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ITEM 1. | Business |
report.
explore new flavors while offering a balanced selection of familiar dishes. Our menu also simplifies execution, and along with recent kitchen enhancements allows us to deliver dishes to customers hotter and faster to drive an improved customer experience. While our menu appeals to a broad spectrum of customers, we continue to evolve it to reflect the changing tastes of our21-39year-old primary target guests, customers, 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,health-conscious options comparable to those of otherhigher-end casual dining operators.low calorie, vegetarian, and gluten friendly options. We believe our broad menu offers something for everyone and is appropriate for many different occasions. To ensure that we stay with societal shifts, roll outupdate our menus that featureregularly with new food items two times a year.
or limited time offers. Our food revenues, which include68%66% of our food and beverage revenues and approximately 29%24.1% of our total revenues during fiscal 2018.
2020.
2020.
Our Company’s Core Strengths
following:
male and female adults,families, which is moderately skewed to males, primarily between the ages of 21 and 39, as well as families and teenagers. Based on customer survey results, we also believe that the average annual household incomemake up approximately 40% of our customers is approximately $75, which we believe represents an attractive demographic.
mix.
which is reflected byin our fiscal 2018 average annual comparablehistorically higher revenue per store, revenues of $11,100, averagehigher comparable store operating income margins, of 21.7% and higher comparable Store Operating Income Before Depreciation and Amortization Margins (defined in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of of 30.4%.
Experienced management team. We believe
Our Growth Strategies
The operating strategy that underlies the growth
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Offer novel food & drink to bring people together. one-of-a-kind Offer the latest entertainment to enjoy together. 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 extend our programming capabilities by offering more curated content and creating a calendar of ongoing andone-time events leveraging our investments in the best and latest audio-visual technology.Align team and integrated experience. in-store experience. We will also refresh our commitment to serving customers through an improved hiring, training and service model, and our team will help create fun and bring our new strategies to life.7 Drive customer engagement. |
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Build great new stores. We will continue to pursue what we believe to be a disciplinedleverage our customer relationship management program and our growing loyalty database by delivering more targeted individualized offers and creative content.
internal studies and third-party research suggests a total store potential in the United States and Canada in excess of 230 stores (including our 121140 stores as of the end of fiscal 2018)2020). We anticipate that approximately 25%opened six stores and closed two stores in fiscal 2020. We will maintain a moderate pace of our future new store openings will utilizein fiscal 2021 as our new 17K design business recovers from the impact of
Our store expansion strategy is driven by aincluding site selection process that allows us to evaluatevisibility, accessibility and select the location, sizetraffic volume, and design of our stores based on consumer research and analysis of operating data from sales in our existing stores. Our site selection process and flexible store design enable us to customize each store with the objective of maximizing return on capital given the characteristics of the market and the location. Our current store large formats are 30,001 to 45,000 square feet in size and our current store small formats span 25,000 to 30,000 square feet. Our small and 17K formats provide us the flexibility to enter new smaller markets and further penetrate existing markets. Our various store formats also provide us with the ability to strategically choose between building new stores and converting existing space, which can be more cost efficient for certain locations. We are targeting average year onecash-on-cash returns of approximately 35% for both our large format and small format stores and approximately 25% for the 17K format. To achieve this return for large format stores, we target average net development costs of approximately $8,300 to $8,800 and first-year store revenues of approximately $10,000 to $12,200. For small format stores, we target average net development costs of approximately $6,800 and average first year store revenues of approximately $8,700. For 17K format stores, we target average net development costs of approximately $5,000 and first-year store revenues of approximately $5,000. Additionally, for both large format and small format stores, we target average year one margins on operating income (excluding allocated national marketing costs) of approximately 18%, and Store Operating Income Before Depreciation and Amortization (excluding allocated national marketing costs) of approximately 29%. For our 17K format store, we target average year one margins on operating income (excluding allocated national marketing costs) of approximately 12% and Store Operating Income Before Depreciation and Amortization (excluding allocated national marketing costs) of approximately 25%.
