Dave & Buster's Entertainment, Inc. (PLAY) FY 2022 MD&A

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read together with our audited consolidated financial statements and related notes included herein. Unless otherwise specified, the meanings of all defined terms in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are consistent with the meanings of such terms as defined in the Notes to Consolidated Financial Statements. All dollar amounts are presented in thousands, unless otherwise noted, except share and per share amounts.

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COVID-19
Pandemic

In March 2020, a novel strain of coronavirus
(“COVID-19”)
outbreak was declared a global pandemic and a National Public Health Emergency. Shortly after the national emergency declaration, state and local officials began placing restrictions on businesses, some of which allowed
To-Go
or curbside service only while others limited capacity in the dining room or Midway. By March 20, 2020, all our 137 operating stores were temporarily closed. On April 30, 2020, our first store
re-opened
to the public, and, by the end of fiscal 2020, 107 of our 140 stores were open and operating in limited capacity. The Company
re-opened
the remaining 33 stores that had been temporarily closed by August 1, 2021, the end of the second quarter of fiscal 2021. During the fourth quarter of fiscal 2021, our two Canadian stores temporarily closed due to the resurgence, and shortly after the end of our fiscal year, these two stores
re-opened
with limited operations. By the end of March 2022, the Company expects all types of
COVID-19
related restrictions to be lifted in all but three of our stores.

These developments have had a material adverse impact on the Company’s revenues, results of operations and cash flows for fiscal 2020, and during fiscal 2021, continued to have a significant impact on our business and results of operations. The ongoing effects of
COVID-19
and its variants, including, but not limited to, consumer behavior, capacity restrictions, mask and vaccination mandates, wage inflation, our ability to continue to staff our stores and disruptions in the supply chain, will determine the impact to our operating results and financial position. The impact to our operations has been most notable during the periods of greatest accelerating
COVID-19
case counts. We have incurred and will continue to incur additional costs to address government regulations and the safety of our team members and customers.

Financial Highlights

General

We are a leading owner and operator of high-volume venues in North America that combine dining and entertainment for both adults and families under the name “Dave & Buster’s”. Founded in 1982, the core of our concept is to offer our customers the opportunity to “Eat Drink Play and Watch” all in one location. Eat and Drink are offered through a full menu of entrées and appetizers and a full selection of
non-alcoholic
and

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alcoholic beverages. Our Play and Watch offerings provide an extensive assortment of entertainment attractions centered around playing games and watching live sports and other televised events. Our brand appeals to a relatively balanced mix of male and female adults, as well as families and teenagers. We believe we appeal to a diverse customer base by providing a highly customizable experience in a dynamic and fun setting.

Our stores average 40,000 square feet and range in size between 16,000 and 70,000 square feet. During the
COVID-19
pandemic recovery period, to comply with various federal, state, and local guidelines and in response to changing customer levels, our stores operated with reduced hours of operation. Generally, our stores have returned to pre-pandemic operating hours and are open seven days a week, with normal hours of operation typically from 11:00 a.m. to midnight, with some stores open for extended hours on weekends.

Strategy

Our strategy is built on four key components, including offering the latest entertainment to enjoy together, novel food & drink to bring people together, creating an aligned team and integrated experience, and driving customer engagement. For further information about our strategy, refer to “Item 1. Strategy”.

Key Measures of Our Performance

We monitor and analyze several key performance measures to manage our business and evaluate financial and operating performance. These measures include:

Comparable store sales.

Comparable store sales are a comparison of sales to the same period of prior years for the comparable store base. We historically define the comparable store base to include those stores open for a full 18 months before the beginning of the fiscal year and excluding stores permanently closed during the period. Due to the limitations of store operations during the
COVID-19
pandemic, the comparable store base for fiscal 2021 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. Our comparable store base consisted of 113, 114, and 99 stores as of the end of fiscal 2021, 2020 and 2019, respectively.

New store openings.

Our ability to expand our business and reach new customers is influenced by the opening of additional stores in both new and existing markets. The success of our new stores is indicative of our brand appeal and the efficacy of our site selection and operating models. During fiscal 2021, we opened five new stores, including our relocated Cary, North Carolina store. We currently plan to open eight stores in fiscal 2022.

