speaker
Operator

Welcome to the Dave & Buster's Entertainment Incorporated third quarter 2020 earnings results conference call. Today's call is being hosted by Brian Jenkins, Chief Executive Officer. He will be joined on the call by Scott Bowman, Chief Financial Officer, and Margo Manning, Chief Operating Officer. I'd like to remind everyone that this call is being recorded. and will be available for replay beginning later today. Now, I would like to turn the conference over to Scott Bowman for opening remarks. Please go ahead.

speaker
Brian Jenkins

Thank you, and thank you for joining us today. Before we begin our discussion on the company's results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed which are not entirely based on historical facts. Any of these items should be considered forward-looking statements related to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risk and uncertainty, which could cause actual results to differ from those anticipated. Information on the risk factors and uncertainties have been published in our filings with the SEC, which are available on our website at www.daveandbusters.com under the Investor Relations section. In addition, our remarks today will include references to EBITDA, adjusted EBITDA, and store operating income before depreciation and amortization, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website. Now I will turn the call over to Brian. Well, thank you, Scott. Good afternoon, everyone, and we appreciate you joining our call today. On behalf of the entire D&B team, we hope you and your families are remaining healthy and safe during what continues to be a challenging time in our nation's history. I continue to be extremely proud of our team for their tremendous agility, their resilience and commitment, to succeeding under extremely difficult circumstances. As we have discussed on previous calls, our two key near-term priorities are to, number one, reopen and operate our stores safely and efficiently as quickly as possible, and two, to thoughtfully accelerate change in our service model, menu, programming, and marketing. We believe our focus on those two priorities will position our business to thrive in a future beyond COVID, and on both of those fronts, we had a very successful third quarter. I'll speak to the first of those priorities now, and then Margo and I will provide an update on the second after Scott has had a chance to review our Q3 results and also our expectations for the fourth quarter. During the third quarter, we made significant progress reopening stores, and driving improved operating performance. We began the quarter with 84 open stores and finished with 104, representing 75% of our total store base. This included the opening of two brand-new stores, one in Manchester, New Hampshire, and one in Lehigh Valley, Pennsylvania, and the permanent closure of one store in Houston, Texas. Over the quarter, we also made progress rebuilding our revenue with an average of 74 reopened fully operational comp stores generating revenues at 57% of 2019 levels. That's up from 35% in the second quarter when we had an average of 39 fully operational comp stores. Comp sales at our reopened stores improved as the quarter progressed. peaking in late October at a 68% index to 2019 levels, with the top quartile reaching a combined index of 91%. Four stores generated sales above their 2019 sales for that same week. With improving sales over the course of the quarter and continued discipline around the lean operating model, we drove meaningful improvement in our EBITDA trend relative to the second quarter, and reduced our cash burn rate as well. In fact, 68 of our 104 re-open stores achieved positive store-level EBITDA during the third quarter, and 80 stores did so in the month of October, bringing us to within a few million dollars of break-even on an enterprise level for that month, even with all of our California and New York stores so close. We believe the strong sales recovery for the fifth quarter and return to store level profitability at the majority of our open stores clearly illustrate the resilience of the Dave & Buster's brand and validate our game plan for navigating through this unique COVID environment. Also during the third quarter, we solidified our balance sheet and significantly enhanced our liquidity by successfully issuing $550 million of senior secured notes due in November of 2025. We used the proceeds along with available cash to completely pay off our term loan and to pay down our revolving credit facility. As a result, our total available liquidity under our revolver stood at $314 million at the end of the quarter, significantly extending our liquidity horizon. In conjunction with the bond offering, we also secured modifications to certain debt covenants through 2022 and a two-year term extension on our credit facility, resulting in no debt maturities until August of 2024. On the whole, we are very pleased with our performance and accomplishments during the third quarter. Now, as you are all aware, The resurgence of COVID infections around the country is causing states and local jurisdictions to place renewed restrictions on restaurants and arcade operations and has led to store reclosings in the month of November. As a result, the pace of our overall sales recovery moderated over the first five weeks of the fourth quarter, causing a sequentially higher EBITDA loss in November. And we expect these pressures to intensify over the remainder of the quarter. Despite this recent turn of events, we are well positioned with an exceptional team, a strong plan, significant liquidity, and a resilient brand. And I view this as a temporary setback. And we are extremely optimistic about our ability to navigate through another COVID resurgence period. and really come out on the other side of this even stronger when this wave passes. At this time, I'm going to ask our CFO, Scott Bowman, to touch on the financial highlights of the third quarter and provide some broad insights on how we're managing through the fourth quarter in the midst of renewed COVID limitations. Scott? Thanks, Brian, and thanks to everyone on the call for joining us today. I'll first spend some time summarizing our third quarter performance and our current liquidity position. And then I'll provide some expectations for the fourth quarter. For the third quarter, total revenues of $109 million decreased 64% compared with the prior year period, reflecting a 56% decrease in comparable store sales. By month, comparable store sales were negative 75% in August, negative 62% in September, negative 59% in October. For comparable stores that were open and fully operational for these periods, I would also like to provide some performance details by month compared with the same period last year. For August, our 68 open comparable stores produced a sales index of 46%. For September, 76 open comparable stores posted a sales index of 65%. And for October, our 77 open comparable stores produced a sales index of 61% compared to the prior year. As for sales mix, amusements and other continued to outperform food and beverage, accounting for 65% of total sales compared to 58% last year. Turning to the balance of the P&L, gross margin improved 101 basis points to 83.6% in the quarter, primarily due to higher mix of amusement sales, partially offset by food and beverage spoilage that was expensed as stores reopened. Operating payroll and benefits expense was $27.7 million, a decrease of 64% from the prior year, primarily due to fewer open stores and continued execution of the leaner labor model. Despite