Expand the Dave & Buster’s brand internationally. We believe that in addition to the growth potential that exists in North America, the Dave & Buster’s brand can also have significant appeal in certain international markets. We are currently assessing these opportunities while maintaining a conservative and disciplined approach towards the execution of our international development strategy. As such, we have retained the services of a third-party consultant to assist in identifying and prioritizing potential markets for expansion as well as potential franchise or joint venture partners. Thus far, we have identified our international market priorities and begun the process of identifying potential international partners.
Site Selection
We believe that the location of stores is critical to our long-term success.trade area demographics 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.
Our Store Formats
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 span 25,000 to 30,000are below 25,001 square feet. Additionally, our newly-developed 17K design which will span 15,000 to 20,000 square feet, should allowAt January 31, 2021, we operated 110 large format stores, 20 medium format stores and 10 small format stores.
We utilizereduce capital investment risk per store. For the smaller format, stores to penetrate less densely populated markets and backfill existing markets. The smaller format haswe have reduced thesalescustomer facing 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
Marketing, Advertising and Promotion
Our corporate marketing department manages all consumer-focused initiatives for the Dave & Buster’s brand. In order to drive sales and expand our customer base, we focus our efforts in three key areas:
Marketing: national advertising, media (linear and digital), promotions,in-store merchandising, pricing
Food and beverage: menu and product development
Customer insights: research, brand health and tracking
We spent approximately $40,767 in marketing efforts in fiscal 2018, $37,876 in fiscal 2017, and $33,795 in fiscal 2016. Our annual marketing expenditures include the cost of national television and radio advertising totaling $30,437, $30,003, and $25,845, in fiscal years 2018, 2017, and 2016, respectively.
We continually seek to improve our marketing effectiveness through a number of initiatives, 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;
leveraging our loyalty database to create stronger relationships with consumers to engage and motivate them to visit; and
reflecting a consistent brand identity that represents our positioning and commitment to quality.
To drive traffic and increase visit frequency and average check size, the bulk of our marketing 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;
runin-store promotions and createpoint-of-purchase materials;
leverage the customer loyalty program, including promotional and trigger emails; 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.
Special Event Marketing
Our corporate and group sales 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 events call center located at our corporate office, targeted printwe are committed to being fun creators. Our team members share a deep commitment to four culture pillars, which describe the relationships our team members have with our customers and online media plans,each other. We are devoted to our “You Got It” service philosophy that calls us to provide exceptional service to our customers and to each other every day. Our “Play Your Heart Out” attitude encourages
Male | Female | Total | ||||||||||
White | 23.9 | % | 22.6 | % | 46.5 | % | ||||||
Black or African American | 14.4 | % | 11.7 | % | 26.1 | % | ||||||
Hispanic | 12.3 | % | 9.6 | % | 21.9 | % | ||||||
Asian/American Indian/Pacific Islander | 2.1 | % | 1.4 | % | 3.5 | % | ||||||
Two or more races | 1.2 | % | 0.8 | % | 2.0 | % | ||||||
Total | 53.9 | % | 46.1 | % | 100.0 | % | ||||||
Operations
Management
brand.
Operational Tools During the recovery, to comply with various federal, state and Programs
local guidelines and in response to changing guest levels, our stores have reduced the hours of operation and in some cases, the number of days operating in a week.
Management Information Systems
financial and marketing data and reduce store and corporate administrative time and expense. We believe our management information systems are sufficient to support our store expansion plans.
Training
We strive to maintain quality and consistency in eachwe share the results of our stores through the careful training and supervision ofannual audit with 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 andone-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 includesfront-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 intensivetwo-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.
Audit Committee.
$18,848, $20,075 $2.9 million, $18.6 million, and $13,369$18.8 million in fiscal 2018, 20172020, 2019, and 2016,2018, respectively, representing approximately 1.5%0.7%, 1.8%1.4%, and 1.3%1.5%, respectively, of our consolidated revenues. As of February 3, 2019,January 31, 2021, less than 2.0% of our long-lived assets were located outside of the United States.
During fiscal 2020, results also fluctuated due to the timing and frequency of temporary closures and operating restrictions as a result of state and local guidelines imposed due to the
Competition
Theout-of-home entertainment market is highly competitive. We compete for customers’ discretionary entertainment dollars with providers ofout-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.
