Dave & Buster's Entertainment, Inc.

Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment Incorporated Fourth Quarter 2020 Earnings Results Conference Call. Today's call is being hosted by Brian Jenkins, Chief Executive Officer. You'll 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'd like to turn the conference over to Scott Bowman for opening remarks. Thank you, James, and thank you to all of 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 risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties have been published in our filings with the SEC, which are available on our website at www.daveinvestors.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 immunization, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-YET measures to the comparable GAAP results contained in the earnings announcements released this afternoon, which is also available on our website. Now we'll turn the call over to Brian. Well, thank you, Scott. Good afternoon, everyone, and thank you for joining our call today. As we close out a challenging 2020 fiscal year, I am pleased to report today that our business is on a clear path to recover. Our stores are reopening. Cost sales trends are improving. Our financial performance is rebounding, and our liquidity remains strong. As I reflect back on the agility, the resilience, and resolve that our team has demonstrated over the past year, I am extremely proud of what they have accomplished. Dave & Buster's is a stronger company today because of the outstanding effort of our team, and for that, I am grateful. Following a temporary setback caused by the COVID resurgence over the holidays, our business recovery regained solid momentum. We concluded our fiscal year in January with 107 re-open stores. Our fully operational re-open comp stores generated January sales at 67% of 2019 levels, representing our strongest COVID impacted month in fiscal 2020. In January, 85 stores, representing approximately 80% of our re-open stores, achieved positive store-level EBITDA, enabling us to post our first month of positive enterprise-level EBITDA since the shutdown of our entire store base just over one year ago. Our operating and corporate teams continue to execute a lean operating model as our stores rebuild their business, When our revenues return to 2019 levels, we estimate the operational improvements we've implemented will drive approximately 200 basis points of incremental EBITDA margin over the rate we achieved in 2019, excluding the impact of cost pressures that may emerge over time. With improving COVID trends, higher seasonal sales, and stimulus-related demand, our recovery has continued during the first eight weeks of fiscal 2021, Sales at our fully operational comp stores have achieved 74% of 2019 levels. Total sales reached approximately $150 million. And we posted our second consecutive month of positive enterprise level EBIT in February, the first full month of fiscal 2021. Also encouraging, the recent reopening of limited capacity dining and arcade operations at our 11 New York stores. and limited to athlete dining at seven of our 16 California stores brings us very close to the complete reopening of our 141 store base. In time, these positive developments give us confidence that we will achieve enterprise-level EBITDA profitability for the first quarter of fiscal year 2021, a significant achievement for our team and our company. Our accelerated recovery illustrates the resilience of the Dave & Buster's brand and the important role that good, clean farming plays in the lives of our guests. It also validates the changes we've made to our business model that have not only enabled us to navigate the challenges of the past year, but to emerge with a stronger, more competitive, and more profitable business. Our team is prepared. They're excited and fully engaged, and we are optimistic about what the future holds in 2021 and beyond. At this time, I'm going to ask our CFO, Scott Bowman, to cover the results of the fourth quarter and to share some insights on our expectations for the first quarter. After that, our COO, Margaret Manning, will join me to provide an update on our 2021 strategic plan. Scott? Thanks, Ryan. I'll first spend some time summarizing our fourth quarter performance in our liquidity position. and then provide some insights on the first quarter and fiscal of 2021. For the fourth quarter, total revenues of $117 million reflected a 70% decline in comparable store sales. We ended the year with 107 open stores, including three new stores open during the quarter. By month, overall comparable store sales were negative 69% in November, negative 70% in December, and negative 59% in January. January performance improved mainly due to the benefit from the COVID stimulus and the reopening of 14 comparable stores compared with December. Turning to the balance of the P&L, gross margin declined 11 basis points to 82.7% in the quarter, primarily due to inventory write-offs related to closed stores, which was substantially offset by a higher mix of amusement sales. Operating payroll and benefits expense was 27.6% of sales compared to 23.9% last year. This is mainly due to deleverage in management labor due to lower sales and your decision to recall a core group of managers in New York and California to help ensure effective restart capabilities. Understore operating expense was 50.3% of sales compared to 31.2% last year. Most of the deleverage was due to occupancy costs and lower sales, along with deleverage in areas such as utilities and repairing maintenance expense. Throughout the quarter, we continued to ramp up repair and maintenance expense to prepare a store for reopening and expectation of higher sales across the chain. DNA expense of $11.6 billion decreased 43% from prior year, primarily due to savings related to staffing reduction as well as lower consulting expense. Fourth quarter EBITDA loss was $20.1 million. That said, we were pleased to achieve positive enterprise level you got in January, driven by improving sales trends and additional story opens. Turning to the balance sheet, we ended the quarter with $12 million in cash and $280 million of availability under a revolving credit facility, net of $150 million minimum liquidity covenant and $10 million in letters of credit. Total