the lower sales base, we succeeded in managing the expenses to 25.4% of sales, equal to the same period last year. Other store operating expense was $70.8 million, a decline of 36% from the prior year, primarily due to lower variable costs, compounded by savings in marketing, repair and maintenance, and rent abatements. As a percent of sales, as a store operating expense was 64.9% of sales versus 37.1% last year. The higher percentage was mainly due to the deleveraging effect of lower sales on occupancy expense. G&A expense of $11.7 billion decreased 28% from the prior year, mainly due to savings in compensation expense, consulting expense, and legal fees. Consulting expense declined $2.6 million, partially due to a $1.5 million accrual reversal related to outside advisory fees. As a percent of sales, GMA expense was 10.8% compared to 5.4% for the same period last year, mainly due to the deleveraging effect of lower sales. Third quarter EBITDA loss was $21.7 million, reflecting an average EBITDA burn rate of $1.7 million per week, which compares to a burn rate of $3.5 million per week in the second quarter. Adjusted eval loss was $16 million per quarter. Turning to the balance sheet, we ended the quarter with $8 million in cash and $314 million of availability under a revolving credit facility, which was net of our $150 million minimum liquidity covenant. Total long-term debt stood at $576 million at the end of the quarter, consisting of $550 million in recently issued senior secured notes and $26 million outstanding on our revolver. Additionally, at the end of the quarter, we had approximately $17 million in deferred vendor payables, which compares to approximately $35 million at the end of the second quarter. We plan to have approximately $6 million of deferred payables remaining at the end of the fiscal year. Deferred rent totaled approximately $48 million at the end of the third quarter, compared with approximately $40 million at the end of the second quarter. We continue to negotiate with landlords for further rent deferrals, but expect to begin some level of repayment beginning in January and extending over a 12- to 18-month time period. Also during the third quarter, we received a 2019 tax refund of approximately $10 million related to the CARES Act and expect additional refunds of approximately $11 million over the next several quarters. Excluding financing activities, our weekly cash burn rate improved to $2.4 million due primarily to an improved EBITDA burn rate. When netted together, the temporary working capital adjustments related to deferred payables and deferred rent, offset by the CARES Act tax refund, had an overall de minimis effect on our weekly cash burn rate. Turning to capital spending, we recently completed construction and opened two new stores in in Greenwood, Indiana, and Gloucester, New Jersey, and plan on opening one additional store by the end of fiscal 2020. Additionally, we plan on accelerating two capital projects in the fourth quarter, which have contributed to efficiency gains in our stores. These projects include investments in tablets to improve our service model efficiency, and in high-speed kitchen equipment to gain efficiency for certain menu items. Including these investments, we expect to spend approximately $60 to $65 million in capex for fiscal 2020 net attendant allowances. In summary, our operating results for the third quarter reflected encouraging sales trends that reopened stores and validated our lean operating model. Additionally, as a result of the improved liquidity position and the company's projected cash flows from operations, The company believes it has alleviated the substantial doubt about the company's ability to continue as a growing concern, and the company has sufficient liquidity to satisfy its obligations over the next 12-month period. While we are very encouraged by recent performance, COVID resurgence around the country has resulted in new operating limitations, store reclosures, and further delays in the company's ability to reopen stores. This has naturally had a negative impact on our performance during the first five weeks of the fourth quarter. After ending the third quarter with 104 open stores, we now have 90 open stores. We're 65% in the chain and have experienced overall comparable store sales of negative 71% for the first five weeks of the quarter. For our average of 71 fully operational comp stores, we have experienced an index of approximately 49% compared to last year, which has been mainly due to heightened COVID concerns and mandated reductions in operating hours. For the month of November, the slowdown resulted in 32.6 million in sales at a negative 69% comp, and an EBITDA loss of 11 million, resulting in a weekly EBITDA burn rate of 2.7 million. We currently anticipate that the trend of COVID cases and resulting actions by local jurisdictions will intensify over the balance of the fourth quarter, and that reopening of our California and New York stores will likely be delayed until early 2021. These conditions will be especially impactful to our December sales and profitability, a month in which we have historically benefited from high foot traffic and a robust special events business. Given these expectations, coupled with anticipated cost pressures, we expect further erosion in our fourth quarter comparable store sales and EBITDA. One of the primary expected cost pressures during the fourth quarter is school labor, reflecting our decision to recall key school leadership positions to maintain talent and to ensure school restart capabilities. We also plan to incur increased repair and maintenance costs to ensure schools are up to standard, above normal spoilage costs due to prolonged closures, reduction of rent abatements due to the expiration of landlord agreements, and the GNA, as we recall, select positions based on need. While this temporary setback will impact our results in the near term, we have the playbook to navigate through this resurgence and feel confident that demand will return once the resurgence subsides. With that, I'll turn it back over to Brian. Thanks, Scott. Despite the recent temporary setback in our business, we're very encouraged about our future potential due to the resilience demonstrated in our third quarter of sales trends and our enhanced security. Another reason we feel very confident is that even before COVID arrived, we were developing and preparing to implement strategic initiatives to accelerate change in our menu, service model, programming, and marketing. Over the past nine months, our team has worked to create a new future for Dave & Buster's beyond COVID with a plan designed to broaden our relevance and enhance guest engagement while at the same time enabling us to operate more efficiently. As we've reopened and welcomed guests back to our stores, we've been confident in each element of that plan. Much of the execution of our reopening game plan and implementation of our future forward strategic initiatives is being driven by our Chief Operating Officer, Margo Manning. Margo is a 29-year veteran of Dave & Buster's and has been in her current role for the past four years. And she and her team, together with our store managers, have led our store-level COVID response with incredible professionalism, teamwork, and discipline. I've asked Margo to join us today to share more information about the investments we're making in our service model and menu initiatives today. which we believe will help put us in a very strong competitive position when we begin to emerge from the current COVID limitations. Here's Margo.

