-opening
costs
   
23,163
     
1.8
     
23,746
     
2.1
 
                                 
Total operating costs
   
1,104,301
     
87.3
     
974,019
     
85.5
 
                                 
Operating income
   
161,000
     
12.7
     
165,772
     
14.5
 
Interest expense, net
   
13,113
     
1.0
     
8,665
     
0.7
 
Loss on debt retirement
   
—  
     
—  
     
718
     
0.1
 
                                 
Income before provision for income taxes
   
147,887
     
11.7
     
156,389
     
13.7
 
Provision for income taxes
   
30,666
     
2.4
     
35,440
     
3.1
 
                                 
Net income
  $
117,221
     
9.3
%   $
120,949
     
10.6
%
                                 
Change in comparable store sales
(1)
   
     
(1.6
)%    
     
(0.9
)%
Company-owned stores open at end of period
(2)
   
     
121
     
     
106
 
Comparable stores open at end of period
   
     
86
     
     
76
 
 
(1)
The change in comparable store sales in fiscal 2018 has been calculated by shifting forward our 2017 fiscal year comparable store sales results by one week, to account for the fact that our 2017 fiscal year consisted of 53 weeks. The fiscal year 2017 comparable store sales have been adjusted to remove the impact of the 53
rd
week prior to calculating the year-over-year change percentage.
 
(2)
Our Duluth (Atlanta), Georgia store which closed in fiscal 2019 is included in our store counts and comparable store sales for all periods presented. The number of new store openings during the last two fiscal years were as follows:
 
                 
 
Fiscal Year Ended
 
 
Fiscal Year Ended
 
 
February 3, 2019
 
 
February 4, 2018
 
First Quarter
   
6
     
4
 
Second Quarter
   
5
     
4
 
Third Quarter
   
1
     
1
 
Fourth Quarter
   
3
     
5
 
                 
   
15
     
14
 
 
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Table of Contents
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:
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 3, 2019
   
February 4, 2018
 
Net income
  $
117,221
     
9.3
%   $
120,949
     
10.6
%
Interest expense, net
   
13,113
     
     
8,665
     
 
Loss on debt retirement
   
—  
     
     
718
     
 
Provision for income tax
   
30,666
     
     
35,440
     
 
Depreciation and amortization expense
   
118,275
     
     
102,766
     
 
                                 
EBITDA
   
279,275
     
22.1
%    
268,538
     
23.6
%
Loss on asset disposal
   
1,121
     
     
1,863
     
 
Share-based compensation
   
7,422
     
     
8,916
     
 
Pre-opening
costs
   
23,163
     
     
23,746
     
 
Other costs (1)
   
136
     
     
(333
)    
 
                                 
Adjusted EBITDA
  $
311,117
     
24.6
%   $
302,730
     
26.6
%
                                 
 
(1)
Primarily represents costs related to currency transaction (gains) or losses.
 
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:
                                 
 
Fiscal Year Ended
   
Fiscal Year Ended
 
 
February 3, 2019
   
February 4, 2018
 
Operating income
   
161,000
     
12.7
%   $
165,772
     
14.5
%
General and administrative expenses
   
61,521
     
     
59,565
     
 
Depreciation and amortization expense
   
118,275
     
     
102,766
     
 
Pre-opening
costs
   
23,163
     
     
23,746
     
 
                                 
Store Operating Income Before Depreciation and Amortization
   
363,959
     
28.8
%   $
351,849
     
30.9
%
                                 
 
Capital Additions
The following table reflects accrual-based capital additions. Capital additions do not include payments from landlords.
<
                 
 
Fiscal Year Ended
 
 
Fiscal Year Ended
 
 
February 3, 2019
 
 
February 4, 2018
 
New store and operating initiatives
  $
162,763
    $
185,449
 
Games
   
27,381
     
18,712
 
Maintenance capital
   
20,821
     
19,160