Employees
As
None of our employeesfood, including regulations regarding product safety, nutritional content and menu labeling. We are covered by collective bargaining agreementsalso subject to federal, state and we have never experienced an organized work stoppage, strike or labor dispute. We believelocal laws that govern health benefits, employment practices and working conditions, including minimum wage rates, wage and compensation packageshour practices, gratuities, overtime, various family leave mandates, discrimination and harassment, immigration, workplace safety and other areas. In California, we are competitive with those offered by competitors and consider our relations with oursubject to the Private Attorneys General Act, which authorizes employees to be good.
file lawsuits to recover civil penalties on behalf of themselves, other employees, and the State of California for labor code violations. 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.
ITEM 1A. |
An investment in
Our growth strategy depends on our ability to open new stores and operate them profitably.
A key element of our growth strategy is to open additional stores in locations that we believe will provide attractive returns on investment.operations may suffer. Our ability to open newmeet our business strategy plan is dependent upon, among other things, 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; and
efficiently manage the amount of time and money used to build and open each new store.
If we succeed in opening new stores on a timely and cost-effective basis, we may nonetheless be unablethese centers to attract enough customers to new stores because potential customersour locations. As demographic and economic patterns change, current locations may be unfamiliar with our stores or concept, or our entertainment and menu options might not appeal to them. Our new stores may not meetcontinue to be attractive or exceedprofitable.
Our expansion into new markets may present increased risks due to our unfamiliarity with the area.
Some of our new stores will be in areas where we have little or no meaningful experience. Those markets
our existing markets. In addition, our national advertising program may not be successful in generating brand awareness in all local markets, and the lack of market awareness of the Dave & Buster’s brand can pose an additional risk in expanding into new markets. Stores opened in new markets may open at lower average weekly revenues than stores opened in existing markets and may have higher store-level operating expense ratios than stores in existing markets. Sales at stores opened in new markets may take longer to reach average store revenues, if at all, thereby adversely affecting our overall profitability.
In addition, we intend to establish stores outside of the United States and Canada. In addition to the risks posed by new markets generally, the operating conditions in overseas markets may vary significantly from those we have experienced in the past, including in relation to consumer preferences, regulatory environment, currency risk, the presence and cooperation of suitable local partners and availability of vendors or commercial and physical infrastructure, among others. There is no guarantee that we will be successful in integrating these new stores into our operations, achieving market acceptance, operating these stores profitably, and maintaining compliance with the rapidly changing business and regulatory requirements of new markets.demand. If we are unablefail to do so, we could suffer a material adverse effect onanticipate changing trends or other consumer preferences, our business, financial condition and results of operations.
operations would be adversely affected.
Our sales growth and ability to achieve profitability are impacted by our comparable store sales, and there are material risks to our ability to increase such sales.
Comparable store sales are a year-over-year comparison of sales at stores open at the end of the period which 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. The level of comparable store sales will affect our sales growth and will continue to be a critical factor affecting our ability to generate profits because the profit margin on comparable store sales is generally higher than the profit margin on new store sales. Our ability to increase comparable store sales depends on many factors, including perceptions of our brand, competition, our ability to increase menu or game prices without adversely impacting traffic counts, executing our marketing strategies effectively, changes in consumer preferences and discretionary spending for multiple reasons including an economic downturn or slower growth, transfer sales from new store openings, weather and changes in government regulations, among others. Many of these factors are beyond our control, and there is no guarantee that management initiatives to increase comparable store sales will be successful.
Our revenues generally fluctuate due to the seasonality of our business and other events.
Our operating results may fluctuate significantly due to seasonal factors. Typically, we have higher revenues associated with the spring andyear-end holidays. Our third quarter, which encompasses theback-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.
Our results of operations are subject to fluctuations due to the timing of new store openings.
The timing of new store openings may result in significant fluctuations in our quarterly performance. We typically incur most cashpre-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 substantialup-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.