speaker
Brian

Thank you, Brian, for this opportunity to highlight the exceptional job our operating teams have done reopening our stores. As each market has been cleared for reopening, our team has demonstrated their ability to get stores up and headed back towards store-level profitability quickly. This takes enormous effort, And I'm extremely proud of the team's performance through these unprecedented conditions. The best part about reopening our stores is bringing back the staff. To date, we've been able to recall approximately 8,000 team members, almost half of the number we were forced to furlough at the outset of the pandemic. And it's been great seeing them welcome our guests back for good, clean fun. As Brian said, our team has been implementing and refining a number of service model and menu initiatives that we had already developed before COVID arrived and were originally planning to roll out in 2020. The primary objective of our menu initiative is to establish a stronger, differentiated food identity for the Dave & Buster's brand. After extensive research, we have landed on Inspired American Kitchen as that identity, and we have built a plan to bring it to life in 2021. Our new food identity is rooted in enhanced flavors and quality ingredients, across a condensed number of menu items priced to maintain our historic gross margins. It enables our guests to explore new flavors while also offering them a balanced selection of familiar dishes. Designed to simplify operational execution, this new menu sets our staff up to deliver dishes to our guests hot and fast. Taken together, we expect our new menu to drive an improved guest experience, to increase our food attachment rate, and to accelerate table turns. all aimed towards increasing food and beverage sales. Our new menu is supported with a dedicated training program that educates our kitchen and wait staff on everything from flavor profiles to cooking techniques. Additionally, we're in the process of rolling out a new piece of kitchen equipment to every store that will speed up cooking times. And we are also upgrading our kitchen management system to facilitate a seamless flow of food, both meaningful operational improvements that will be completed the first half of 2021. In mid-November, we began the transition to our new menu from the temporary 15-item menu that we implemented as stores began to reopen last spring. We are now offering 17 items and currently plan to add six more dishes in early March and expands to 28 amazing items by late April. This represents 33% fewer items than the 42 items on our pre-COVID menu. Of course, we're prepared to remain flexible in terms of these menu expansion timelines, and we will adjust accordingly based on the status of the pandemic. Turning to the Service Model Initiative. The primary goals here are to enable guests to control more of their in-store experience and to free up our team members to focus on cross-selling and up-selling. We believe that increased interaction with our guests will enhance their overall experience. The nucleus of this effort consists of deploying a combination of tablets, kiosks, and mobile web to enable a completely contactless order pay experience. Our five newest stores were launched on this platform, and it's been well-received by our guests, most of whom have adopted a hybrid approach initially, utilizing both the new technology and a WAVE staff team member. As we continue to refine the technology and service model, we are evaluating the potential to expand this platform to all of our stores during 2021. Another completely new element of our service model initiative involves the November launch of a third-party delivery partnership with DoorDash and UberEats at 105 of our stores, essentially all of the stores that we have reopened during the third quarter. Our plan is to add the remaining stores, primarily our California and New York locations, once we are able to open them for on-site dining. And finally, To further expand our reach and leverage our kitchen capabilities, we're beginning to test several Goat's Kitchen concepts, highlighting specific food categories from our new menu. We're exploring concepts that could be rolled out nationally, regionally, or offered in specific markets, or offered seasonally, or even offered around specific major events. An overarching objective of our menu and service model initiative is to enhance our long-term possibility by driving increased sales more efficiently. Obviously, many aspects of the lean operating model that we've adopted for the past nine months will not be fully sustainable as we move back towards a full operating posture. However, we have learned a lot. and are confident that our post-COVID fully operational service model and menu will produce some degree of sustainable leverage across our major cost levers. Now, I'll turn the call back to Brian for his closing remarks, and we'll remain on the call to answer any questions.

speaker
Brian Jenkins

Thanks, Margo, and thank you so much for your leadership and your team's ongoing commitment and dedication to this company that we both love so much. So thank you for that. As Margo indicated, we have been working on our service model initiative, even in the midst of COVID limitations. We've also refined our menu during this period and are poised to fully execute the next two phases of expansion as market conditions improve to a level that will support our success. In addition to those investments, we used some of our re-open stores to test new programming strategies that we believe will drive relevance and recovery as we are able to return to full operations. For example, we launched a system-wide in-store radio station, DMV Live, and deployed a cloud-based digital video system that enables us to centrally manage programming on our wow walls and other high visibility screens in each store. We also experimented this fall with sports programming to see how our guests respond to a more immersive watch experience featuring live DJs and engaging events like vendor-managed beverage tastings at select stores. We're taking the learnings from these tests and we're finding our programming and event strategies to be in a position to expand them as COVID restrictions ease. Additionally, during the third quarter, we launched our exclusive Star Wars lightsaber dojo VR game that quickly established itself as our top-earning single-player non-redemption game. In Q1, we'll test multiple game tiles to determine the extent of our 2021 game buy, and we'll watch the pace of business recovery to time their broad rollout. We also launched our new national brand marketing campaign in September, Initial response to the campaign has been encouraging, and we will continue to leverage our relationship with our new creative agency to expand the platform along with Leah Manager's promotions and events calendar as market conditions recover. We currently anticipate rolling out our game programming and marketing initiatives more broadly in late spring to early summertime planning, depending on COVID trends. I'll close today by reiterating the themes we've been focused on for the past nine months. You know, as difficult as those months have been, we are confident that our team, our plan, our liquidity, and our brand put us in a strong competitive position to bounce back quickly when the threat of COVID begins to subside. Our team is far more experienced and prepared for this current resurgence than we were back in March We have confidence in our COVID game plan and in our team's ability to execute it nimbly as market conditions allow. We have a vastly improved liquidity horizon, expanding beyond the projected threat of COVID with the promise of one or more vaccines expected to become widely available in 2021. And we validated that our score reopening process and lean operating model can produce positive enterprise EBITDA at sales index of 50% to 55% of 2019 levels. And finally, and perhaps most important, we've demonstrated the resilience of the D&B brand and the pent-up demand that exists among our guests to return to Dave & Buster's unique menus. When they do, they'll be greeted by an inspired team, a fresh new menu, a more customer-centric experience, and the good, clean fun that come to effect from Dave & Buster's. I continue to be very proud of and inspired by our team for their commitment and teamwork in the face of difficult and ever-fluctuating conditions. Each member of the DMV team is contributing their unique skills to drive our success while setting us up for a better future. And for that, I am extremely grateful. We will get through this together. We're going to come out on the other side, and we will thrive again in 2021. Now, Allie, we'd like to open up the call for questions.

speaker
Operator

Of course. Thank you. And if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, it is star one if you would like to ask a question. And if your question has been answered, please press star two. And we'll go ahead and take our first question from Jake Bartlett from TruList Securities. Please go ahead.

