UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED July 31, 2022
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
(Exact name of registrant as specified in its charter)
(State of Incorporation) |
(I.R.S. Employer ID) | |
( | ||
(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 | ||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2
of the Exchange Act. ☒ |
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 As of September 1, 2022, the registrant had 48,235,675 shares of common stock, $0.01 par value per share, outstanding.
DAVE & BUSTER’S ENTERTAINMENT, INC.
FORM
10-Q
FOR QUARTERLY PERIOD ENDED JULY 31, 2022 TABLE OF CONTENTS
Page |
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| PART I |
FINANCIAL INFORMATION |
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| Item 1. |
3 |
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| Item 2. |
19 |
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| Item 3. |
32 |
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| Item 4. |
32 |
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| PART II |
OTHER INFORMATION |
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| Item 1. |
33 |
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| Item 1A. |
33 |
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| Item 2. |
35 |
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| Item 6. |
36 |
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37 |
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2
PART I – FINANCIAL INFORMATION
Item 1. |
Financial Statements |
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
July 31, |
January 30, |
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2022 |
2022 |
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(unaudited) |
(audited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
Inventories |
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Prepaid expenses |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Property and equipment (net of $ |
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Operating lease right of use assets |
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Deferred tax assets |
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Tradenames |
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Goodwill |
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Other assets and deferred charges |
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Total assets |
$ | $ |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Current installments of long-term debt |
$ | $ | ||||||
Accounts payable |
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Accrued liabilities |
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Income taxes payable |
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Total current liabilities |
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Deferred income taxes |
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Operating lease liabilities |
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Other liabilities |
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Long-term debt, net |
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Commitments and contingencies |
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Stockholders’ equity: |
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Common stock, par value $ |
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Preferred stock, |
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Paid-in capital |
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Treasury stock, |
( |
) | ( |
) | ||||
Accumulated other comprehensive loss |
( |
) | ( |
) | ||||
Retained earnings |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
3
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
Thirteen Weeks |
Thirteen Weeks |
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Ended |
Ended |
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July 31, 2022 |
August 1, 2021 |
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| Food and beverage revenues |
$ | $ | ||||||
| Amusement and other revenues |
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| |
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|
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| Total revenues |
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| Cost of food and beverage |
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| Cost of amusement and other |
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| |
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| Total cost of products |
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| Operating payroll and benefits |
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| Other store operating expenses |
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| General and administrative expenses |
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| Depreciation and amortization expense |
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| Pre-opening costs |
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| Total operating costs |
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| Operating income |
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| Interest expense, net |
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| Loss on debt refinancing |
— | |||||||
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| Income before provision for income taxes |
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| Provision for income taxes |
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| Net income |
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| |
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| Unrealized foreign currency translation gain (loss) |
( |
) | ||||||
| Unrealized gain on derivatives, net of tax |
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| |
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| Total other comprehensive income |
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| Total comprehensive income |
$ | $ | ||||||
| |
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|
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| Net income per share: |
||||||||
| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
| Weighted average shares used in per share calculations: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
See accompanying notes to consolidated financial statements.
4
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands, except share and per share amounts)
Twenty-Six Weeks |
Twenty-Six Weeks |
|||||||
Ended |
Ended |
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July 31, 2022 |
August 1, 2021 |
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| Food and beverage revenues |
$ | $ | ||||||
| Amusement and other revenues |
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| |
|
|
|
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| Total revenues |
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| Cost of food and beverage |
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| Cost of amusement and other |
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| |
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| Total cost of products |
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| Operating payroll and benefits |
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| Other store operating expenses |
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| General and administrative expenses |
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| Depreciation and amortization expense |
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| Pre-opening costs |
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| |
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| Total operating costs |
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| |
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| Operating income |
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| Interest expense, net |
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| Loss on debt refinancing |
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| Income before provision for income taxes |
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| Provision for income taxes |
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| |
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| Net income |
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| |
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| Unrealized foreign currency translation gain (loss) |
( |
) | ||||||
| Unrealized gain on derivatives, net of tax |
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| |
|
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| Total other comprehensive income |
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| |
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|
|
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| Total comprehensive income |
$ | $ | ||||||
| |
|
|
|
|||||
| Net income per share: |
||||||||
| Basic |
$ | $ | ||||||
| Diluted |
$ | $ | ||||||
| Weighted average shares used in per share calculations: |
||||||||
| Basic |
||||||||
| Diluted |
||||||||
`
See accompanying notes to consolidated financial statements.
5
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
Thirteen Weeks Ended July 31, 2022 |
||||||||||||||||||||||||||||||||
Common Stock |
Paid-In Capital |
Treasury Stock At Cost |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
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Shares |
Amt. |
Shares |
Amt. |
|||||||||||||||||||||||||||||
| Balance May 1, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation gain |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
( |
) | — | — | — | — | ||||||||||||||||||||||||||
| Repurchase of common stock |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||||
| |
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| Balance July 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| |
|
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Thirteen Weeks Ended August 1, 2021 |
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Common Stock |
Paid-In Capital |
Treasury Stock At Cost |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
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Shares |
Amt. |
Shares |
Amt. |
|||||||||||||||||||||||||||||
| Balance May 2, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
— | — | — | — | ||||||||||||||||||||||||||||
| Repurchase of common stock |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||||
| |
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| Balance August 1, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| |
|
|
|
|
|
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|
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|
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|
|||||||||||||||||
See accompanying notes to consolidated financial statements.