Slow economic growthrecessionfailure to respond effectively to adverse publicity, could have a material adverse impact onharm our landlords or other tenants in shopping centers in which we are located, which in turn could negatively affect our financial results.If we experience an economic downturn in the future, our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay required tenant improvement allowances or satisfy other lease covenants to us. In addition, tenants at shopping centers in which we are located or have executed leases, or to which our stores are near, may fail to open or may cease operations. Decreases in total tenant occupancy in shopping centers in which we are located, or to which our stores are near, may affect traffic at our stores. All these factors could have a material adverse impact on our operations.Damage to our brand or reputation could adversely affect our business.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.
publish the content their subscribers and participants’participants post, often without filters or checks on accuracy of the content posted. InformationThe opportunity exists for dissemination of information, including inaccurate information, to spread quickly. Inaccurate or adverse information concerning our Company may be posted on such platforms at any timetime. 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 interests, performance, orbusiness, prospects, financial condition, and results of business,operations, regardless of the information’s accuracy.
As a part of our marketing strategy, we rely on search engine marketing, social media and new digital platforms to attract and retain our customers and maintain brand relevance. Our strategy and initiatives may not be successful, resulting in expenses incurred without improvement in traffic or relevance. In addition, a variety of risks are associated with the use of social media, including improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud andout-of-date information. 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.
Our procurementfuture 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 games and amusement offerings is dependent upon a few suppliers.
Our abilitythe lease term. We depend on cash flow from operations to continue to procure new games, amusement offerings, and other entertainment-related equipment is important topay our lease obligations. If our business strategy. The numberdoes 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, all of suppliers from which could have a material adverse effect on us.
entities, pay dividends, acquire other businesses or sell assets. In addition, other than during the second amendment suspension period, our credit facility requires us to comply with a total leverage ratio that is no greater than the applicable financial covenant level and a fixed charge ratio that is no greater than 1.25:1.00, which are each tested as of the last day of each fiscal quarter. During the second amendment suspension period, we are required to maintain minimum liquidity of $150.0 million.
Webusiness 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 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 pressurea material adverse effect on our results of operations.
our data center, as well as our backup data facility, are all located in Dallas, Texas. A natural or
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 supplies,product costs, our operating costs may increase, and, if we are unable to adjust our purchasing practices or pass suchany cost increases on to our customers, by changing menu or game prices, our operating results could be adversely affected.
We rely on third-party service providers for certain key elements of our operations including credit card processing, telecommunications and utilities. The unplanned loss of services from a major provider could adversely affect our business as we seek out and negotiate for alternate sources of service. We may be unable to replace service providers in a short period of time on acceptable terms, which could limit our operations and increase our costs. If our cost of services increases, we may be unable to pass such cost increases on to our customers, and our operating results could be adversely affected.
Food safety incidents at our stores or in our industry or supply chain may adversely affect customer perception of our brands or industry and result in declines in sales and profits.
We cannot guarantee that our supply chain and food safety controls and training will be fully effective in preventing all food safety issues at our stores, including any occurrences of foodborne illnesses such as salmonella, E. coli, Norovirus, or hepatitis A. In addition, we rely on third-party vendors, making it difficult to monitor food safety compliance and increasing the risk that foodborne illness would affect multiple locations rather than a single store. Some foodborne illness incidents could be caused by third-party vendors and distributors outside of our control. New illnesses resistant to our current precautions may develop in the future, or diseases with long incubation periods could arise, that could give rise to claims or allegations on a retroactive basis. One or more instances of foodborne illness in any of our stores or markets or related to food products we sell could negatively affect our store sales nationwide if highly publicized on national media outlets or through social media. This risk exists even if it were later determined that the illness was wrongly attributed to us or one of our stores. Other restaurant chains have experienced incidents related to foodborne illnesses that have had a material adverse effect on their operations. The occurrence of a similar incident at one or more of our stores, or negative publicity or public speculation about an incident, could reduce customer visits to our stores and negatively impact demand for our menu or game offerings.
We are subject to risksother associated with leasing space subject to long-term,non-cancelable leases.
risks. We typically do not own any real property. Payments under ournon-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, respondanticipate and react to competitive challengeschanging amusement offerings cost by adjusting purchasing practices or fund other liquiditygame prices, and capital needs, which would have a material adverse effect on us.