speaker
Brian Jenkins

Great. Thanks for taking the question. Brian, my first is on the deceleration of the same source sales. We're actually really focusing on the stores that remain open in the comp base, a deceleration quarter to date from late October. Can you disaggregate what the impact has been on stores that have not had any change in restrictions? I'm trying to, you know, it seems mathematical, obviously, restrictions being reimposed, but in the stores that have not, for instance, stores in In Florida, you gave us such great detail in the debt from mid-October. You have markets that have not been directly affected by reclosures. Have those also decelerated fairly meaningfully? Yes. That is a really good question, Jake. I hope you're doing well, by the way.

speaker
Brian

You as well.

speaker
Brian Jenkins

Yeah, thank you. The deceleration we've seen in November has been broad. So, you know, restrictions themselves, if we're still allowed to open, you know, have not really created a big headwind in performance, you know, operating hours a little bit, you know, capacity restrictions, those sorts of things really don't impact us like they would a casual diner because we have big facilities and a lot of capacity and a lot of it's unused certainly over the week and many operating hours. So, That's not particularly the headwind there. So the decline that we have seen in November have been in virtually every market. So there's definitely a COVID overhang now. You know, in most markets, even in Florida, if you look at the data we put out on the website, showing the trends by state, virtually every state is declining in November. Okay. So I think you're seeing some reluctance, I think, by guests to get out really nationally right now. Great. Okay, that makes a lot of sense. And my next question is just on the work that you're doing with your initiatives around the menu and around some of the operational improvements. When you look out into the future, maybe it's a year, a couple years, when you regain your sales, How much more efficient do you think you'd be? And I'm not sure how you know what the best way to frame that is. Some companies have talked about, you know, we would need 90% of our sales to achieve the same level of profitability or something like that. So is there a way you can frame, you know, how we should think about these, the more efficient model coming out of COVID, just really the extent that it's going to be more efficient? Yeah, I mean, as Margo said, you know, we've learned a lot of things. You know, we've been really scrappy over the last month in terms of labor. And in some ways, a lot of initiatives we're talking about, you know, tablets and what we're trying to do with self-service are not really driving what's happening today. I mean, this is just grit on the part of our operators, and they're doing a fantastic job and being very nimble in terms of how we're scheduling things. you know, up and down the P&L and particularly labor. So, you know, we are definitely, you know, getting some efficiencies by our operating calendar. You know, we're not operating 95 hours a week, so some of the periods where we, you know, are less efficient with less revenue, You know, that's helpful right now, and, you know, we're going to continue to look at that, our operating calendar, as we move forward because it has been helpful. And, you know, the initiatives we're talking about and Margo's talking about are really more forward-looking, and, you know, we have some of that stuff in test. We think it could be very helpful to us. But, you know, I think we've learned some things. We don't anticipate that we're going to go back to – full par level on our management team, you know, to the extent when we get back to our normal sales level, I think some of this stuff is going to stick. It's not all going to stick in terms of hourly labor. You know, we're going to see some pressure on that as we get in New York and California, and those are higher cost states for us. And They're not open right now, but, you know, you want to add anything, Margo?

speaker
Brian

I think you hit the high point.

speaker
Brian Jenkins

Okay. Okay, and just lastly, you're very helpful to see what the EBITDA burn rate is in November. You know, things are going to change here in December, as you talked about, kind of on a year-to-year basis being much lower just because they're high volume weeks and months. Can you help us out on really from a free cash flow level, and that's kind of including your deferrals, interest expense, you know, what you think, you know, the EBITDA might be. But just trying to understand, you know, how, you know, what kind of cash burn you expect, you know, in the fourth quarter. Maybe it's a wide range, but just trying to get a better idea of that. Yeah, Jake, this is Scott. I'll give you a little bit of color, you know, as we saw earlier. because the November numbers come in, you know, with EBITDA, you know, about $11 million off. So, yeah, as we kind of look at that month, you know, our cash burn was, you know, between $3.5 and $4 million. And, you know, so, you know, we do expect, you know, naturally to have a little bit higher cash burn. And, you know, I think a couple of things, you know, to think about is, you know, our rent deferrals that we have out there So that will be a little bit of a drag on cash. But the other thing is we're really having some pretty good success of paying down our deferred payables outside of rent. I mentioned that we should have about $6 million remaining at the end of this year. And then also the potential of another $11 million or so from the CARES Act. So I think keep those things in mind, just from an operational standpoint. And depending on what your estimate of EBITDA is, you know, take that, you know, kind of example from November and hopefully that kind of helps you kind of model out what we may see in the future. Great. That's very helpful. I appreciate it.

speaker
Operator

We'll take our next question from Jeff Farmer from Gordon Hoskett. Please go ahead.

speaker
Brian Jenkins

Thank you very much. I'm just curious if you guys can provide some color on the impact that what looks like a pretty significant drop in special event and large party bookings will have on your fiscal fourth quarter, same for sales? Well, it's going to have a pretty significant impact. Special events represents, what, 15% of our overall sales in the month of December. And, you know, that business, early on, we were actually booking some events. We geared up a small team to – and somebody sent happy thoughts that things would be a little bit better. You know, we kind of lost that bet a bit. And, you know, so we're not expecting to have a particularly big, you know, special event. calendar here over the course of the holidays. And so that's a pretty big headland. And as you know, our overall party business for the full year is around 10% of overall sales. So even the indexes that we're talking about and we're disclosing pretty transparently here, we're generating those numbers in the face of you know, special events business that's in the high single digits in terms of mix with really no business, that headwind is going to get a little bit bigger here as we hit December. Okay, that's helpful. And you also, I believe, mentioned sort of the early entry into third-party delivery. Anything you can share with us in terms of how impactful that's been, delivery-sales mix in the stores that offer delivery?

speaker
Brian

Hi, this is Margo. I'll take this one. Just starting with, we are an entertainment brand first, but in terms of third-party delivery, it's low cost, low risk, and so it makes complete sense for us to enter into this space. For us, we view it as being incremental. We're early days into it, and so We rolled it out in November. We're talking literally being live on it for about two and a half weeks. We're working on additional ghost concepts because we do feel like there's going to be an opportunity for us to expand this in addition to experimenting with promotion and marketing because, you know, again, it's going to be sort of new space for us. But it's early for us to really comment on its impact, but just recognize the fact that for us we're an experiential brand. And that's what the consumer is going to be looking for for us. So this is an incremental but probably not a game-changing initiative for us.