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

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

Adjusted EBITDA and Adjusted EBITDA Margin

. We define “Adjusted EBITDA” as net income (loss), plus interest expense, net, loss on debt extinguishment or refinancing, provision (benefit) for income taxes, depreciation and amortization expense, loss on asset disposal, impairment of long-lived assets, share-based compensation,
pre-opening
costs, currency transaction (gains) losses and other costs. “Adjusted EBITDA Margin” is defined as Adjusted EBITDA divided by total revenues.

Adjusted EBITDA is presented because we believe that it provides useful information to investors and analysts regarding our operating performance. By reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods by excluding items that we do not believe are indicative of our core operating performance.

Store Operating Income Before Depreciation and Amortization and Store Operating Income Before Depreciation and Amortization Margin.

We define “Store Operating Income Before Depreciation and Amortization” as operating income (loss), plus depreciation and amortization expense, general and administrative expenses and
pre-opening
costs. “Store Operating Income Before Depreciation and Amortization Margin” is defined as Store Operating Income Before Depreciation and Amortization divided by total revenues. Store Operating Income Before Depreciation and Amortization Margin allows us to evaluate operating performance of each store across stores of varying size and volume.

We believe that Store Operating Income Before Depreciation and Amortization is another useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store level, and the costs of opening new stores, which are
non-recurring
at the store level, and thereby enables the comparability of the operating performance of our stores for the periods presented. We also believe that Store Operating Income Before Depreciation and Amortization is a useful measure in evaluating our operating performance within the entertainment and dining industry because it permits the evaluation of store-level productivity, efficiency, and performance, and we use Store Operating Income Before Depreciation and Amortization as a means of evaluating store financial performance compared with our competitors. However, because this measure excludes significant items such as general and administrative expenses and
pre-opening
costs, as well as our interest expense, net and depreciation and amortization expense, which are important in evaluating our consolidated financial performance from period to period, the value of this measure is limited as a measure of our consolidated financial performance.

Presentation of Operating Results

The Company’s fiscal year consists of 52 or 53 weeks ending on the Sunday after the Saturday closest to January 31. Each quarterly period has 13 weeks, except in a
53-week
year when the fourth quarter has 14 weeks. Fiscal 2021, 2020 and 2019, which ended on January 30, 2022, January 31, 2021, and February 2, 2020, respectively, each contained 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 typically open with sales volumes in excess of their expected long-term
run-rate
levels, which we refer to as a “honeymoon” effect. We traditionally expect our new store sales volumes in year two to be 10% to 20% lower than our year one targets, and to grow in line with the rest of our comparable store base

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thereafter. As a result of the substantial revenues associated with each new store, the number and timing of new store openings will result in significant fluctuations in quarterly results.

While fiscal 2020 and fiscal 2021 were unusual years with the impact of
COVID-19,
historically 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 historically have fluctuated due to seasonal factors. Typically, we have higher revenues associated with the spring and
year-end
holidays, which will continue to be susceptible to the impact of severe or unseasonably mild weather on customer traffic and sales during that period. Our third quarter, which encompasses the

back-to-school

fall season, has historically had lower revenues as compared to other quarters. During fiscal 2020 and fiscal 2021, results also fluctuated due to the timing and frequency of temporary closures and operating restrictions due to state and local guidelines imposed due to the
COVID-19
pandemic.

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.

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Fiscal 2021 Compared to Fiscal 2020

Results of operations.

The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of comprehensive income (loss).

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Reconciliations of
Non-GAAP
Financial Measures

Adjusted EBITDA

The following table reconciles Net income (loss) to Adjusted EBITDA for the periods indicated:

Store Operating Income Before Depreciation and Amortization

The following table reconciles Operating income (loss) to Store Operating Income Before Depreciation and Amortization for the periods indicated:

Capital Additions

The following table reflects accrual-based capital additions. Capital additions do not include any reductions for accrual-based tenant improvement allowances or proceeds from sale-leaseback transactions (collectively, “Payments from landlords”).

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Results of Operations

Revenues

In response to the
COVID-19
outbreak, which was declared a global pandemic and a National Public Health Emergency in the United States in March 2020, the Company temporarily closed all our stores. On April 30, 2020, our first store
re-opened
to the public, and by the end of fiscal 2020, 107 of our 140 stores were open and operating in limited capacity. Of these 107 open stores, 83 were comparable stores. By the end of our second quarter of fiscal 2021, all the Company’s stores were open and operating, the majority of which having no operating restrictions. However, several of the local jurisdictions in which we operate instituted masking and vaccination restrictions. During the fourth quarter of fiscal 2021, our two Canadian stores temporarily closed due to the resurgence, and shortly after the end of our fiscal year,
re-opened
in limited capacity.