long-term debt stood at $610 million at the end of the quarter, consisting of $550 million in senior secured notes, and $60 million outstanding on our revolver. Additionally, at the end of the quarter, we had approximately $5 million in deferred vendor payables, which compares with approximately $17 million at the end of the third quarter. We plan to repay most of this deferred balance by the end of the second quarter of fiscal 2021. Excluding revolver draws and repayments, cash burn rate averaged $2.3 million per week during the fourth quarter. The third grant totaled approximately $52 million at the end of the fourth quarter, compared with approximately $48 million at the end of the third quarter. As a result of our continued negotiations with our landlords, we have further extended rent deferrals, resulting in expected paybacks of approximately $20 million in fiscal 2021, $25 million in fiscal 2022, and $7 million thereafter. In addition, we expect to receive a tax refund of approximately $11 million either late in the first quarter or early in the second quarter of 2021, resulting from CARES Act legislation. We also expect to receive a tax refund of approximately $50 million late in the fourth quarter or early in the first quarter of 2022 related to the carryback of fiscal 2020 losses. Turning to capital spending, we completed construction and opened three new stores in the fourth quarter. Overall, we have $64 million in capital additions for 2020 and $51 million net of tenant allowances. In summary, our operating results for the fourth quarter reflected encouraging sales recovery trends at reopened stores, and we were very pleased to achieve the enterprise-level EBITDA profitability for the first month of January. Now, turning to our Outlook for fiscal 2021, we will not be providing detailed full-year guidance at this time due to continued uncertainty in the operating environment. However, I would like to offer some insights for the first quarter of fiscal year 2021. For the first eight weeks of the first quarter, we've seen continued improvement in sales trends with total revenue of approximately $150 million and comp sales down 47% compared to 2019. As a housekeeping note, we will continue to report comp sales for 2021 against 2019 results, and we believe this is a more meaningful comparison versus the COVID-affected 2020 results. For the first quarter, we expect total revenues to be in the range of $210 million to $220 million, which assumes that the month of April will continue to be a seasonally low-volume month as it has been historically. And fourthly, as Brian noted earlier, we're also experiencing some meaningful improvement in profitability and expect to achieve enterprise-level EBITDA profitability for the full quarter, reflecting another significant milestone in our recovery. Regarding liquidity, We had approximately $309 million of available liquidity under our revolving credit agreement as of the end of the first eight weeks of the first quarter, net of $850 million minimum liquidity covenant, and $10 million in letters of credit. From a CapEx perspective, we will continue to invest in the business in fiscal 2021 to further strengthen our brand, concentrating on our strategic initiatives that Brian and Margo will discuss next, as well as a limited number of new store openings. We plan on being conservative on new store openings for the near term while our business continues to recover, but we will retain some flexibility to be able to begin construction on additional stores should the business improve more quickly than anticipated. Overall, we currently have 10 new store commitments in our new store pipeline, of which we plan to open four in fiscal 2021, along with a relocation of one additional store. We opened the first of those new stores in early February. In total, we plan to invest $65 to $70 million in CapEx in fiscal 2021, net attendant allowances, while maintaining adequate liquidity to meet our operating needs and to position us to lower our debt profile over time. Finally, I'd like to provide some insight on the Operational Improvements and Business Model Initiative, which we estimate will drive approximately 200 basis points of EBITDA margin improvement as we return to 2019 revenue levels. First, we expect to see leverage from hourly labor as we continue to invest in technology to improve efficiency. The main main boards of this deployment will be tablets for our servers, mobile ordering by our guests, and more effective scheduling of hourly staff based on anticipated day part traffic. We also expect to realize leverage for management labor as we adjust scheduling for peak and off-peak hours and utilize key hourly team members to provide coverage in certain situations. For G&A, we have scaled down the organization to be more nimble and will benefit from process improvements identified during the past year. From a marketing standpoint, we're planning on fewer, more strategically placed promos, targeting our spend into key windows during the year. And finally, we will achieve savings from other P&L line items from opportunities realized through our zero-based budgeting approach as we continue to cautiously add back expenses at a slower rate than our sales recovery. While this model does not reflect the impact of cost inflation or other cost pressures that may emerge over time, we believe these initiatives will drive approximately $30 million of EBITDA improvement as we return to 2019 sales levels. With that, I'll turn it back over to Brian and Margo to discuss our strategic initiatives. Thanks, Scott. We're very encouraged by the first quarter momentum that Scott just described to you and are confidently implementing our 2021 strategic plan. It's built around four key pillars that really define the Dave & Buster's brand. The first is to offer novel food and drink to bring people together. The second is to offer the latest entertainment to enjoy together. is to deliver an integrated guest experience with an aligned team. And the fourth is to drive deeper guest engagement. Our COO, Margo, shared early details of the first and third pillars during the last quarter's call. She will bring you up to date on our more recent progress, and then I'll follow up with an update on the second and the fourth pillars. Margo?