speaker
Brian Jenkins

Okay. I appreciate that. And just one final question. I believe you guys sort of the math works out to 15 stores that have been closed in recent weeks. And obviously you've outlined an expectation for potentially some additional stores to close with some of the intensifying mitigation efforts. But The question is, where would you theoretically expect those closures to take place from a state perspective? Well, we've got a couple today.

speaker
Brian

Yeah, they're kind of coming, you know, certainly rollbacks in terms of hours or even limited service. We're seeing sort of coming at us and, you know,

speaker
Brian Jenkins

We had a few in, you know, Maryland today. I think Northeast, Mid-Atlantic, you know, we just had one fall. And, yeah, we have been eyeing some stores in the Midwest, but actually we were expecting to fall earlier, and they haven't yet. But, you know, this is really hard to say. You know, I think, you know, we feel like it's going to get a little worse before it gets better. And we're going to lose more stores. The nine you have today, we lost two today. So, you know, we're going to see a further dial back here, I suspect. And, you know, that said, you know, again, I'm not trying to minimize it, but I do view this as, you know, a temporary setback here. And I think the line of sight for us is much better today. than, you know, when we were facing, you know, rollbacks and shutdowns of the entire brand back in March. I mean, you know, there's a lot of optimism around a vaccine that's on the horizon here. I don't think it's an immediate thing, and nobody really does. But, you know, there's a brighter future in 2021, and I think a way forward to get our store base open. And in my view, You know, when we get these open the next time, some of this stop and start closed activity that we've seen and been dealing with over 2020, which has been very difficult, I think we're pretty optimistic that, you know, when we get these doors open again, we have a pretty good shot that they're going to stay open and we're on a path to, you know, just better days. And, you know, what we're so encouraged about is, Even with COVID still running all around the country, we hit our peak in October. At the top quartile, as I said, at 90%. That's very encouraging. We're really confident that we're going to bounce back. We've just got to get these schools open. We've got to weather the winter here. And like I said, we're very hopeful for next year. I appreciate that. Thank you, guys.

speaker
Operator

We'll take our next question from Andrew Strelzyk from BMO. Please go ahead.

speaker
Brian Jenkins

Hi. Thanks for taking the question. I hope everyone's doing well. I'm curious about – I'm curious what you're seeing in some of the stores that were farthest along in the sales recovery. So whether that's, you know, the 15 or 20 or so from the deck that you provided in mid-October about, you know, that were, you know, at 100% or close or maybe – you know, the top quartile that were at 90% sales index. If you could just kind of compare and contrast how the business looked versus, you know, a year ago or before the pandemic, where were the margins relative to a year ago for those stores? What did the demographics look like? What did the business mix look like? And any other color nuances that you can share would be helpful. Wow, that's a lot of questions.

speaker
Brian

Just one overarching question.

speaker
Brian Jenkins

So, you know, in terms of the sports that were, you know, performing the best, you know, over the course of COVID, you know, Florida and the southeast, you know, were the states that were really performing the best for us. You know, and those are the ones that are really getting close to 100% if you look that up on our website. So, you know, with what we had done in terms of the lean operating model, some of those folks were actually performing better than they were in 2019. So, you know, that's sort of the good news. In terms of what's happened recently with this resurgence, really all boats are declining here, are dropping, all sales levels have crossed. You know, those states, Florida, South Carolina, some of those locations, Georgia, that were performing so well, they've dialed back quite a bit now. And, again, we think it's temporary. It will be temporary, but, you know, they're suffering right now. I don't know what the other questions were. That was pretty much it. Demographics are – You know, I think, Margo, you're here. You know, we're still seeing a little more adult, a little more male, I think.

speaker
Brian

And then the families start to come back after the stores have been open for a while. We start seeing them sort of settle back to the pre-COVID sort of guest space. But initially when they open, it does look a little different.

speaker
Brian Jenkins

Okay, great. That's very helpful. You know, the competitive environment, competitive intrusion had before COVID been, you know, very key for the business. And, you know, you've hinted at kind of how that could change moving forward. I'm just curious, have you been able to kind of quantify or dig in on kind of what you've seen so far from a closure perspective or how you expect that to evolve as we kind of move forward over the next couple of years? So your question was on closures here? Competitive closures? Yeah. You know, we're tracking, you know, kind of the competitive set right now, and I think you are and many others in terms of what we're seeing. There's a mixed bag right now in terms of the competitive set we have. You know, some of the ones that we've talked about in recent years, Main Event and Topgolf in particular, that are, you know, largely open right now. And then there are others where, you know, some of them are largely closed down. So it's definitely a mixed bag. You know, my feeling is that we're all grappling with, you know, store closures, softer demand, dealing with liquidity issues. And so My feeling is that we're going to see, you know, we definitely saw a rollback and a decrease in store openings. Certainly we did that. Others did that as well. I think we're going to see, you know, a bit of a slowdown as people are really trying to concentrate on their core business. That's definitely what we're going to do. We are going to concentrate. Our best path to recovering as a brand is getting our existing store base reopened, and driving profitability in the business. And so that's what our focus is. And I would expect that that's going to be a bit of a focus here for some of these other brands. And I do think there's going to be a shakeout of a few, and we've already seen some of that with a couple of our competitors. And I do think with this resurgence, some of the coming soon signs you might see on the websites I wouldn't be surprised to see some delays in that pipeline. We're internally going to be very measured about our store development pipeline, again, concentrating on getting our store gates open. That's the clearest path for recovery for us. I think we, and I've said this before on these calls, guys, I'm very confident that we have one of the best operating models out there in this competitive space in terms of AUVs, margins, returns on a pre-COVID basis. And I think that's serving us really well right now. And we're doing it, I think, better than we ever have in terms of being nimble. And I'm not sure the entire competitive set has that same situation because it Most of those models I don't think were as strong and as solid as ours coming into COVID. So, you know, we're going to concentrate on what we're doing, and we're going to do the best we can do, and I think that's going to position us really well. Great. Thank you very much.