Selected revenue and store data for the periods indicated are as follows:

Total revenues increased $867,544, or 198.7%, to $1,304,056 in fiscal 2021 compared to total revenues of $436,512 in fiscal 2020. The increase in revenue is attributable primarily to more store operating weeks in fiscal 2021 compared to the prior year due to temporary store closures during fiscal 2020, as a result of the
COVID-19
pandemic. The table below represents our revenue mix for the fiscal years indicated. The shift in mix from food and beverage sales to amusement sales of 300 basis points is due, in part, to reduced special events and less discounting of amusements, offset somewhat by food price increases effective midway through the third quarter of fiscal 2021.

Comparable store revenue increased $709,612 or 199.1%, in fiscal 2021 compared to fiscal 2020, due primarily to an 80.8% increase in comparable store operating weeks. Comparable store sales in fiscal 2021 were approximately 88.8% of the levels achieved
pre-pandemic
during fiscal 2019. Our individual comparable stores generally experienced gradual increases in weekly sales performance as operating weeks increased. Individual store performance after
re-opening
was also impacted by changes in local operating restrictions and consumer reactions to changes in local
COVID-19
infection rates.

Food sales at comparable stores increased by $155,171, or 180.5%, to $241,127 in fiscal 2021 from $85,956 in fiscal 2020. Beverage sales at comparable stores increased by $72,108, or 160.6%, to $117,006 in fiscal 2021 from $44,898 in fiscal 2020. Comparable store amusement and other revenues in fiscal 2021 increased by $482,333, or 213.8%, to $707,952 from $225,619 in fiscal 2020.

Non-comparable
store revenue increased $167,103 in fiscal 2021 compared to fiscal 2020, for the same reasons noted above, including 707 more store operating weeks.

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Cost of products

The total cost of products was $204,971 for fiscal 2021 and $74,905 for fiscal 2020. The total cost of products as a percentage of total revenues decreased 150 basis points to 15.7% for fiscal 2021 compared to 17.2% for fiscal 2020.

Cost of food and beverage products increased to $119,123 compared to $45,207 for fiscal 2020. Cost of food and beverage products, as a percentage of food and beverage revenues, decreased 100 basis points to 27.3% for fiscal 2021 from 28.3% for fiscal 2020. The impact of year-over-year cost increases in food products, primarily poultry, were offset by lower closure-related spoilage costs and food price increases effective midway through the third quarter of fiscal 2021.

Cost of amusement and other increased to $85,848 in fiscal 2021 compared to $29,698 in fiscal 2020. The costs of amusement and other, as a percentage of amusement and other revenues, decreased 80 basis points to 9.9% for fiscal 2021 from 10.7% in fiscal 2020. This decrease was driven primarily by lower ticket redemption activity as a percent of tickets issued during the first half of fiscal 2021, partially offset by higher freight costs.

Operating payroll and benefits

Total operating payroll and benefits increased by $169,788, or 144.5%, to $287,263 in fiscal 2021 compared to $117,475 in fiscal 2020. Nearly all our store workforce, except a small team of essential personnel, were furloughed in
mid-March
2020. Hourly team members began to return as stores
re-opened
at reduced staffing levels. The total cost of operating payroll and benefits as a percentage of total revenues was 22.0% in fiscal 2021 compared to 26.9% in 2020. This decrease is primarily due to favorable leveraging on management labor and benefits and lower labor hours due to labor efficiency initiatives and hourly labor staffing shortages, partially offset by increases in the hourly labor costs and higher incentive compensation, including referral and retention incentives implemented during the second quarter of fiscal 2021.

Other store operating expenses

Other store operating expenses increased by $103,197, or 34.5%, to $402,661 in fiscal 2021 compared to $299,464 in fiscal 2020. The increase is primarily due to the impact of increased store weeks during fiscal 2021 on costs such as utilities, supplies, maintenance, and other services and an approximate $11,000 increase in marketing spend. These increases were offset somewhat by a $13,727 charge for impairment of long-lived assets and lease termination costs incurred during fiscal 2020. Other store operating expense as a percentage of total revenues decreased to 30.9% in fiscal 2021 compared to 68.6% in fiscal 2020. This decrease was due primarily to favorable sales leveraging on occupancy costs and utilities and the absence of any impairment charges in fiscal 2021.