6
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share amounts)
Twenty-Six Weeks Ended July 31, 2022 |
||||||||||||||||||||||||||||||||
Common Stock |
Paid-In Capital |
Treasury Stock At Cost |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
|||||||||||||||||||||||||||
Shares |
Amt. |
Shares |
Amt. |
|||||||||||||||||||||||||||||
| Balance January 30, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation loss |
— | — | — | — | — | ( |
) | — | ( |
) | ||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
— | — | — | — | ||||||||||||||||||||||||||||
| Repurchase of common stock |
— | — | — | ( |
) | — | — | ( |
) | |||||||||||||||||||||||
| |
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| Balance July 31, 2022 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| |
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Twenty-Six Weeks Ended August 1, 2021 |
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Common Stock |
Paid-In Capital |
Treasury Stock At Cost |
Accumulated Other Comprehensive Loss |
Retained Earnings |
Total |
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Shares |
Amt. |
Shares |
Amt. |
|||||||||||||||||||||||||||||
| Balance January 31, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| Net income |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized foreign currency translation gain |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Unrealized gain on derivatives, net of tax |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Share-based compensation |
— | — | — | — | — | — | ||||||||||||||||||||||||||
| Issuance of common stock |
— | — | — | — | ||||||||||||||||||||||||||||
| Repurchase of common stock |
— | — | ( |
) | — | — | ( |
) | ||||||||||||||||||||||||
| |
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| Balance August 1, 2021 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | ||||||||||||||||||||||
| |
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See accompanying notes to consolidated financial statements.
7
DAVE & BUSTER’S ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Twenty-Six Weeks Ended July 31, 2022 |
Twenty-Six Weeks Ended August 1, 2021 |
|||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization expense |
||||||||
Non-cash interest expense |
||||||||
Impairment of long-lived assets |
||||||||
Deferred taxes |
( |
) | ||||||
Loss on disposal of fixed assets |
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Loss on debt refinancing |
||||||||
Share-based compensation |
||||||||
Other, net |
||||||||
Changes in assets and liabilities , net of acquired assets and liabilities: |
||||||||
Inventories |
( |
) | ( |
) | ||||
Prepaid expenses |
( |
) | ||||||
Income tax receivable |
||||||||
Other current assets |
( |
) | ( |
) | ||||
Other assets and deferred charges |
( |
) | ||||||
Accounts payable |
( |
) | ( |
) | ||||
Accrued liabilities |
||||||||
Income taxes payable |
||||||||
Other liabilities |
( |
) | ( |
) | ||||
Net cash provided by operating activities |
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Cash flows from investing activities: |
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Capital expenditures |
( |
) | ( |
) | ||||
Proceeds from sales of property and equipment |
||||||||
Acquisition of a business, net of cash acquired |
( |
) | ||||||
Net cash used in investing activities |
( |
) | ( |
) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
||||||||
Payments of debt |
( |
) | ( |
) | ||||
Debt issuance costs |
( |
) | ||||||
Proceeds from the exercise of stock options |
||||||||
Repurchases of common stock under share repurchase program |
( |
) | ||||||
Repurchases of common stock to satisfy employee withholding tax obligations |
( |
) | ( |
) | ||||
Net cash provided by (used in) financing activities |
( |
) | ||||||
Increase in cash and cash equivalents |
||||||||
Beginning cash and cash equivalents |
||||||||
Ending cash and cash equivalents |
$ | $ | ||||||
Supplemental disclosures of cash flow information: |
||||||||
Increase in fixed asset accounts payable |
$ | $ | ||||||
Cash paid (refund received) for income taxes, net |
$ | ( |
) | $ | ( |
) | ||
Cash paid for interest, net |
$ | $ | ||||||
See accompanying notes to consolidated financial statements.
8
DAVE & BUSTER’S ENTERTAINMENT, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
Note 1: Summary of Significant Accounting Policies
The accompanying unaudited consolidated financial statements include the accounts of Dave & Buster’s Entertainment, Inc. (referred to herein as the “Company”, “we,” “us” and “our”), any predecessor companies and its wholly-owned subsidiaries, Dave & Buster’s Holdings, Inc. (“D&B Holdings”), which owns 100
% of the outstanding common stock of Dave & Buster’s, Inc. (“D&B Inc”), the operating company. All intercompany balances and transactions have been eliminated in consolidation. The Company, headquartered in Coppell, Texas, is a leading operator of high-volume entertainment and dining venues (“stores”) in North America for adults and families.
On June 29, 2022 (the “Closing Date”), the Company completed its previously announced acquisition (the “Main Event Acquisition” or “the Acquisition”) of 100
% of the equity interests of Ardent Leisure US Holding Inc. (“Ardent US”), pursuant to that certain Agreement and Plan of Merger (the “Merger Agreement”), dated April 6, 2022, by and among the Company, Ardent US, Delta Bravo Merger Sub, Inc, the Company’s wholly-owned subsidiary formed for the purpose of completing the transactions set forth in the Merger Agreement, for the limited purposes set forth therein, Ardent Leisure Group Limited (“Ardent”), and, for the limited purposes set forth therein, RB ME LP (“RedBird”) and RB ME Blocker, LLC, REB ME Series 2019 Investor Aggregator LP and RedBird Series 2019 GP , for further details.
Co-Invest,
LP. Refer to Note 2, Business Combinations
During the first and second quarters of fiscal 2022, the Company opened one Dave & Buster’s store located in Sioux Falls, South Dakota and three Dave & Buster’s stores located in Brooklyn (Atlantic Center), New York, Modesto, California, and Augusta, Georgia, respectively. As of July 31, 2022, the Company owned and operated 148 Dave & Buster’s stores located in 41 one Canadian province and 49 Main Event and 3 The Summit stores (collectively
states, Puerto
Rico and referred to as “Main Event”), located in 17 states.
The Company operates its business as two one reportable segment. The Company operates on a 52 or
operating units aggregated into
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period reported has 13 weeks. Fiscal 2022 and 2021, which end on January 29, 2023, and January 30, 2022, respectively, contain 52 weeks. The Company’s financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States for interim financial information as prescribed by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Our quarterly financial data should be read in conjunction with the audited financial statements and notes thereto for the year ended January 30, 2022, included in our Annual Report on Form 10-K as filed with the SEC.