speaker
Operator

We'll now take our next question from Andrew Barish from Jefferies. Please go ahead.

speaker
Brian Jenkins

Hey, thanks, guys. Happy holidays. I hope you get a little break here coming up. A couple of quick ones on just actually looking back and trying to understand a little bit of the ramp. In the 3Q, there was a big jump in the store sales index, you know, September from August, like 20 points. So I was just trying to get a sense of What was going on there? Is it the changes in schools, or was it just kind of the momentum of adding some more stores and having additional ones open? It just seemed like a big jump. Well, I mean, we were seeing – I mean, if you kind of roll back the tape, and I think we have all that made out there, right? We showed the leaflet? We showed months. But we – You know, with the resurgence that happened in June and July, you know, we dialed back pretty quickly and sharply there. And then it was a pretty steady progression through the month of August, you know, moving up. And then in September, we were back on air and on TV for the first time in a long time. So, you know, we came out with a new brand campaign, launched that in September. We were on air, I want to say, five weeks ago. You know, it was a meaningful investment. These were some dollars that we were unable to cancel. And it actually was a perfect timing for us because some of the fears were subsiding at that time. You know, consumer appetite was improving, and we had more stores open. It was sort of the perfect combination in September. We had more stores open, and we had dollars when we put them to work. You know, right now we're not – You know, we actually delayed and canceled some plans that we had for media here over the holiday season, really looking to sort of save that powder for a time when, you know, COVID fears are actually waning, not increasing, and that appetite for guests to get out is not something we're swimming up the stream on, which I think is what's happening right now. But, yeah. I mean, I think that was helpful for us in September. Yeah, that's helpful in understanding that as well. And then, technically, on the programming side of things, as obviously it's been difficult for fans to get out to sporting events, have you seen kind of noticeable increases, you know, on those weekends, sports, football, games, et cetera, and – How are you thinking about the Wow Wall rollout in light of that as you look out to 21? Yeah, I mean, we've performed well on those days. You know, Thursday has been a little tougher for us because we had wings working for us in the prior year. It took a little bit differently for us, and we're not really discounting materially right now. You know, we don't have plans at this point to further roll out, you know, WOW walls. You know, we could develop, what, 60 of them out now. You know, our view at the moment, number one, we're going to be very conservative and cautious with the capital in this environment. But, you know, we've got to go to work on building a programming muscle in this company. You know, we have a lot of assets here. We have big facilities here. You know, sports could be, you know, we can improve on our sports offering and what we're doing around that from an experience standpoint. And, you know, we're going to be focused on that. And, you know, we're looking to see what other things we can do to, you know, drive frequency and a reason to visit within our stores. So the programming engine is, you know, I'd say we're running on, you know, a few cylinders right now. It's a muscle that we're trying to develop and get at. But I think you know, as an entertainment brand that is, you know, trying to get beyond an arcade, this is a natural fit for us. You know, just as sports was a natural fit for us, just thinking about how we can create events and a reason to visit over the course of our calendar and the course of a month and year. So, you know, our SVP of entertainment, Kevin Bacchus, is leading that charge and I'd say we're in pretty early innings, and we're focused on sports here, obviously, and the football season, a tough lead here. You know, 2020 is just a year I want to get out of, to be done with, but a really tough lead, you know, kind of what that's going to look like. Okay. Thanks to the coach. Thank you, Andy. Be safe.

speaker
Operator

We'll now take our next question from Chris Ockel from Stiefel. Please go ahead.

speaker
Brian Jenkins

Hi. Good afternoon, guys. Brian, given you guys have seen stores go through one or two cycles of closing and reopening, what factors do you think influence the strength of sales recovery when a store reopens? Well, you know, I think some of it's fundamentally the market itself. I mean, we've definitely seen a stronger appetite for, you know, for our experience in the Southeast. You know, the stores developed out quickly, pretty quickly, and, you know, many of the stores in the Southeast got, and some of them actually were surpassing prior to the year. over the course of not recent weeks. And I think some of the northern states and midwest states have been a little more difficult for us. So I think some of us, the underpinnings of COVID fears in the particular market, because we're really not running really a different playbook when we own them. So it's not necessarily something we're doing. in different markets a little more about consumer appetite, I think. And I think the good news is when you look at the recovery curve that's out on the website and the maturity curve, by and large, the good news is they all have an upward trajectory. And we feel very confident that we're going to be able to get all of our states when we get past this thing back to a really good place. Some of them may get there quicker, but we're pretty darn confident. A good example of that is when we opened California, we weren't up in there for more than three weeks, but they opened and shut. Those stores opened up at a 30% index in their first week of operation. That's actually one of the highest opening week indexes we had in any state. So You know, we're really optimistic that people want to give back to their early pay life and actually we think that's going to happen everywhere eventually. You guys mentioned increased labor costs in the fourth quarter to recall some key store leadership positions. I'm trying to understand the sales level you're anticipating and when you expect to see that sales level to determine how many of those employees to recall. Yeah, let me explain that a little bit here. You know, we wrote two pieces of this, you know, a month or two ago. What month was it, October? End of September, actually. Early October, we made the decision to bring back our core leadership team in our New York and California stores. Those stores represent 25% of our overall sales base. They represent about 20% of our units. Those stores were going on six, seven months of being closed. There is nothing more important for us right now than being able to re-open our stores quickly and effectively. We brought back a small team in each of those stores. to make sure we could preserve our ability to reopen. When you're closed that long, if you have to start with a brand new leadership team, you're in trouble. This is a win the battle and lose the war kind of thing, and we weren't going to try to win the labor battle and lose the war on being able to reopen. So we brought those folks back, a team of folks, And then as we've reclosed the 15 net stores that Scott mentioned, we are not planning to course correct and have a significant furlough at this time. We think this is temporary, and we need to make sure that when the time comes to reopen, which we think, you know, we're going to get some of these stores back open after the holidays, and then, you know, California and New York we think it's going to take longer until – Yeah, really our first quarter of next year or early next year. We have to have our eye on that. That's really important. It's imperative, really, where we don't bounce back, we don't recover, and we're not going to fade our way to profitability here. We've got to have sales. We've got to get these stores up. I agree. And then one last one, just with the addition of those positions being filled and ramping operations back up during the quarter and some of the other investments you mentioned, did you guys provide an update to your EBITDA break-even target at the enterprise level? I think previously you mentioned something like sales being down 45%, 50% was break-even. Is there any new updates to that? No, we would, you know, I sort of confirmed it in my preparedness watch today or reaffirmed it. You know, we have, you know, if you look at October, you know, and we were pretty close to break even in the month of October. Just, you know, we were, you know, an even loss and it was $3 million. And you could calculate that if you look at what we've disclosed out there. So no new news here. So we were really close in the month of October. As I mentioned, you know, our copper covering index was, you know, we had a 68% index late in the quarter and had about 75% of the chain open. So we feel really confident that when we get to 50 to 55, we're going to be in that, you know, uh... enterprise-level break-even ahead and then the profit uh... i apologize and that's for the fourth quarter as well i'm sorry uh... i meant for future for the upcoming quarter not the third no we're not uh... no we're as we said you know we were close to it so we're confirming that when we get to 50-55 we think we'd be profitable. That's not going to happen in Q4. You know, as Scott said, we're seeing rollbacks. We were scaring them in October. We're seeing rollbacks in November. So the profit-covered index is going the wrong way on us, and more of the chain is being – more of our store base is being shut down right now. So we're going the wrong direction. Scott, what's the comp for November to share that? Yeah, for November, it's negative 69%. Yeah, so we've got an index that's not close to getting to 55% of 2019. So we've got a ways to go. Okay. Thank you. I think one of the ways to think about it, Chris, is, you know, as – You know, as we do get the ability to start reopening stores again, I mean, we'll have, you know, some of this infrastructure and some of these people in place already. And so it won't be, you know, kind of as much variable cost adding on because we are, you know, taking care of some of the repair and maintenance and things like that. And with the store leadership being here, at least on that back, but, you know, we have a pretty good base to build from.