General and administrative expenses

General and administrative expenses increased by $28,286, or 59.9%, to $75,501in fiscal 2021 compared to $47,215 in fiscal 2020. The increase in general and administrative expenses was driven primarily by higher incentive compensation, salaries and benefits, professional fees, board fees, hiring cost, travel, and share-based compensation. Fiscal 2021 also includes a $3,230 severance obligation to the Company’s former Chief Executive Officer, who terminated his service in this position effective September 30, 2021, and a $912 impairment charge related to the relocation of our store support center and abandonment of our former corporate office lease. Effective near the end of March 2020, due to the impacts of the
COVID-19
pandemic, most of our corporate team members were furloughed, with reduced pay and benefits for the remaining team members for a twelve-week period, and board fees were temporarily suspended. Share-based compensation was also lower during that same time due to changes in performance stock unit expense.

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Depreciation and amortization expense

Depreciation and amortization expense was relatively flat at $138,329 in fiscal 2021 compared to $138,789 in fiscal 2020. Increased depreciation due to our 2021 and 2020 capital expenditures for new stores, operating initiatives, games, and maintenance capital, was offset by other assets reaching the end of their depreciable lives.

Pre-opening
costs

Pre-opening
costs decreased by $3,126 to $8,150 in fiscal 2021 compared to $11,276 in fiscal 2020 due to delays in construction and a decrease in the number of planned new store openings, as a result of impacts of the
COVID-19
pandemic, which began during the first quarter of fiscal 2020. Specifically, while construction was put on hold or delayed,
pre-opening
rent continued to be recorded for stores under construction.

Interest expense, net and Loss on debt extinguishment / refinancing

Interest expense, net increased by $17,020 to $53,910 in fiscal 2021 compared to $36,890 in fiscal 2020 due primarily to an increase in the weighted average effective interest rate, offset partially by a decrease in average outstanding debt. In connection with the early extinguishment of a portion of the Notes, the Company recorded a loss on extinguishment of $5,617 during fiscal 2021. In connection with the debt refinancing in fiscal 2020, the Company recorded a charge of $904. These events are explained further in Note 5 to the Consolidated Financial Statements.

Provision (benefit) for income taxes

The effective tax rate for fiscal 2021 was 14.9%, compared to a benefit of 28.7% for fiscal 2020. The current year tax provision includes higher excess tax benefits associated with share-based compensation and higher tax credits while the prior year was a tax benefit primarily due to the impact of the
pre-tax
loss and the impact of the tax provisions within the CARES Act.

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Fiscal 2020 Compared to Fiscal 2019

Results of operations.

The following table sets forth selected data, in thousands of dollars and as a percentage of total revenues (unless otherwise noted) for the periods indicated. All information is derived from the accompanying consolidated statements of comprehensive income (loss).

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Reconciliations of
Non-GAAP
Financial Measures

Adjusted EBITDA

The following table reconciles Net income (loss) to Adjusted EBITDA for the periods indicated:

Store Operating Income Before Depreciation and Amortization

The following table reconciles Operating income (loss) to Store Operating Income Before Depreciation and Amortization for the periods indicated:

Capital Additions

The following table reflects accrual-based capital additions. Capital additions do not include any reductions for Payments from landlords.

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Results of Operations

Revenues

In response to the
COVID-19
outbreak, which was declared a global pandemic on March 11, 2020, and a National Public Health Emergency in the United States on March 13, 2020, the Company temporarily closed of all our 137 stores by March 20, 2020 (including our one new store opening March 16, 2020). On April 30, 2020, our first store
re-opened
to the public, as state and local guidelines began to allow dining rooms and arcades to open at limited capacity and/or limited hours of operation. By the end of fiscal 2020, we had progressively
re-opened
an additional 101 stores with limited operations. Many of these stores that were
re-opened
in limited capacity were required to temporarily close again in areas more severely impacted by the
COVID-19
pandemic, particularly during the fourth quarter holiday season. The Company also opened five new stores in the second half of the fiscal year, all of which commenced construction prior to the outbreak of the
COVID-19
pandemic. As of January 31, 2021, 107 of our 140 stores were open and operating in limited capacity. Of these 107 open stores, 84 are comparable stores.