In addition, as each of our leases expires, we may choose notfailure 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,do so could have a material adverse effect on our business,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.
obtain and obtain/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.Each store is
Our costs
governments in response to the
We are subject to including the following:
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. In general, we have been able to partially offset cost increases resulting from changes inconditions, including minimum wage rates, by increasing menu or game prices, improving productivity, or throughwage and hour practices, gratuities, overtime, labor practices, various family leave mandates, discrimination and harassment, immigration, workplace safety and other adjustments, but there can be no assuranceareas;
Uncertainty continues to exist with respect to the future of areas;
In May 2018, federal disclosure requirements went into effect under PPACA requiring new menu nutritional labeling requirements,food, including the requirement to publish the total numberfederal regulations of calories of standard menu items on menus, along with a statement that puts this calorie information in the context of a total daily calorie intake. The PPACA also requires us to provide to consumers, upon request, a written summary of detailed nutritional information for each standard menu item, and to provide a statement on menus about the availability of this information. The PPACA also permits 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;
Immigration reform continues to attract significant attentionenvironmental factors could delay or prevent development of new stores in the public arena and the U.S. Congress. certain locations.
Our sales andbusiness, results of operations may be adversely affected by climate change and the passage of other environmental legislation and regulations. The costs and other effects of new legal requirements cannot be determined with certainty. For example, new legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent that such requirements increase prices charged to us by vendors
because of increased compliance costs. At this point, we are unable to determine the impact that climate change and other environmental legislation and regulations could have on our overall business.
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. Qualified management and operating personnel are typically in high demand. 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 directioncondition could be adversely affected if we fail to retain, or effectively respond, to a loss of key management.
Our future success significantly depends on the continued service and performanceaffected. Moreover, although none of our key management personnel. Weemployees have employment agreements with all members of senior management. However, 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 replacementbeen or are now represented by any unions, labor organizations may not have equal experience and capabilities. In addition, we have not purchased life insurance on any membersseek to represent certain of our senior management.
If weemployees in the future, and if they are unable to successfully designsuccessful, our payroll expenses and execute a business strategy plan, our revenues and profitabilityother labor costs may be increased in the course of collective bargaining, and/or there may be strikes or other work disruptions that may 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 executingaffect 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.
We face potential liability with our gift cards under the property laws of some states.
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.
Customer complaints
Local conditions, adverse weather conditions, natural disasters and acts of violence or terrorism, could adversely affect our business.
Certain of the regions in which our stores are located have been, and may in the future be, subject to adverse local conditions, events, terrorist attacks, adverse weather conditions, or 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 orman-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. However, if there is a major disaster, such coverage may not be adequate. In addition, upon the expiration of our current insurance policies, adequate insurance coverage may not be available at reasonable rates, or at all. 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.
We may not be ableproperty.Ourproperty could harm our business.
Information technology system failures or interruptions may impact our operations.
We rely heavily on various information technology systems, includingpoint-of-sale, kiosk
The unauthorized access to, theft or destruction of, customer or employee personal, financial or other data or of our proprietary or confidential information that is stored in our information systems or by third parties on our behalf could impact our reputation and brand and expose us to potential liability and loss of revenues.
The protection of customer, employee and company data is critical to us. We are subject to laws relating to information security, privacy, cashless payments, consumer credit and fraud. Additionally, an increasing number of government and industry groups have established laws and standards for the protection of personal and health information. 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 may result in cost increases due to necessary system changes and the development of new administrative processes, and if we fail to comply with laws and regulations regarding privacy and security, we could be exposed to risks of fines, investigations, litigation and disruption of our operations.
In the ordinary course of our business, we receive and maintain certain personal information from our customers, employees and vendors, and we process customer payments using payment information. Customers and employees have a high expectation that we will adequately protect their personal information. Third parties may have the technology orknow-how to breach the security of this customer information, and our security measures and those of our technology vendors may not effectively prohibit others from obtaining improper access to this information. A number of restaurant operators and retailers have experienced security breaches in which credit and debit card information may have been stolen. Although we employ security technologies and practices and have taken other steps to try to prevent a breach, we may nevertheless not have the resources or technical sophistication to prevent rapidly evolving types of cyberattacks. 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. Any such incidents or proceedings could disrupt the operation of our stores, adversely affect our reputation, consumer confidence, and our results of operations, or result in the imposition of penalties or cause us to incur significant unplanned losses and expenditures, including those necessary to remediate any damage to persons whose personal information may have been compromised. Although we have established a cybersecurity policy, which includes procedures designed to increase transparency and address our customers’ concerns regarding data breaches (whether actual or perceived), the policy may not be effective in addressing those concerns, which may in turn adversely affect our reputation and customer confidence. 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, in light of 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 are required to maintain the highest level of Payment Card Industry (“PCI”) Data Security Standard compliance at our corporate office and stores. As part of an overall security program and to meet PCI standards, we undergo regular external vulnerability scans and we are reviewed by a third-party assessor. As PCI standards change, we may be required to implement additional security measures. 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.