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities at the date of the consolidated financial statements and for the period then ended. Actual results could differ from those estimates. Operating results for the twenty-six weeks ended July 31, 2022 are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year ending January 29, 2023.
Cash and cash equivalents
Fair value of financial instruments
9
The carrying amounts of cash and cash equivalents, accounts and notes receivable, accounts payable, and other current liabilities approximate fair value because of their short-term nature. The fair value of the Company’s interest rate swap is determined based upon Level Two inputs which includes valuation models as reported by our counterparties and third-party valuation specialists. These valuation models are based on the present value of expected cash flows using forward rate curves. The fair value of our senior secured notes was $445,271 and $456,204 as of July 31, 2022 and January 30, 2022, respectively. The fair value of the Company’s term note was $881,343 as of July 31, 2022. The fair value of the Company’s debt is determined based on a discounted cash flow method, using a sector-specific yield curve based on market-derived, trade price data as of the measurement date, and is classified as a Level Two input within the fair value hierarchy.
The Company also measures certain non-financial assets (primarily property and equipment, right-of-use (“ROU”) assets, goodwill, tradenames, and other assets) at fair value on a non-recurring basis in connection with its periodic evaluations of such assets for potential impairment. During the second quarter of fiscal 2022, an impairment of $1,841
was recognized related to Main Event’s corporate headquarters lease, which will be abandoned, and was included in “General and administrative expenses” in the Consolidated Statements of Comprehensive Income. During the first quarter of fiscal 2022, there
were no impairments recognized.
Interest rate swaps
The fair value of outstanding interest rate swap derivatives liability was $30 and $3,823 as of July 31, 2022 and January 30, 2022, respectively, and the balance is included in “Accrued liabilities” in the Consolidated Balance Sheets. The following table
summarizes the activity in accumulated other comprehensive loss related to our derivative instruments:
Thirteen weeks ended |
Twenty-six weeks ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
July 31, 2022 |
August 1, 2021 |
|||||||||||||
Loss reclassified or amortized into interest expense |
$ | $ | $ | $ | ||||||||||||
Income tax effect |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
Revenue recognition
twenty-six
weeks ended July 31, 2022, we recognized revenue of approximately , respectively, related to the amount in deferred amusement revenue as of the end of fiscal 2021 (or as of the Closing Date of the Acquisition).
In jurisdictions where we do not have a legal obligation to remit unredeemed gift card balances to a legal authority, we recognize revenue on unredeemed gift cards in proportion to the pattern of redemption by the customers. During the thirteen and
twenty-six
weeks ended July 31, 2022, we recognized revenue of approximately $1,200 and $3,300
$140 and $430 , respectively, was breakage revenue.
Stockholders’ equity
respectively.
Earnings per share
10
share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. For the calculation of diluted net income per share, the basic weighted average shares outstanding is increased by the dilutive effect of stock options and restricted share awards. Stock options and restricted share awards with an anti-dilutive effect are not included in the diluted net income per share calculation. For the thirteen weeks ended July 31, 2022 and August 1, 2021, the Company excluded anti-dilutive awards from the calculation of approximately
and
, respectively. For the twenty-six weeks ended July 31, 2022, and August 1, 2021, the Company excluded anti-dilutive awards from the calculation of approximately
and
, respectively.
Thirteen weeks ended |
Twenty-six weeks ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
July 31, 2022 |
August 1, 2021 |
|||||||||||||
Basic weighted average shares outstanding |
||||||||||||||||
Weighted average dilutive impact of awards |
||||||||||||||||
Diluted weighted average shares outstanding |
||||||||||||||||
Recent accounting pronouncements
Note 2: Business Combinations
On June 29, 2022, the Company acquired Main Event for approximately
$837,380
in net cash and contingent consideration. Dallas-based Main Event, which debuted in 1998,
is also focused on food, drinks, and games, largely for the demographic target of families with young children. The acquisition is expected to put the Company in a strategic position for accelerated, profitable growth in both brands as well as create cost synergies with our Dave & Buster’s brand.
The Main Event Acquisition was made at a price above the determined fair value of the acquired identifiable net assets, resulting in goodwill, primarily due to expectations of the synergies that will be realized by combining the businesses and the benefits that will be gained from the assembled workforce. These synergies include the elimination of redundant facilities, functions, and staffing. None of the goodwill recorded from this business combination is expected to be tax deductible.
The acquisition has been accounted for using the acquisition method of accounting with assets acquired and liabilities assumed recorded at fair value, and the results of Main Event have been included in the accompanying financial statements from June 29, 2022, the date of acquisition. Acquisition transaction costs totaling approximately
$12,200 are recorded in general and administrative expenses as incurred.
The following summarizes the purchase consideration paid, which consisted of cash consideration of $835,000
11
The components of the purchase price and net assets acquired in the Main Event Acquisition are as follows:
Amount |
||||
Gross cash consideration |
$ |
|||
Contingent consideration (1) |
||||
Less: cash acquired |
( |
) | ||
Total consideration paid |
$ |
|||
Assets: |
||||
Current assets |
||||
Property and equipment |
||||
Operating lease right |
||||
Deferred tax assets |
||||
Tradenames |
||||
Other assets and deferred charges |
||||
Liabilities: |
||||
Accounts payable |
||||
Current portion of operating lease liabilities |
||||
Accrued liabilities |
||||
Operating lease liabilities |
||||
Other liabilities |
||||
Net assets acquired, excluding goodwill |
$ |
|||
Goodwill |
$ |
|||
(1) |
The Company has an obligation to pay, in cash, an aggregate amount equal to any “Transaction Tax Benefits,” with respect to any taxable year of the Company after the Closing Date ending on or before December 31, 2028, including the current taxable year. Transaction Tax Benefits is generally defined as any reduction in the Company’s liabilities for U.S. federal and state income taxes due to the use of net operating losses generated prior to the Closing Date. The contingent consideration could range from $ Transaction Tax Benefits are achieved) to a cap, as defined in the Merger Agreement of approximately $ |
The preliminary allocation of the purchase price for the Acquisition was based on estimates of the fair value of the net assets acquired and are subject to adjustment for up to one year upon finalization, largely with respect to acquired property and equipment; lease assets and liabilities; deferred taxes; and contingent consideration. Measurements of these items inherently require significant estimates and assumptions considered to be Level Three fair value estimates.