Selected revenue and store data for the periods indicated are as follows:

Total revenues decreased $918,179, or 67.8%, to $436,512 in fiscal 2020 compared to total revenues of $1,354,691 in fiscal 2019. The decline in revenue is attributable to fewer store operating weeks in fiscal 2020 as a result of temporary store closures, lower customer volumes due to limited food and beverage and amusement operations and the canceling or postponement of special events as a result of the
COVID-19
pandemic. For the year ended January 31, 2021, we derived 24.1% of our total revenue from food sales, 12.4% from beverage sales, 63.1% from amusement sales and 0.4% from other sources. For the year ended February 2, 2020 we derived 28.3% of our total revenue from food sales, 13.3% from beverage sales, 57.5% from amusement sales and 0.9% from other sources.

Comparable store revenue decreased $842,588, or 70.2%, in fiscal 2020 compared to fiscal 2019, due primarily to a 46.7% reduction in comparable store operating weeks and lower customer volumes as stores
re-opened
with limited operations. As of March 20, 2020, all the Company’s 114 comparable stores were closed due to operating restrictions put in place by local jurisdictions in response to the
COVID-19
pandemic. Beginning April 30, 2020, we began
re-opening
our stores based on changes in operating restrictions in the various jurisdictions. As of January 31, 2021, 84 of our comparable stores had
re-opened
under limited operating conditions. Our individual comparable stores generally experienced gradual increases in weekly sales performance as operating weeks increased. Individual store performance after
re-opening
was impacted by changes in local operating restrictions and consumer reactions to changes in local
COVID-19
infection rates.

Comparable
walk-in
revenues, which accounted for 97.0% of comparable store revenue for fiscal 2020, decreased 67.8% compared to the similar period in fiscal 2019. Comparable store special events revenues, which accounted for 3.0% of comparable store revenue for fiscal 2020, decreased 91.1% compared to the similar period in fiscal 2019 as events were canceled or postponed due to local restrictions on group gathering size and operating restrictions on our business.

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Food sales at comparable stores decreased by $252,827, or 74.5%, to $86,382 in fiscal 2020 from $339,209 in fiscal 2019. Beverage sales at comparable stores decreased by $113,917, or 71.6%, to $45,104 in fiscal 2020 from $159,021 in fiscal 2019. Comparable store amusement and other revenues in fiscal 2020 decreased by $475,844, or 67.7%, to $226,909 from $702,753 in fiscal 2019.

Non-comparable
store revenue decreased $81,195 in fiscal 2020 compared to fiscal 2019. During the first four-week period of fiscal 2020,
non-comparable
stores contributed an additional $9,668 of revenue and 54 additional operating weeks over the same period of fiscal 2019. During the remainder of the
fifty-two
weeks ended January 31, 2021,
non-comparable
store revenue decreased $90,863 for the same reasons noted above, including 130 fewer store operating weeks.

Cost of products

The total cost of products was $74,905 for fiscal 2020 and $233,311 for fiscal 2019. The total cost of products as a percentage of total revenues was 17.2% for both fiscal 2020 and fiscal 2019. For the year ended January 31, 2021, the cost of food products was 29.9% of food revenue, the cost of beverage products was 25.3% of beverage revenue, and the amusement and other cost of products was 10.7% of amusement and other revenues. For the year ended February 2, 2020, the cost of food products was 27.2% of food revenue, the cost of beverage products was 24.3% of beverage revenue, and the amusement and other cost of products was 10.8% of amusement and other revenues.

Cost of food and beverage products decreased to $45,207 in fiscal 2020 compared to $148,196 for fiscal 2019. Cost of food and beverage products, as a percentage of food and beverage revenues, increased 200 basis points to 28.3% for fiscal 2020 from 26.3% for fiscal 2019. Cost of food and beverage products during fiscal 2020 was negatively impacted by food and beverage spoilage of approximately $3,567 associated with store closures and the upcoming new menu rollout, partially offset by cost reductions resulting from vendor payment negotiations.