Failure of our internal control over financial reporting could harm our business
Our management is responsible for establishingfollowing March 2020, the coronavirus global pandemic 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 principlessignificant uncertainties in the United States. Because of its inherent limitations, internal control over financial reporting is not intendedStates economy created due to provide absolute assurance that we would prevent or detectthe health crisis had 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 providerssignificant impact 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 common stock.
Our long-term business strategy may include growth through the acquisitionfuture. The outcome of other businesses. 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, whichreforms may result in unforeseen operational difficulties, diminishedincreased interest expense to us. Changes in interest rates, either positive or negative, may affect the yield requirements of investors who invest in our shares, and a rising interest rate environment could have an adverse impact on the price of our shares, our ability to issue equity or incur debt for acquisitions or other purposes.
Acquisitions that we complete could present several additional risks, including but not limited to:
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.
ITEM 1B. |
ITEM 2. | Properties |
As of February 3, 2019, we lease the building or site of all our 121 operating stores. The table below shows the locations of our operating stores as of February 3, 2019:
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The contracted lease terms, including renewal options, generally range from 20 to 40 years. Our leases typically provide for a minimum annual rent plus contingent rent to be determined as a percentage of the applicable store’s annual gross revenues. In fiscal 2018 we paid contingent rent in 33 of our stores. Generally,
leases are “net leases” that require us to pay our pro rata share of taxes, insurance and maintenance costs. All our leases include renewal options that give us the opportunity to extend the lease terms through 2023 or later. During fiscal 2018, we also purchased land for a future site in Wichita, Kansas. Additionally, as of February 3, 2019, we have signed 24 lease agreements for future store openings, including ten stores that are under construction, and these future locations are excluded from the table above. During the first quarter of fiscal 2019 we closed a store in Georgia as a result of our decision not to renew the lease.
In addition to our leased stores, we
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 | 4 | |||
Indiana | 2 | |||
Kansas | 3 | |||
Kentucky | 2 | |||
Louisiana | 1 | |||
Maryland | 5 | |||
Massachusetts | 3 | |||
Michigan | 3 | |||
Minnesota | 2 | |||
Missouri | 1 | |||
Nebraska | 1 | |||
Nevada | 1 | |||
New Hampshire | 1 | |||
New Jersey | 3 | |||
New Mexico | 1 | |||
New York | 11 | |||
North Carolina | 4 | |||
Ohio | 6 | |||
Oklahoma | 2 | |||
Oregon | 1 | |||
Pennsylvania | 7 | |||
Rhode Island | 1 | |||
South Carolina | 3 | |||
Tennessee | 4 | |||
Texas | 13 | |||
Utah | 1 | |||
Virginia | 4 | |||
Washington | 1 | |||
Wisconsin | 3 | |||
Puerto Rico | 1 | |||
Ontario, Canada | 2 | |||
Total | 140 | |||
ITEM 3. | Legal Proceedings |
ITEM 4. | Mine Safety Disclosures |
ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
stock.