The fair values of property and equipment were determined using a cost approach that utilized the Replacement Cost New methodology. Key inputs and assumptions include current cost estimates, functional and economic obsolescence. The fair values of the real estate leases were determined using a market approach that utilized the Above-Below Regression methodology. Key inputs and assumptions include mean rental rates (based on metrics such as rent/revenue and operating cash flow/revenue) and discount rate. The fair value of the tradename was determined using an income approach that utilized the Relief from Royalty methodology. Key inputs and assumptions include the Company’s projected future EBITDA, royalty rates, discount rate, and long-term growth rate.
The preliminary fair values of acquisition-related intangible assets are as follows:
Amount |
Useful Life(Yrs) |
|||||||
Favorable/unfavorable lease contracts, net |
$ | |||||||
Tradenames |
Indefinite |
|||||||
Total acquisition-related intangible assets |
$ |
|||||||
Taxes
—
12
Unaudited Pro Forma Information
To reflect the Acquisition as if it had occurred on February 1, 2021, the unaudited pro forma results include adjustments to reflect, among other things, the interest expense from debt financings obtained to partially fund the cash consideration transferred. Pro forma adjustments were tax effected at the Company’s historical statutory rates in effect for the respective periods. The unaudited pro forma amounts are not necessarily indicative of the combined results of operations that would have been realized had the acquisitions and related financings occurred on the aforementioned dates, nor are they meant to be indicative of any anticipated combined results of operations that the Company will experience after the transaction. In addition, the amounts do not include any adjustments for actions that may be taken following the completion of the transaction, such as expected cost savings, operating synergies, or revenue enhancements that may be realized subsequent to the transaction.
The following unaudited pro forma information provides the effect of the Main Event Acquisition as if the acquisition had occurred on February 1,
2021:
Thirteen Weeks Ended |
Twenty-six Weeks Ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
July 31, 2022 |
August 1, 2021 |
|||||||||||||
Revenues |
$ | $ | $ | $ | ||||||||||||
Net i ncome |
$ | $ | $ | $ | ||||||||||||
Main Event’s revenues and net income attributable to the Company in the thirteen and
twenty-six
weeks ended July 31, 2022, subsequent to the acquisition date, were $51,405
$5,668
, respectively.
The historical consolidated financial information of the Company and Main Event has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisitions and related financing arrangements and are factually supportable.
Note 3: Goodwill and Intangible Assets, Net
Goodwill
is evaluated at the level of the Company’s single operating segment, which also represents the Company’s only reporting unit. Goodwill is not subject to amortization and is evaluated for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value below carrying amount. Such events or circumstances generally include the occurrence of operating losses or a significant decline in earnings. The Company is permitted to first assess qualitative factors to determine whether the quantitative goodwill impairment test is necessary. If the qualitative assessment results in a determination that the fair value is more likely than not less than carrying amount, the Company performs a quantitative goodwill impairment test. The Company may bypass the qualitative assessment in any period and proceed directly to the goodwill impairment test. The Company estimates fair value by using forecasts of discounted future cash flows and peer market multiples. The Company would record an impairment charge based on the excess of the carrying amount over fair value (limited to the amount of goodwill). The Company determined t
hat no impairments existed in periods reflected. The carrying amount of goodwill is impacted by foreign currency translation a
djustments.
The changes in the carrying amount of goodwill during fiscal 2022 and fiscal 2021 are as follows:
Balance at January 31, 2021 |
$ | |||
Currency adjustment |
||||
Balance at January 30, 2022 |
||||
Currency adjustment |
||||
Acquisition of Main Event |
||||
Balance at July 31, 2022 |
$ | |||
Intangible assets
13
Tradenames with indefinite lives are not amortized and are reviewed for impairment annually or whenever events or changes in circumstances indicate they may be impaired. The Company may perform an optional qualitative assessment. If the Company determines that the fair value of the indefinite-lived intangible asset is more likely than not greater than its carrying amount, no additional testing is necessary. If not, or if the Company bypasses the optional qualitative assessment, the carrying value is written down to the fair value, if applicable.