speaker
Operator

And we'll go ahead and take our next question from Brian Mullen from Deutsche Bank. Please go ahead.

speaker
Brian Jenkins

Hey, guys, thanks. You touched on sports as an opportunity earlier, but I was curious, does the legalization of sports betting across the country, does that offer any opportunities to drive increased traffic to the stores over the long term? Are you devoting any time or resources to exploring that opportunity right now? Is there an opportunity? Yeah, short answer is, you know, there is an opportunity, and we are devoting resources to explore that. Kevin Bacchus, who is our SVP of entertainment, you know, is in discussions with a potential partner. We're deep into those discussions, and, you know, we think it is a potential fit for us and I don't have any more to report on that right now, but, you know, hopefully as we hit our next call, we'll have a little bit more to report out on that. Okay, great. Thanks. And then earlier you touched a bit on the competitive environment, some of your competitors, but just in terms of your own unit growth coming out of the pandemic, you know, are you, same kind of question, are you devoting resources or time to thinking about what the pipeline could look like for Dave and Buster's? Big picture, do you anticipate being a net unit grower concept once again when we get out of this time period? You know, short answer, eventually. You know, as we, you know, if you look at this year, you know, we're going to open six stores. You know, we were well on our way with virtually every one of those stores. So it makes sense to, you know, wrap those up, limited capital remaining. And we have one left, Green Bay. here in the fourth quarter, and that will take us to six. You know, as I look at 2021 and what our team has on the plate, you know, our top priority is not the opening of new stores, it's the reopening of a significant portion of the chain. And as I said before, my view is that is, you know, the clearest, quickest path to the financial health and recovery of the B&B brand. So We will be prioritizing new store growth in 2021, and we must prioritize the recovery and the reopening of the brand. As long as some of these stores have been down, particularly California and New York, we're coming up on a year. it feels a lot like a reopening, right, Margo? Yes, it does. And that is why we're bringing back a small core leadership team to make sure we preserve that ability. But there's still a lot of lifting to get hourly team members that are calling to do other things, rebuild those doors. So that is our top priority. Our view also is, You know, as we have gotten these stores back up in a really lean way, our bench strength is not what it once was. You know, we're operating stores right now at a fraction of the prior team, you know, typically nine to ten folks, and we're in an average of around five right now. So our bench strength to actually fund new stores has, you know, been hurt by this right now. And then, you know, we're going to watch liquidity. You know, we want to see a better line of sight. more of the store-based back open, and we're back on a recovery path that is healthy, like what we were seeing prior to this recent resurgence. So there'll be a time for acceleration. I don't view that as 2021. You know, we have a good solid pipeline right now in 2021. We have about 12 locations that We have under lease that we're working with our landlords in terms of the timing of those. So we still view the U.S. as a great market for us. There's a lot of potential. We have some in our pipeline. We think there will be possibly a lot coming up, too, in the current real estate environment. So we will pivot at some point. It's not going to be able to pivot here early in 2021. Thank you.

speaker
Operator

Well, now I'll take our next question from Joshua Long from Piper Sandler. Please go ahead.

speaker
Brian Jenkins

Great. Thank you for taking my question. I hope everyone's doing well. I wanted just more of a point of clarification. I understand that some of the stores are closing back due to the restriction. Curious on what the opportunity is or if there is a need to revisit the idea of which of those closures would be not temporary but permanent in terms of just optimizing the overall portfolio? Good question. You know, Isaac, the good news for us, and I think we're maybe one of a few brands that could probably say this, you know, we had a very healthy store base overall prior to COVID. You know, all our stores even a positive. And, you know, we have in this environment, we have close to stores, one of them in Chicago, one in Houston. We had made the Chicago call prior to COVID. You know, an older store, markets moved away from the location. It was profitable, but we had made that decision. We just elected not to reopen it. And then we closed Houston, which is our oldest store right now, or was our oldest store in the fleet. But we had a sister store five miles away, close to the end of the lease. It just made sense. We expected it to be accretive because of the transfer to the sister store. So, you know, at this point, I don't plan to make any long-term closure decisions based on short-term results and the disruption that we're seeing. I think we're going to want to see how these stores recover. So we don't have plans to close any other stores at this time. Understood. And then my follow-up question would be, lots of interesting opportunities and initiatives about extending the brand into some new channels, whether that's through the third-party delivery, virtual brands. And then it also sounds like Kevin and his team are quite busy on some different pieces as well. But curious on if you think about work from home being a larger piece incrementally or relative to how consumers spent time pre-pandemic, is there an opportunity – to extend the gaming piece that you guys have leadership in as a category into mobile or into the home as well? Is that something that makes sense? And how do you think about kind of engaging with guests on that core brand equity if we're all going to be spending time and have our consumer travel patterns a bit disrupted versus pre-pandemic opportunities? It's a really good question. Today our focus is in-store experiential, and I think we have a lot of opportunities to improve our live air right now, and that is where we're focused. So I can't say we're actively looking at that at this point. So I just think we have a lot of heavy lifting around the the in-store experience right now, and that's where the team is focused. And I will say this. We have a lot on our plate right now in a small team, and I think we're focused on the right thing. When you look at how people have responded in these markets, how much they want to get back out of their house and not be in their home sitting in a room, I think that's where we're going to focus our attention. That makes sense. Thank you.