Information regarding repurchase
Period(1) | Total Number of Shares Repurchased | Average Price Paid per Share | Total Number of Shares Repurchased as Part of Publicly Announced Plan (2) | Approximate Dollar Value of Shares That May Yet Be Repurchased Under the Plan (in thousands) (2) | ||||||||||||
November 5, 2018 — December 2, 2018 | 134,411 | $ | 59.10 | 134,411 | $ | 125,243 | ||||||||||
December 3, 2018 — January 6, 2019 | 780,441 | $ | 46.08 | 780,441 | $ | 89,277 | ||||||||||
January 7, 2019 — February 3, 2019 | 393,800 | $ | 48.60 | 393,800 | $ | 70,137 | ||||||||||
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| Period Ended | ||||||||||||||||||||||
| 10/10/2014 | 2/1/2015 | 1/31/2016 | 1/29/2017 | 2/4/2018 | 2/3/2019 | |||||||||||||||||
PLAY | $100.00 | $ | 179.63 | $ | 226.69 | $ | 342.50 | $ | 298.13 | $ | 320.88 | |||||||||||
S&P 600 Small Cap | $100.00 | $ | 110.16 | $ | 104.99 | $ | 141.75 | $ | 161.70 | $ | 162.27 | |||||||||||
S&P 600 Consumer Discretionary | $100.00 | $ | 116.77 | $ | 103.57 | $ | 121.41 | $ | 144.21 | $ | 146.95 | |||||||||||
NASDAQ Composite | $100.00 | $ | 108.40 | $ | 107.90 | $ | 132.38 | $ | 169.33 | $ | 169.87 | |||||||||||
ITEM 6. | Selected Financial Data |
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
| Fiscal Year Ended | ||||||||||||||||||||
| February 3, 2019 | February 4, 2018 | January 29, 2017 | January 31, 2016 | February 1, 2015 | ||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Total revenues | $ | 1,265,301 | $ | 1,139,791 | $ | 1,005,158 | $ | 866,982 | $ | 746,751 | ||||||||||
Operating income | 161,000 | 165,772 | 150,516 | 110,036 | 73,861 | |||||||||||||||
Net income | 117,221 | 120,949 | 90,795 | 59,619 | 7,636 | |||||||||||||||
Balance sheet data (as of end of period): | ||||||||||||||||||||
Cash and cash equivalents | 21,585 | 18,795 | 20,083 | 25,495 | 70,876 | |||||||||||||||
Working capital (deficit)(1) | (153,297 | ) | (112,918 | ) | (102,193 | ) | (46,567 | ) | 17,140 | |||||||||||
Property and equipment, net | 805,337 | 726,455 | 606,865 | 523,891 | 436,048 | |||||||||||||||
Total assets(2) | 1,273,187 | 1,197,030 | 1,052,733 | 1,003,701 | 944,794 | |||||||||||||||
Total debt, net(2) | 393,469 | 366,249 | 264,128 | 337,416 | 423,496 | |||||||||||||||
Stockholders’ equity | 387,837 | 421,646 | 439,452 | 346,338 | 258,697 | |||||||||||||||
Other data: | ||||||||||||||||||||
Capital expenditures | $ | 216,286 | $ | 219,901 | $ | 180,577 | $ | 162,892 | $ | 129,688 | ||||||||||
Stores open at end of period(3) | 121 | 106 | 92 | 81 | 73 | |||||||||||||||
Stores closed during period | — | — | — | 2 | 1 | |||||||||||||||
Cash dividends declared per share | $ | 0.30 | — | — | — | — | ||||||||||||||
Net income per share of common stock: | ||||||||||||||||||||
Basic | $ | 3.00 | $ | 2.93 | $ | 2.16 | $ | 1.46 | $ | 0.22 | ||||||||||
Diluted | $ | 2.93 | $ | 2.84 | $ | 2.10 | $ | 1.39 | $ | 0.21 | ||||||||||
Weighted average number of shares outstanding: | ||||||||||||||||||||
Basic | 39,047,106 | 41,276,314 | 41,951,770 | 40,968,455 | 35,314,884 | |||||||||||||||
Diluted | 39,975,122 | 42,583,009 | 43,288,592 | 42,783,905 | 37,126,048 | |||||||||||||||
Fiscal Year Ended | ||||||||||||||||||||
January 31, 2021 | February 2, 2020 | February 3, 2019 | February 4, 2018 | January 29, 2017 | ||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||
Total revenues | $ | 436,512 | $ | 1,354,691 | $ | 1,265,301 | $ | 1,139,791 | $ | 1,005,158 | ||||||||||
Operating income (loss) | (252,612 | ) | 148,079 | 161,000 | 165,772 | 150,516 | ||||||||||||||
Net income (loss) | (206,974 | ) | 100,263 | 117,221 | 120,949 | 90,795 | ||||||||||||||
Balance sheet data (as of end of period): | ||||||||||||||||||||
Cash and cash equivalents | 11,891 | 24,655 | 21,585 | 18,795 | 20,083 | |||||||||||||||
Working capital (deficit) (1) | (152,765 | ) | (211,888 | ) | (153,297 | ) | (112,918 | ) | (102,193 | ) | ||||||||||