The net carrying amount of intangibles are as
follows:
July 31, 2022 |
January 30, 2022 |
|||||||||||||||||||||||
Gross Amount |
Accumulated Amortization |
Net Amount |
Gross Amount |
Accumulated Amortization |
Net Amount |
|||||||||||||||||||
Favorable/unfavorable lease contracts, net |
$ |
$ |
( |
) |
$ |
$ |
— |
$ |
— |
$ |
— |
|||||||||||||
Tradenames (indefinite lived) |
$ |
N/A |
N/A |
$ |
N/A |
N/A |
||||||||||||||||||
The following table summarizes the estimated amortization expense for each of the next five fiscal years as of July 31, 2022:
Remainder of 2022 |
$ |
|||
2023 |
$ |
|||
2024 |
$ |
|||
2025 |
$ |
|||
2026 |
$ |
Note 4: Accrued Liabilities
Accrued liabilities consist of the following as of the end of each period:
July 31, 2022 |
January 30, 2022 |
|||||||
Deferred amusement revenue |
$ | $ | ||||||
Current portion of operating lease liabilities, net (1) |
||||||||
Compensation and benefits |
||||||||
Deferred gift card revenue |
||||||||
Property taxes |
||||||||
Current portion of deferred occupancy costs |
||||||||
Accrued interest |
||||||||
Sales and use taxes |
||||||||
Customer deposits |
||||||||
Utilities |
||||||||
Current portion of long-term insurance |
||||||||
Variable rent liabilities |
||||||||
Other |
||||||||
| $ | $ | |||||||
| ( 1 ) |
The balance of leasehold incentive receivables of $ |
Note 5: Leases
We currently lease most of the buildings or sites for our stores, store support centers, and warehouse space under facility operating leases. These leases typically have initial terms ranging from ten to twenty years and include one or more options to renew. When determining the lease term, we include option periods for which renewal is reasonably certain. Most of the leases require us to pay property taxes, insurance, and maintenance of the leased assets. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. Operating leases also includes certain equipment leases that have a term in excess of one year. Certain facility leases also have provisions for additional contingent rentals based on revenues.
14
During fiscal 2020 and the first half of fiscal 2021, the Company entered into rent relief agreements with our respective landlords. The Company elected to apply an available practical expedient to account for lease concessions and deferrals resulting directly from the
COVID-19
pandemic as though the enforceable rights and obligations to the deferrals existed in the respective contracts at lease inception and not account for the concessions as lease modifications unless the concession results in a substantial increase in the Company’s obligations. The majority of rent relief agreements qualified for this accounting election, and the remaining agreements were treated as lease modifications, primarily due to a significant extension of the lease term. The Company has bifurcated our current operating lease liabilities into the portion that remains subject to accretion and the portion that is accounted for as a deferral of payments. The current portion of deferred occupancy costs is included in “Accrued liabilities” and the balance, or $4,293 and $8,434
as of July 31, 2022, and January 30, 2022, respectively, is included in “Other liabilities” in the Consolidated Balance Sheets.
Operating lease cost, variable lease cost and short-term lease cost related primarily to our facilities is included in “Other store operating expenses” for our operating stores,
“Pre-opening
costs” for our stores not yet operating, or “General and administrative expenses” for our corporate office and warehouse, in the Consolidated Statements of Comprehensive Income. The components of lease expense, including variable lease costs primarily consisting of common area maintenance charges and property taxes, are as follows for the fiscal year ended:
Thirteen Weeks Ended |
Twenty-Six Weeks Ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
July 31, 2022 |
August 1, 2021 |
|||||||||||||
Operating lease cost |
$ |
$ |
$ |
$ |
||||||||||||
Variable lease cost |
||||||||||||||||
Short-term lease cost |
||||||||||||||||
Amortization of favorable/unfavorable lease contracts, net |
||||||||||||||||
Total |
$ |
$ |
$ |
$ |
||||||||||||
Minimum future maturities of operating lease liabilities were as follows as of July 31, 2022, by fiscal year:
Remainder of 2022 |
$ |
|||
2023 |
||||
2024 |
||||
2025 |
||||
2026 |
||||
Thereafter |
||||
Total future operating lease liability |
$ |
|||
Less: interest |
( |
) | ||
Present value of operating lease liabilities |
$ |
|||
Operating lease payments in the table above includes minimum lease payments for future sites for which the leases have commenced. Operating lease payments exclude approximately
$
of minimum lease payments for seven executed facility leases which have not yet commenced.
Note 6: Debt
Long-term debt consists of the following:
15
July 31, 2022 |
January 30, 2022 |
|||||||
Senior secured notes |
$ | $ | ||||||
Term loan |
— | |||||||
Total debt outstanding |
||||||||
Current portion |
( |
) | — |
|||||
Original issue discount on term loan |
( |
) | — |
|||||
Debt issuance costs |
( |
) | ( |
) | ||||
Long-term debt |
$ | $ | ||||||
In connection with the closing of the Main Event Acquisition on June 29, 2022, D&B Inc entered into a senior secured credit agreement, which refinanced the
$500,000 existing revolving facility, extendJune 29, 2027 , and added a new term loan facility in the aggregate principal amount of $850,000 , with a maturity date of June 29, 2029 (“Credit Facility”). The proceeds of the term loan, net of an original issue discount of $42,500
ed
the maturity date to , were used to pay the consideration for the Acquisition. The revolving credit facility can expire before the stated maturity date if the aggregate outstanding principal amount of the Notes exceeds
$100,000 ninety-one days prior to November 1, 2025 . A portion of the revolving facility not to exceed $35,000
$8,605 and an unused commitment balance of $491,395 under the revolving facility. The Credit Facility may be increased through incremental facilities, by an amount equal to the greater of (i) $400,000 and (ii) 0.75 times trailing twelve-month Adjusted EBITDA, as defined, plus additional amounts subject to compliance with applicable leverage ratio and/or interest coverage ratio requirements. The Credit Facility is unconditionally guaranteed by D&B Holdings and certain of D&B Inc’s existing and future wholly owned material domestic
The
interest rates per annum applicable to SOFR term loans are based on a defined SOFR rate (with a floor of 0.50 %) plus an additional credit spread adjustment of 0.10 %, plus a margin of 5.00 %. The interest rates per annum applicable to SOFR revolving loans are based on the term loan SOFR rate, plus an additional credit spread adjustment of 0.10 %, plus an initial margin of 4.75 %. Unused commitments under the revolving facility incur initial commitment fees of 0.50 %. After the Company’s third quarter of fiscal 2022, the margin for SOFR revolving loans are subject to a pricing grid based on net total leverage, ranging from 4.25 % to 4.75
%, and commitment fees are subject to a pricing grid based on net total leverage, ran
ging from 0.30 % to 0.50 %.
