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Investing.com -- Moody’s Ratings has revised its ratings for Dave & Buster’s, Inc., downgrading the corporate family rating (CFR) from B1 to B2. The rating agency also lowered the probability of default rating (PDR) to B2-PD from B1-PD and adjusted the ratings for the backed senior secured first lien bank credit facilities to B2 from B1. Along with these downgrades, Moody’s switched the outlook for Dave & Buster’s from stable to negative.
The rating agency also revised the speculative grade liquidity rating (SGL) for the company, moving it to SGL-3 from SGL-2. These changes come as Moody’s anticipates continued weak customer traffic due to a drop in consumer confidence, which is expected to impact discretionary spending and put pressure on credit metrics.
The company’s EBIT/interest expense ratio is projected to stay around 1.3x, with the debt/EBITDA ratio expected to be at 5.0x for the next 12 months. The downgrade to SGL-3 from SGL-2 is based on the expectation that the company’s liquidity will remain adequate despite negative free cash flow, as it has scaled back capital spending and continues to rely on external funding.
As of February 4, 2025, Dave & Buster’s had $135 million outstanding and $503 million available, net of letters of credit, from its $650 million revolving credit facility, which is due in 2029.
The B2 CFR for Dave & Buster’s reflects the company’s weak interest coverage and high capital spending, resulting in negative free cash flow. This is related to the company’s capital-intensive business model, which has prioritized store remodels and new units. Despite high capital investments and a decline in revenue and profitability, the company has pursued an aggressive financial policy, repurchasing over $470 million of its own shares in the past 24 months.
Dave & Buster’s faces challenges including labor cost inflation and pricing pressure on discretionary spending by value-oriented consumers. The company’s scale is relatively small compared to other rated restaurants in terms of systemwide units and revenue. Nonetheless, Dave & Buster’s maintains a leading position in the niche food & entertainment industry, with strong brand recognition, good geographic diversity, healthy EBITDA margins, and cash flow generation.
The negative outlook from Moody’s is based on the expectation that it will be difficult for Dave & Buster’s to improve credit metrics and return to positive free cash flow in the challenging consumer environment. The company also faces additional risk as it works to streamline its capital plan and improve operational execution.
Ratings could be upgraded if leverage is sustained below 4.5x with EBIT/interest coverage above 2.0x. An upgrade would also require a balanced financial policy and the maintenance of at least good liquidity, including positive free cash flow. Conversely, ratings could be downgraded if revenue and earnings deteriorate resulting in debt/EBITDA sustained near 6.0x or if EBIT/interest coverage is maintained below 1.5x. Ratings could also be downgraded if liquidity weakens or if financial policies become more aggressive.
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