Property and equipment, net | 815,027 | 900,637 | 805,337 | 726,455 | 606,865 | |||||||||||||||
Total assets | 2,352,824 | 2,370,139 | 1,273,187 | 1,197,030 | 1,052,733 | |||||||||||||||
Total debt, net | 596,388 | 647,689 | 393,469 | 366,249 | 264,128 | |||||||||||||||
Stockholders’ equity | 153,232 | 169,650 | 387,837 | 421,646 | 439,452 | |||||||||||||||
Other data: | ||||||||||||||||||||
Capital expenditures | $ | 83,016 | $ | 228,091 | $ | 216,286 | $ | 219,901 | $ | 180,577 | ||||||||||
Company-owned stores at end of period | 140 | 136 | 121 | 106 | 92 | |||||||||||||||
Stores closed during period | 2 | 1 | — | — | — | |||||||||||||||
Cash dividends declared per share | $ | — | $ | 0.62 | $ | 0.30 | $ | — | $ | — | ||||||||||
Net income (loss) per share of common stock: | ||||||||||||||||||||
Basic | $ | (4.75 | ) | $ | 3.00 | $ | 3.00 | $ | 2.93 | $ | 2.16 | |||||||||
Diluted | $ | (4.75 | ) | $ | 2.94 | $ | 2.93 | $ | 2.84 | $ | 2.10 | |||||||||
Weighted average number of shares outstanding: | ||||||||||||||||||||
Basic | 43,549,887 | 33,450,217 | 39,047,106 | 41,276,314 | 41,951,770 | |||||||||||||||
Diluted | 43,549,887 | 34,099,378 | 39,975,122 | 42,583,009 | 43,288,592 | |||||||||||||||
| (1) | Defined as total current assets minus total current liabilities. |
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ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
By their nature, forward-looking statements involve risks and uncertainties because they relateMarch 28, 2021, fifteen stores continue 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 annual reportremain closed to
the initial agreements. As of the end of fiscal 2020, the Company had executed 17 of these additional rent relief agreements.
Our Growth Strategies and Outlook
Our growth is based primarily
Build great new stores;
Driveof our comparable stores sales;after mandated shutdowns related to
Expand the Dave & Buster’s brand internationally.
integrated experience, and driving customer engagement. For further information about our growth strategies and outlook, see Item 1 “Business – Our Growth Strategies”strategy, refer to “Item 1. Strategy”.
Overview
Total revenues increased 11% to $1,265,301 in fiscal 2018 compared to $1,139,791 in fiscal 2017. Our revenue growth was primarily influenced by the number of new store openings partially offset by one less week in fiscal 2018.
Comparable store sales decreased 1.6% in fiscal 2018 compared to the comparable52-week period of fiscal 2017, driven by lower customer volumes.
Operating income decreased to $161,000 in fiscal 2018 compared to Operating income of $165,772 in fiscal 2017. Fiscal 2018 operating margin was 12.7% compared to 14.5% in fiscal 2017. The decrease in operating margin in fiscal 2018 was primarily driven by the increased margin pressure on occupancy costs associated with our recent store openings and higher operating payroll and benefits as a percentage of sales, partially offset by favorable leverage of general and administrative costs.
Earnings per share (“EPS”) for fiscal 2018 increased to $2.93 per diluted share, compared to EPS of $2.84 per diluted share in fiscal 2017.
Cash flows from operations were $337,616 in fiscal 2018 compared to $264,672 in fiscal 2017. The increase was primarily due to increased cash flows from additionalnon-comparable store sales as well as an increase in our net working capital deficit.
Capital expenditures were $216,286 in fiscal 2018 compared to $219,901 in fiscal 2017.
Liquidity and Cash Flows
The primary source of cash flow is from our operating activities and availability under the revolving credit facility.
Store-Level Variability, Quarterly Fluctuations, Seasonality and Inflation
Our new stores typically open with sales volumes that exceedin excess of their expected long-termperformgrow in line with the rest of our comparable store base thereafter. Due toAs 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