During fiscal 2020, the Company issued $550,000 aggregate principal amount of 7.625 % senior secured notes (the “Notes”). Interest on the Notes is payable in arrears on November 1 and May 1 of each year . The Notes mature on November 1, 2025 , unless earlier redeemed, and are subject to the terms and conditions set forth in the related indenture. The Notes were issued by D&B Inc and are unconditionally guaranteed by D&B Holdings and certain of D&B Inc’s existing and future wholly owned material domestic subsidiaries. During fiscal 2021, the Company redeemed a total of $110,000
outstanding principal amount of the Notes, and paid prepayment premiums of
$3,300 , plus accrued and unpaid interest to the date of redemptions. The early redemptions of the Notes resulted in a loss on extinguishment of approximately $2,300 related to a proportional amount of unamortized issuance costs. Beginning October 27, 2022, the Company may elect to further redeem the Notes, in whole or in part, at certain specified redemption prices, plus accrued and unpaid interest, at the redemption date.
Amortization of debt issuance costs and original issue discount was $1,636 and $2,595 for the thirteen and twenty-six weeks ended July 31, 2022, and $1,103 and $2,205 for the thirteen and twenty-six weeks ended August 1, 2021, respectively, and is included in “Interest expense, net” in the Consolidated Statements of Comprehensive Income. For the twenty-six weeks ended July 31, 2022, and August 1, 2021, respectively, the Company’s weighted average effective interest rate on our total debt facilities (before capitalized interest amounts) was 10.08 % and 10.17
%, respectively. During the second quarter of fiscal 2022, the Company recognized a loss of
$1,479
, related to the write off of unamortized debt issuance costs associated with exiting creditors of the refinanced revolving facility.
Our debt agreements contain restrictive covenants that, among other things, place certain limitations on our ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, pay dividends, acquire other businesses or sell assets. The Credit Facility also requires the Company to maintain a maximum net total leverage ratio, as defined, as of the end of each fiscal quarter, beginning with the Company’s first full fiscal quarter after the Closing Date.
Note 7: Commitments and Contingencies
We are subject to certain legal proceedings and claims that arise in the ordinary course of our business, including claims alleging violations of federal and state law regarding workplace and employment matters, discrimination, slip-and-fall and other customer-related incidents and similar matters. In the opinion of management, based upon consultation with legal counsel, the amount of ultimate liability, with respect to such legal proceedings and claims will not materially affect the consolidated results of our operations or our financial condition. Legal costs related to such claims are expensed as incurred.
1
6
The Company is a defendant in several lawsuits filed in courts in California alleging violations of California Business and Professions Code, industry wage orders, laws and rules and regulations pertaining primarily to the failure to pay proper regular and overtime wages, failure to pay for missed meals and rest periods, pay stub violations, failure to pay all wages due at the time of termination and other employment related claims (the “California Cases”). Some of the California Cases purport or may be determined to be class actions or Private Attorneys General Act representative actions and seek substantial damages and penalties. The Company’s assessments of potential liabilities associated with these claims are based on assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Management’s assessment of these California Cases, as well as other lawsuits, could change because of future determinations or the discovery of facts that are not presently known. Accordingly, the ultimate costs of resolving these cases may be substantially higher or lower than estimated. The Company continues to aggressively defend the remaining cases.
wage-and-hour
Note 8: Share-Based Compensation
Compensation expense related to stock options and restricted stock units is included in “General and administrative expenses” in the Consolidated Statements of Comprehensive Income and is as follows:
Thirteen Weeks Ended |
Twenty-six Weeks Ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
July 31, 2022 |
August 1, 2021 |
|||||||||||||
| Stock options |
$ | $ | ||||||||||||||
| Restricted stock units |
||||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Share-based compensation expense |
$ | $ | $ | $ | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
Transactions related to stock option awards during the
twenty-six
weeks ended July 31, 2022 were as follows: 2014 Stock Incentive Plan |
2010 Stock Incentive Plan |
|||||||||||||||
Number |
Wtd. Avg. |
Number |
Wtd. Avg. |
|||||||||||||
of Options |
Exercise Price |
of Options |
Exercise Price |
|||||||||||||
| Outstanding at January 30, 2022 |
$ | $ | ||||||||||||||
| Granted |
— | — | ||||||||||||||
| Exercised |
( |
) | ( |
) | ||||||||||||
| Forfeited |
( |
) | — | — | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Outstanding at July 31, 2022 |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Exercisable at July 31, 2022 |
$ | $ | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
The total intrinsic value of options exercised during the twenty-six weeks ended July 31, 2022 was $2,287 . The unrecognized expense related to our stock option plan totaled approximately $4,159 as of July 31, 2022 and will be expensed over a weighted average period of 4.3 years.
Transactions related to restricted stock units during the twenty-six weeks ended July 31, 2022, were as follows:
Wtd. Avg. |
||||||||
Shares |
Fair Value |
|||||||
| Outstanding at January 30, 2022 |
$ | |||||||
| Granted |
||||||||
| Performance adjusted units |
||||||||
| Vested |
( |
) | ||||||
| Forfeited |
( |
) | ||||||
| |
|
|
|
|||||
| Outstanding at July 31, 2022 |
$ | |||||||
| |
|
|
|
|||||
17
Fair value of our time-based and performance-based restricted stock units is based on our closing stock price on the date of grant. The grant date fair value of stock options was determined using the Black-Scholes option valuation model. The grant date fair value of market-based restricted stock units was determined using the Monte Carlo valuation model. The unrecognized expense related to restricted stock units was $32,489 as of July 31, 2022 and will be expensed over a weighted average period of 3.2 years.