Cost of amusement and other decreased to $29,698 in fiscal 2020 compared to $85,115 in fiscal 2019. The costs of amusement and other, as a percentage of amusement and other revenues, decreased 10 basis points to 10.7% for fiscal 2020 from 10.8% for fiscal 2019. This decrease was driven by lower freight costs, lower cost per ticket and higher revenue per game play credit sold as a result of less discounting of amusement revenues, partially offset by an unfavorable shift in ticket redemption patterns.

Operating payroll and benefits

Total operating payroll and benefits decreased by $205,495, or 63.6%, to $117,475 in fiscal 2020 compared to $322,970 in fiscal 2019. Nearly all of our store workforce, with the exception of a small team of essential personnel, were furloughed in
mid-March
2020. Hourly team members returned only as stores
re-opened
and at reduced staffing levels. The total cost of operating payroll and benefits, as a percentage of total revenues, increased 310 basis points to 26.9% in fiscal 2020 compared to 23.8% for fiscal 2019. Favorable results in hourly labor were offset by the deleveraging impact of management labor as a result of the temporary store closures and continued benefit coverage for furloughed team members. Additionally, late in the third quarter, we recalled a core group of store managers at unopened stores and then maintained this core group throughout the fourth quarter to ensure retention of key team members.

Other store operating expenses

Other store operating expenses decreased by $129,967, or 30.3%, to $299,464 in fiscal 2020 compared to $429,431 in fiscal 2019. Decreased spend on marketing, maintenance, and restaurant services due to temporary store closures and $1,000 insurance proceeds related to the
COVID-19
business disruptions were partially offset by a net loss on derivatives of $1,729 and special charges of $13,727 (consisting of a charge for impairment of long-lived assets of $12,248 and lease termination costs of $1,479). We have also incurred additional costs to

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address government regulations and the safety of our team members and customers. Other store operating expense as a percent of total revenues increased to 68.6% in fiscal 2020 compared to 31.8% in fiscal 2019. This increase was primarily due to sales deleveraging of occupancy costs and utilities as a result of the temporary store closures and the charges for impairment.

General and administrative expenses

General and administrative expenses decreased by $22,254, or 32.0%, to $47,215 in fiscal 2020 compared to $69,469 in fiscal 2019. The decrease in general and administrative expenses was driven primarily by lower labor costs due to continued furloughs and elimination of a significant number of positions at our corporate office, temporarily reducing pay and benefits for team members that were not furloughed for a twelve-week period and the elimination of the corporate bonus program, lower professional services, and reduced travel expenses. General and administrative expenses, as a percentage of total revenues, increased 570 basis points to 10.8% in fiscal 2020 compared to 5.1% in fiscal 2019, due primarily to unfavorable leverage on revenue decreases.

Depreciation and amortization expense

Depreciation and amortization expense increased by $6,329, or 4.8%, to $138,789 in fiscal 2020 compared to $132,460 in fiscal 2019. Increased depreciation due to our 2020 and 2019 capital expenditures for new stores, operating initiatives, games and maintenance capital, was partially offset by other assets reaching the end of their depreciable lives.

Pre-opening
costs

Pre-opening
costs decreased by $7,695 to $11,276 in fiscal 2020 compared to $18,971 in fiscal 2019 due to a decrease in the number of new store openings in the current year, as construction was put on hold or delayed after the disruption of our business from the
COVID-19
pandemic, with
pre-opening
costs being primarily limited to
pre-opening
rent expense, including three future sites for which the leases have commenced.

Interest expense, net and Loss on debt refinance

Interest expense, net increased by $15,953 to $36,890 in fiscal 2020 compared to $20,937 in fiscal 2019 due primarily to an increase in interest rates and partially due to an increase in average outstanding debt. In connection with the October 27, 2020 debt refinancing, which is explained in Note 5 to the Consolidated Financial Statements, the Company recorded a charge of $904 during fiscal 2020.

Provision for income taxes

The effective income tax rate for fiscal 2020 was a benefit of 28.7% compared to a provision of 21.1% in fiscal 2019, primarily due to the impact of a decrease in operating earnings before income tax as well as the impact of provisions of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), including technical amendments to qualified improvement property and the impact of carrying back tax net operating losses from fiscal years 2020 and 2019 to years with a higher federal corporate income tax rate.

