Dave & Buster's Entertainment, Inc.

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.

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.

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.