During the second quarter of fiscal 2022, the Company granted certain options, time-based, performance-based, and market-based restricted stock units to the newly appointed chief executive officer. The majority of these grants vest over five years
, but the market-based restricted stock units can vest earlier if the targets are achieved prior to that time. As a result, the requisite service period for such grants was determined to be less than the explicit service period.
During the twenty-six weeks ended July 31, 2022 and August 1, 2021, excess tax expense (benefit) of $(3,133 ) and $(5,665 ), respectively, were recognized in the “Provision for income taxes” in the Consolidated Statement of Comprehensive Income and classified as a source in operating activities in the Consolidated Statement of
Cash Flows.
Note 9: Income Taxes
The effective tax rate for the twenty-six weeks ended July 31, 2022, was 23.3 %, compared to 17.4 % for the twenty-six weeks ended August 1, 2021. The previous year tax provision includes higher excess tax benefits associated with share-based compensation and credits associated with the reversal of certain tax valuation allowances.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law. Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, allowing for the carryback of net operating losses generated in fiscal 2018, 2019 and 2020 and technical amendments regarding the expensing of qualified improvement property. The application of the technical amendments made by the CARES Act to qualified improvement property resulted in additional tax net operating losses which were carried back from fiscal 2020 and fiscal 2019 to years with a higher federal corporate income tax rate. During the second quarter of fiscal 2021, the Company filed the fiscal 2020 carryback claims for federal tax refunds of approximately $57,400 , of which approximately $33,200 were received during the first quarter of fiscal 2022
.
18
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read together with the accompanying unaudited consolidated financial statements and the related notes in Item 1 and with the audited consolidated financial statements and the related notes included in our Annual Report on Form
10
as filed with the Securities and Exchange Commission (“SEC”) on March 29, 2022. Unless otherwise specified, the meanings of all defined terms in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are consistent with the meanings of such terms as defined in the Notes to Unaudited Consolidated Financial Statements. This discussion contains statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,” “estimates,” “anticipates,” “expects,” “intends,” “may,” “will” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate. -
KBy their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Forward-looking statements are not a guarantee of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially from those made in or suggested by the forward-looking statements contained in this quarterly report as a result of various factors, including those set forth in the section entitled “Risk Factors” in our Annual Report on Form
10-K
filed with the SEC on March 29, 2022. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this Form 10-Q,
such results or developments may not be indicative of results or developments in subsequent periods. Recent Events
On June 29, 2022, the Company completed its previously announced Main Event Acquisition. As of July 31, 2022, there were 49 family entertainment centers under the name Main Event and 3 family entertainment centers under the name The Summit (collectively referred to as “Main Event”), operating in seventeen states. Refer to Note 2,
Business Combinations
, to the Unaudited Consolidated Financial Statements for further details. Quarterly Financial Highlights
| • | Revenues totaled $468,359 in the second quarter of 2022 compared with $344,599 in the second quarter of 2019. A total of 148 and 130 Dave & Buster’s stores were open and operating without restrictions at the end of the second quarter of 2022 and 2019, respectively. The newly acquired Main Event stores contributed revenues of $51,405 from the acquisition on June 29, 2022, through the end of the second quarter. Revenues totaled $377,638 in the second quarter of 2021, which ended with 142 Dave & Buster’s stores open and operating in limited capacity. |
| • | Overall Dave & Buster’s comparable store sales increased 9.6% compared with the same period in 2019 and increased 5.7% compared with the same period in 2021, which ended with 113 comparable Dave & Buster’s stores open and operating in limited capacity. |
| • | Net income totaled $29,088, or $0.59 per diluted share, compared with net income of $32,356, or $0.90 per diluted share in the same period of 2019. Net income in the second quarter of fiscal 2022 was impacted by incremental acquisition and integration costs related to the Main Event Acquisition. In the same period of 2021, we recorded net income of $52,770. |
| • | Adjusted EBITDA totaled $119,550, or 25.5% of revenues, compared with Adjusted EBITDA of $85,982 or 25.0% of revenues in the second quarter of 2019. Adjusted EBITDA was $119,152 or 31.6% of revenues in the second quarter of 2021. |
| • | Ended the quarter with $100,386 in cash and $491,395 of liquidity available under the Company’s revolving 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 names “Dave & Buster’s” and “Main Event”. 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 19
entertainment attractions centered around playing games, bowling, and watching live sports and other televised events. Our brands appeal to a relatively balanced mix of male and female adults, as well as families and teenagers. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.
Our Dave & Buster’s stores, which average 40,000 square feet, range in size between 16,000 and 70,000 square feet. Our Main Event stores, which average 54,000 square feet, range in size between 46,000 and 74,000 square feet. Generally, our stores are open seven days a week, with normal hours of operation generally from between 10:00 to 11:30 a.m. until midnight, with stores typically open for extended hours on weekends.
Key Measures of Our Performance
We monitor and analyze several key performance measures to manage our business and evaluate financial and operating performance. These measures include:
Comparable store sales.
COVID-19
pandemic, the comparable store base for fiscal 2022 is defined as stores open for a full 18 months before the beginning of fiscal 2020 and excludes two stores that the Company elected not to reopen after they were closed in March 2020 due to local operating limitations and one store in Cary, North Carolina that was closed and relocated during the fourth quarter of fiscal 2021. For the first and second quarter of fiscal 2022, our comparable store base consisted of 113 stores. Our Main Event stores were not included in comparable store sales for the thirteen and twenty-six
weeks ended July 31, 2022. New store openings.