speaker
Operator

We'll take our next question from Brian Valcaro from Raymond James. Please go ahead.

speaker
Brian Jenkins

Thank you, and good evening. Good to catch up with everyone. I hope everyone's doing well. I wanted to ask a question on the changes you're making to the menu, and I understand you're adding the items back. I think you said you expected to settle with around a third fewer items, but Can you help us understand where some of the more meaningful reductions have been, where there are specific categories that were removed, or will it be more sprinkled sort of throughout the menu? Just trying to understand how you view sort of that food and bed experience and how that looks post-COVID versus where you were in 18 or 19.

speaker
Brian

Hi, this is Margo. So I'll start and then Brian can chime in. For us, when we did the research, one of the things that came out was, again, just a strong interest in appetizers. So in the new menu, you will see that we have done some significant work with the new items along the category of appetizers. But every aspect of the menu has been touched, and really what the objective was is to get to very few, very good items that we could execute well without the guests And so at the end of the full rollout, when we hit 28 items, we've distilled it down so that there is enough variety that you don't have a veto vote, but that it is really tightly curated to enable superb operational execution. Brian, do you think you want to add to that?

speaker
Brian Jenkins

Okay. Okay, that's helpful. And I guess shifting gears a little bit, but trying to think about the more efficient labor model in a post-COVID world. Can you maybe expand and perhaps quantify some of the benefits you expect from the streamlined menu in the back of the house, things like prep and that sort of thing? Also, the kiosks and the server handhelds, how that will impact the front of house labor model? Yeah, I think, you know, we're still working through that, Brian. You know, if you look at kind of the numbers that we've put up and, you know, the architects sitting right across from Margo in terms of what the operators have been able to accomplish right now in terms of managing labor, it's quite remarkable that, you know, we're, having the kind of declines in sales, which would typically result in a significant deleveraging event in hours of labor. It's not all variable. We have, you know, a store within a store and when. We have game tech. You know, there's a semi-thick to thick element to some of that. And, you know, we're running that very efficiently right now. Hours of labor, you know, sort of flash, if I recall, for the third quarter. So, you know, that's a really good outcome. And, you know, some of the things we're talking about, you know, some of the technology, kiosks and mobile devices, you know, will be helpful. But I think some of that stuff is going to be a lot more helpful in terms of speed and execution for the guests and a little less necessarily about, you know, efficiency. I think, you know, where we're winning the battle right now is, You know, we're just being very thoughtful, and we're not going to be able to keep all this on how we're scheduling off-peak. And it's up and down essentially every job code within our hourly labor, from front of house, back of house, to, you know, front desk, to win, gain tax, and being very nimble and off-peak. So, you know, we're going to try to carry – as much of that that we feel is appropriate that doesn't damage the guest experience. And, you know, I think we're going to have some stuff back eventually for sure. But, you know, I think, you know, and I'm going to stop because we're not going to get into the guidance on how many bips we think we're going to get in 2021 right now or any of that stuff. But, you know, I have to. Henry, are you thinking about on the manager side, and correct me if I'm wrong, but I think the historical structure was a general manager and maybe 10-ish managers throughout the unit on average. Please correct me if that's not right. But I know it will be fluid, but what might that structure look like? Are you thinking about changing the mix of salaried versus hourly managers, maybe team leader type positions? Just trying to get a sense of how you think that might settle out. in a post-COVID world whenever sales recover towards a normal level.

speaker
Brian

Hi, this is Margo. I'll just jump in on this one. So one of the things about this COVID world is it has presented the opportunity for us to look at every single thing that we do. And so when you look at the savings, the savings have not happened by accident. We have literally looked at every single spend in the store and evaluated whether or not we will keep it or whether or not we will permanently eliminate it. And so you will definitely see us look at the management structure. just as we are every single you know line item that is going on in the store and so when we talk about sustaining some of the improvement in 2021 it's impossible to take the learnings that we've had this year and not keep some of them because You learn. And so what we're doing is trying to make sure that we are selecting the efficiencies that are truly good efficiencies without diminishing any aspects of the guest experience. So in terms of the management structure, of course, we'll be looking at that. Just as we're looking at the hourly, and we'll put them both through the same lens to ensure that we can get the experience that our guests need and that we're doing it thoughtfully and efficiently. So that's what you can expect in 2021.

speaker
Brian Jenkins

All right, that's really helpful. Last one just for me. Thinking about the sales index in the next couple of months, can you remind us, in a normal year, how much higher are sales volumes or average sales in December versus the shoulder months? I'll pass it along. Thank you. I don't have that. It's much higher. Yeah, it's a good question, Ryan and Neil. December and March really are two biggest months. And if you look at December, I mean, versus kind of an average, you know, weekly sales across the entire year, it runs about 15% higher than that. Okay, great. Thank you.

speaker
Operator

And we have no further questions. And I will pass it back over to our speakers for any additional or closing remarks.

speaker
Brian Jenkins

Okay. Thank you, Allie. Well, guys, thank you for joining our call today. We wish you and your families a safe and a healthy holiday season, and we look forward to seeing you at a D&D location really soon here. So have a great night.

speaker
Operator

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.

Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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