Liquidity and Capital Resources

In response to the business disruption caused by the
COVID-19
pandemic which began in the first quarter of fiscal 2020, the Company took the following actions to enable it to meet its obligations over the next twelve months:

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The Company had cash and cash equivalents of $25,910 and $492,495 of liquidity available under its revolving credit facility as of the end of fiscal 2021. Additionally, all the Company’s stores were open and operating as of the end of fiscal 2021, except for its two Canadian stores. Although uncertainty persists surrounding future resurgences and variants of
COVID-19,
what safety measures governments may impose in response to it, as well as how quickly customers will return to our stores, the Company believes there is sufficient liquidity to meet estimated cash flow needs and to comply with our credit facility financial covenants for at least the next twelve months.

Debt and Derivatives

On October 27, 2020, the Company issued $550,000 aggregate principal amount of 7.625% senior secured notes (the “Notes”). Interest on the Notes accrues from October 27, 2020, payable in arrears on November 1 and May 1 of each year, commencing on May 1, 2021. The Notes mature on November 1, 2025, unless earlier redeemed, and are subject to the terms and conditions set forth in the related indenture. Prior to November 1, 2022, but not more than once during any twelve-month period commencing with the issue date of the Notes, the Company may redeem up to 10% of the original principal amount of the Notes at a redemption price of 103% of the principal amount, plus accrued and unpaid interest, at the redemption date. After November 1, 2022, the Company may redeem the Notes, in whole or in part, at certain specified redemption prices, plus accrued and unpaid interest, at the redemption date. The Notes were issued by Dave & Buster’s, Inc. and are unconditionally guaranteed by Dave & Buster’s Holdings, Inc. and certain of Dave & Buster’s, Inc. existing and future wholly owned material domestic subsidiaries, which is substantially the same as the guarantors of the Company’s existing credit facility.

The first amendment to the existing credit facility, effective April 14, 2020, increased the interest rate spread on variable rate debt to 2.00% plus a LIBOR floor of 1.00%. Concurrent and subject to the issuance of the Notes, the Company executed a second amendment, which included relief from testing compliance with certain financial covenants until the last day of the fiscal quarter ending on May 1, 2022. During the financial covenant suspension period the Company is required to maintain a minimum liquidity (primarily availability under the credit facility) of $150,000. During the fourth quarter of fiscal 2021, the Company ended this financial covenant suspension period. The second amendment extended the maturity of the $500,000 revolving portion of the facility from August 17, 2022, to August 17, 2024, increased the interest rate spread to 4.00%, and instituted a 1.00% utilization fee due at maturity. After the first quarter of fiscal 2022, when the financial covenant suspension increased pricing period ends, the interest rate spread ranges from 1.25% to 3.00% and the utilization fee will cease.

The second amendment also terminated the term loan portion of the credit facility, triggering payment of $1,900 of lender debt costs, and the Company recorded a loss of $904 related to the unamortized debt costs associated with the term portion of the credit facility. The Company used the proceeds of the Notes offering, along with cash on hand, to repay the $255,000 principal balance of the term loan facility, $463,000 of borrowings under the revolving credit facility, and related accrued interest. The Company incurred debt costs of

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$18,300 associated with the issuance of the Notes and the second amendment to the credit facility, which are being amortized over the respective terms.

During fiscal 2021, the Company redeemed a total of $110,000 outstanding principal amount of the Notes in two separate transactions. In connection with the early redemption of the Notes, the Company paid prepayment premiums of $3,300, plus accrued and unpaid interest to the date of redemptions, pursuant to the terms of the indenture governing the Notes. Additionally, the early redemptions of the Notes resulted in a loss on extinguishment of approximately $2,300 related to a proportionate amount of unamortized issuance costs.

For fiscal 2021 and fiscal 2020, the Company’s weighted average interest rate on outstanding borrowings was 10.34% and 5.40%, respectively. The rate has increased due to the issuance of the Notes and the second amendment to the credit facility. As of January 30, 2022, we had letters of credit outstanding of $7,505 and an unused commitment balance of $492,495 under the revolving credit facility. The Company’s Notes and credit facility contain restrictive covenants that, among other things, place certain limitations on our ability to incur additional indebtedness, make loans or advances to subsidiaries and other entities, pay dividends, acquire other businesses or sell assets. As of January 30, 2022, the Company was in compliance with the financial covenants of our credit facility and all restrictive covenants of the Notes and credit facility.

