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Dave & Buster’s Q1 Earnings Improve despite Rise in Costs

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Adjusted earnings top estimates

Dave & Buster’s Entertainment (PLAY) reported fiscal first-quarter results on June 11. The company’s adjusted EPS (earnings per share) came in at $1.04, up 6.1% on a YoY (year-over-year) basis, which was better than the analyst estimate of 11.8%.

Despite increases in costs, higher revenue and lower provision for taxes due to tax reforms cushioned the bottom-line performance. Also, share repurchases offered some respite. The company repurchased 600,000 shares worth $27.4 million. As of June 6, the total share repurchases amounted to $218 million.

For fiscal 2018, the company has projected net income to be in the range of $95 million to $110 million as against $120.9 million reported in fiscal 2017. The estimated effective tax rate is likely to be 24%.

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Increasing costs

The total cost of products was up 16.6% to $57.1 million due to the higher cost of food and beverage as well as amusement and other categories. Total operating costs were up 14% to $273.6 million primarily due to higher other store operating expenses, operating payroll and benefits, depreciation and amortization expenses, and pre-opening costs. Pre-opening costs were up 57.7% mainly due to higher store openings. Total operating costs as a percentage of sales increased 350 basis points to 82.4%.

Consequently, operating income was down 8.8% to $58.6 million while operating margin was down 350 basis points to 17.6%. Adjusted EBITDA was up 0.4% to $95.9 million, while the adjusted EBITDA margin was down 250 basis points to 28.9% in the first quarter. For fiscal 2018, Dave & Buster’s expects to report EBITDA in the range of $255 million to $275 million. The absence of an extra week in the year is expected to negatively impact EBITDA by $4 million.

Peer comparison

For the fiscal second quarter of 2018, Jack in the Box (JACK) reported adjusted EPS of $0.80, missing analysts’ projection of $0.86. Reduction in the top line offset the benefits of share buybacks and a lower tax rate.

For the fiscal fourth quarter of 2018, Darden Restaurants’ (DRI) adjusted earnings per share are expected to be up 14.4% to $1.35. Higher sales and a lower tax rate are likely to drive Darden’s bottom-line numbers in the fourth quarter.

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