Dave & Buster’s outlook shifted at S&P Global to negative due to weaker profitability

Investing.com -- S&P Global Ratings has revised its outlook for Dallas-based dining and entertainment venue operator Dave & Buster’s Inc. (D&B) from positive to negative due to weaker profitability and cash flow. This comes after seven consecutive quarters of declining same-store sales. The ratings agency expects the company’s adjusted debt to EBITDA to be in the mid-4x area for 2025, a change from their previous expectation of it trending below 4x.

The base case for D&B includes improving but still negative same-store sales growth, new store openings, and adjusted EBITDA margins that remain flat. The company’s high level of capital expenditures (capex) to support store openings and renovations has led to a forecast of adjusted free operating cash flow (FOCF) to debt of about 3% or $10 million in reported FOCF.

The negative outlook is due to risks to the base case, including pressure on discretionary purchases, tight household budgets for lower-income consumers, and uncertainty about the success of renovations and other efforts to increase traffic and stabilize same-store sales.

D&B’s weaker-than-expected operating results and the potential for continued declines in same-store sales and margin compression have contributed to the outlook revision. The company’s comparable store sales fell 8% in its third quarter ending Nov. 5, 2024, due to lower guest traffic despite higher prices.

S&P Global Ratings expects D&B to face negative sales pressure next year as customers reduce discretionary spending due to stretched household budgets, particularly in the lower income bracket. This is compounded by an increasing variety of entertainment options and a shift in overall consumer spending from services to goods.

The company’s aggressive expansion of its store base has resulted in higher manager headcount, occupancy costs, and marketing expenses. Given expectations for a weakening consumer environment, there is a risk that sales will not keep up with increased operating expenses. Although the company is expected to slow down its remodeling pace, which should benefit cash flows, the forecast is for low FOCF in the base case.

For 2025, S&P Global Ratings projects a FOCF of $10 million, following a reported FOCF deficit in 2024. This projection is mainly driven by lower capex and a small amount of EBITDA growth. The company had initially planned on 60 remodels next year, which would have resulted in 68% of its store base being remodeled by the end of 2025. However, due to ongoing same-store sales declines and execution missteps, the pace of remodels is expected to slow.

S&P Global Ratings expects same-store sales declines to persist over the next 12 months and for adjusted EBITDA margins to remain flattish, though lower compared to 2022 and 2023. The company may continue repurchasing shares funded with the revolver, although at a lower level than 2024. Given the expectation for slightly higher EBITDA and increased utilization of the $650 million revolving credit facility, S&P Global Ratings projects an adjusted debt to EBITDA of 4.4x through 2025.

The ratings agency also believes that D&B’s efforts to drive traffic will take longer to show results, as the brand may need to earn back the attention of customers. The consumer discretionary space has faced increased competition and macro pressures, with same-store sales declines reported by many leading players.

S&P Global Ratings forecasts 2% overall revenue growth next year with 7% growth of the store base largely offset by a contraction of about 5% in same-store sales. However, the negative outlook reflects risk to this base case. Challenges re-establishing the brand and slower traffic may result in further traffic declines and pressure on same-store sales. Additionally, margins may decline due to the sales pressure and a largely fixed cost base, weakening credit metrics and cash flow.

The rating could be lowered if D&B faces extended demand weakness resulting in continued same-store sales declines, margin pressure, and sustained weak FOCF generation. The outlook could be revised to stable if the company can sustain positive same-store sales growth and maintain FOCF to debt consistently above 3%, along with adjusted EBITDA margins of about 33% in line with 2023 levels.

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