During fiscal 2019, we entered into interest rate swap agreements to manage our exposure to fluctuations in interest rates on our variable rate credit facility. Our swap agreements with our derivative counterparties contain a provision where if the Company defaults on any of its indebtedness and repayment of the indebtedness has been accelerated, the Company could also be declared in default on its derivative obligations. Refer to Note 1 of the Consolidated Financial Statements for further discussion of our swap agreements, which were
de-designated
as hedges effective April 14, 2020, the date of the first amendment to our credit facility.

Dividends and Share Repurchases

On December 6, 2021, our Board of Directors approved a share repurchase program with an authorization limit of $100,000, expiring at the end of fiscal 2022. Future decisions to pay cash dividends or repurchase shares continue to be at the discretion of the Board of Directors and will be dependent on our operating performance, financial condition, capital expenditure requirements and other factors that the Board of Directors considers relevant. There were no dividends declared or share repurchases under the relevant share authorization programs in either fiscal 2021 or fiscal 2020.

Cash Flow Summary

As of the end of fiscal 2021, we had cash and cash equivalents of $25,910.

Operating Activities

— Cash flow from operations typically provides us with a significant source of liquidity. Our operating cash flows result primarily from cash received from our customers, offset by cash payments we make for products and services, employee compensation, operations, and occupancy costs. Cash from operating activities is also subject to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, the timing of cash receipts and payments, and vendor payment terms.

Cash flow from operating activities increased $332,352 in fiscal 2021 compared to fiscal 2020 driven primarily by the impact of approximately 3,200 more store weeks.

Investing Activities

— Cash flow from investing activities primarily reflects capital expenditures.

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Financing Activities

— Cash flow from financing activities primarily reflected:

The Company has long-term debt obligations under its senior notes and long-term lease commitments. See Notes 5 and 7 to the Consolidated Financial Statements for further information regarding these commitments.

Critical accounting policies and estimates

The above discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements. The preparation of financial statements in conformity with GAAP requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosures of contingent assets and liabilities. Our significant accounting policies are described in Note 1 of Notes to Consolidated Financial Statements. Critical accounting policies are those that we believe are most important to portraying our financial condition and results of operations and require the greatest amount of judgment by management. Judgment or uncertainties regarding the application of these policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following policies to be the most critical in understanding the judgment that is involved in preparing the consolidated financial statements.

Accounting for amusement operations

.

Amusement revenues are primarily recognized upon utilization of game play credits on Power Cards purchased and used by customers to activate video and redemption games. Redemption games allow customers to earn tickets, which may be redeemed for prizes in our WIN! area. We have deferred a portion of amusement revenues for the estimated unfulfilled performance obligations based on an estimated rate of future use by customers of unused game play credits and the material right provided to customers to redeem tickets in the future for prizes. We estimate the amount of deferred revenue based upon credits and tickets remaining on Power Cards, historic game play credit and ticket utilization patterns and estimates of the standalone selling prices of game play credits and the customer material right. The standalone selling price of the customer material right is estimated using an equivalent chip cost plus margin approach. For purposes of recognizing revenue, the total amount collected from each customer is then allocated between the two performance obligations based on the relative standalone selling price of each obligation.

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Accounting for impairment of long-lived assets.

We assess the potential impairment of our long-lived assets related to each store to be held and used in business, including property and equipment and

right-of-use

(“ROU”) assets, on an annual basis or whenever events or changes in circumstances indicate that the carrying values of these assets may not be recoverable. In determining the recoverability of the asset value, an analysis is performed at the individual store level, since this is the lowest level of identifiable cash flows and primarily includes an assessment of historical cash flows and other relevant factors and circumstances, including the maturity of the store, changes in the economic environment, unfavorable changes in legal factors or business climate and future operating plans. The more significant inputs used in determining our estimate of the projected undiscounted cash flows included future revenue growth and projected margins as well as the estimate of the remaining useful life of the assets. If the carrying amount is not recoverable, we record an impairment charge, if any, for the excess of the carrying amount over the fair value, which is estimated based on discounted projected future operating cash flows of the store over the remaining service life using a risk adjusted discount rate that is commensurate with the inherent risk.

Recent accounting pronouncements.

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