Non-GAAP
Financial Measures In addition to the results provided in accordance with generally accepted accounting principles (“GAAP”), we provide
non-GAAP
measures which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with GAAP and include Adjusted EBITDA, Adjusted EBITDA Margin, Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin (defined below). These non-GAAP
measures do not represent and should not be considered as an alternative to net income or cash flows from operations, as determined in accordance with GAAP, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. Although we use these non-GAAP
measures to assess the operating performance of our business, they have significant limitations as an analytical tool because they exclude certain material costs. For example, Adjusted EBITDA does not take into account a number of significant items, including our interest expense and depreciation and amortization expense. In addition, Adjusted EBITDA excludes pre-opening
and other costs which may be important in analyzing our GAAP results. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Our calculations of Adjusted EBITDA adjust for these amounts because they vary from period to period and do not directly relate to the ongoing operations of the currently underlying business of our stores and therefore complicate comparison of underlying business between periods. Nevertheless, because of the limitations described above, management does not view Adjusted EBITDA or Store Operating Income Before Depreciation and Amortization in isolation and also uses other measures, such as revenues, gross margin, operating income and net income, to measure operating performance. Adjusted EBITDA and Adjusted EBITDA Margin
pre-opening
costs, currency transaction (gains) losses and other costs. “Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by total revenues. Adjusted EBITDA is presented because we believe that it provides useful information to investors and analysts regarding our operating performance. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.
Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin.
pre-opening
costs. “Store Operating Income Before Depreciation and Amortization Margin” is defined as Store Operating Income Before 20
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
We operate on a 52 or
53-week
fiscal year that ends on the Sunday after the Saturday closest to January 31. Each quarterly period has 13 weeks, except in a 53-week
year when the fourth quarter has 14 weeks. All references to the second quarter of 2022 relate to the 13-week
period ended July 31, 2022. All references to the second quarter of 2021 relate to the 13-week
period ended August 1, 2021. All references to the second quarter of 2019 relate to the 13-week
period ended August 4, 2019. Fiscal 2022, fiscal 2021 and fiscal 2019 consist of 52 weeks. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.Store-Level Variability, Quarterly Fluctuations, Seasonality and Inflation
We have historically operated stores varying in size and have experienced significant variability among stores in volumes, operating results and net investment costs.
Our new stores historically open with sales volumes in excess of their expected long-term
run-rate
levels, which we refer to as a “honeymoon” effect. We traditionally expect our new store sales volumes in year two to be approximately 10% to 20% lower than our year one targets, and to grow in line with the rest of our comparable store base thereafter. As a result of the substantial revenues associated with each new store, the number and timing of new store openings may result in significant fluctuations in quarterly results. In the first year of operation new store operating margins (excluding
pre-opening
expenses) typically benefit from honeymoon sales leverage on occupancy, management labor, and other fixed costs. This benefit is partially offset by normal inefficiencies in hourly labor and other costs associated with establishing a new store. In year two, operating margins may decline due to the loss of honeymoon sales leverage on fixed costs which is partially offset by improvements in store operating efficiency. Furthermore, rents in our new stores are typically higher than our comparable store base. Our operating results fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with spring and fall season, has historically had lower revenues as compared to the other quarters.
year-end
holidays which will continue to be susceptible to the impact of severe or unseasonably mild weather on customer traffic and sales during that period. Our third quarter, which encompasses the back-to-school
We expect that economic and environmental conditions and changes in regulatory legislation will continue to exert pressure on both supplier pricing and consumer spending related to entertainment and dining alternatives. Although there is no assurance that our cost of products will remain stable or that federal, state, or local minimum wage rates will not increase beyond amounts currently legislated, the effects of any supplier price increase or wage rate increases might be partially offset by selected menu price increases if competitively appropriate. In addition, how quickly, and to what extent, normal economic and operating conditions can resume cannot be predicted, and the resumption of normal business operations may be delayed or constrained by lingering effects of the
COVID-19
pandemic on us or our suppliers, third-party service providers, and/or customers. 21
Thirteen Weeks Ended July 31, 2022 Compared to Thirteen Weeks Ended August 1, 2021
Results of operations.
Thirteen Weeks |
Thirteen Weeks |
|||||||||||||||
Ended |
Ended |
|||||||||||||||
July 31, 2022 |
August 1, 2021 |
|||||||||||||||
| Food and beverage revenues |
$ | 156,995 | 33.5 | % | $ | 123,006 | 32.6 | % | ||||||||
| Amusement and other revenues |
311,364 | 66.5 | 254,632 | 67.4 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total revenues |
468,359 | 100.0 | 377,638 | 100.0 | ||||||||||||
| Cost of food and beverage (as a percentage of food and beverage revenues) |
46,461 | 29.6 | 33,127 | 26.9 | ||||||||||||
| Cost of amusement and other (as a percentage of amusement and other revenues) |
29,075 | 9.3 | 24,584 | 9.7 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total cost of products |
75,536 | 16.1 | 57,711 | 15.3 | ||||||||||||
| Operating payroll and benefits |
113,674 | 24.3 | 80,623 | 21.3 | ||||||||||||
| Other store operating expenses |
142,440 | 30.4 | 105,116 | 27.9 | ||||||||||||
| General and administrative expenses |
37,710 | 8.1 | 18,470 | 4.9 | ||||||||||||
| Depreciation and amortization expense |
38,614 | 8.2 | 34,875 | 9.2 | ||||||||||||
| Pre-opening costs |
3,913 | 0.8 | 1,676 | 0.4 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total operating costs |
411,887 | 87.9 | 298,471 | 79.0 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Operating income |
56,472 | 12.1 | 79,167 | 21.0 | ||||||||||||
| Interest expense, net |
17,118 | 3.7 | 13,728 | 3.7 | ||||||||||||
| Loss on debt refinancing |
1,479 | 0.3 | 0 | 0 | ||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Income before provision for income taxes |
37,875 | 8.1 | 65,439 | 17.3 | ||||||||||||
| Provision for income taxes |
8,787 | 1.9 | ||||||||||||||