Thank you, Brian. I appreciate the opportunity to give an update on the progress we have made on our key initiatives. First, however, I do want to recognize our operating team. They are dedicated to bringing our stores up quickly and possibly. Successfully relaunching these stores takes great effort. They continue to deliver strong performance, and I'm incredibly proud of this team. As Brian shared, our team has been implementing and refining a number of initiatives under each of the strategic pillars that Brian just discussed. Under the first pillar, offering novel food and drinks to bring people together. our teams have been working to establish a stronger, differentiated food identity for the Dave & Buster's brand, exploring virtual kitchen concepts, optimizing back-of-the-house operations, and enhancing our bar menu. Our new food identity, Inspired American Kitchen, is rooted in enhanced flavor and quality ingredients across a condensed number of menu items that we have priced to maintain our historic close margins. This is the most extensive update to our food offering in more than 10 years, and it allows our guests to explore new flavors while offering a sour selection of familiar dishes. Our stores have just completed the second phase of our menu initiative, taking our menu from 17 items to 22. Completion of the third phase of our menu by late May will bring us up to our final target of 28 items. This represents 33% fewer items than were on our pre-COVID menu. We expect our new menu to drive an improved guest experience and increased food attachment rates, all aimed towards increasing food and beverage sales. By the end of April, we'll have completed the rollout of high-speed ovens at all stores, reducing cook times by more than 40% on approximately one-third of our menus. Additionally, we anticipate having the upgrade to our kitchen management system implemented in all stores by June, which will enable a more seamless flow of food and help reduce overall kitchen ticket time. Combined, our new menu, high-speed ovens, and new kitchen management system will enable our teams to deliver dishes to our guests hot and fast. To complement these operational improvements, our marketing department has designed a comprehensive internal and external marketing strategy to tell our guests about the new menu and to drive trials. Throughout our building, from the dining room to our wow walls and video walls to our midway, guests will see mouth-watering pictures of awesome dishes from our new menu. Guests will also experience a new digital menu that is visually appealing and easy for them to navigate. Our external advertising plan is equally compelling and for the first time allocates a majority of our spend towards digital channels to communicate with existing and with first-time guests. I'm particularly excited to see us partner with special influencers to help promote this new menu in a fun and relevant way. To further expand our reach and to leverage our kitchen capabilities, We have tested two ghost kitchen concepts that highlight specific food categories from our new menu. We have focused on concepts that can be rolled out nationally or regionally. Our most recent ghost kitchen test is a concept called Wings Out. It offers a narrow menu of wings and tenders with a variety of loves and interesting sauces to select from. We are excited about ghost kitchens as a new revenue stream. As we consider their potential impact, particularly in the context of our historically category-leading 10 million AUDs and a smaller store count than many of our competitors, we do understand that they will be a relatively small contributor to total sales. Our Go kitchens, combined with our core D&D to Go offerings, are currently generating approximately $50,000 per store. However, we are just beginning this journey. the next steps evaluating additional ghost kitchen concepts, and third-party providers beyond DoorDash and UberEats, as well as working to optimize our promotional strategy to fully capture the revenue potential for these concepts. The third of our four strategic pillars, delivering an integrated guest experience with an aligned team, includes evolving our service model to give guests more control over their in-store experience. growing our culture of social fun by freeing up our team members to engage more frequently to enhance the guest experience, and opening new stores with the new service model capabilities from the outset. This involves deploying a combination of a new service model, tablets, and a mobile web platform to enable a completely contactless order pay experience. In our test stores, we've seen an encouraging improvement in check terms. we have also been able to expand the size of server sections and reduce our staffing levels to be more efficient. We have implemented this new model in our reopened New York stores and are proceeding with a staggered deployment plan across the brand, targeting full deployments by late summer. Lastly, as Scott mentioned, we have analyzed our lean operating model and identified where we can capture operating cost leverage. We're confident that our team will continue to apply the learning from this past year to be an even better operating team in 2021. In summary, let me be clear. The overarching objective of our food and service model strategic initiative is to efficiently drive increased sales, improve the guest experience, and enhance our long-term possibility. Now I'm going to turn the call back to Brian to talk about the two remaining strategic pillars. offering the latest entertainment to enjoy together, and deepening guest engagement. Brian?

Thanks, Margo, and thank you for your leadership and your team's incredible commitment and dedication to this company. The two strategic pillars that round out our 2021 strategic plan are also central to enhancing the guest experience. The first is offering the latest entertainment to enjoy together, Over the past 12 months, our entertainment team has been working on several fronts to support this pillar, starting with six new games that will launch exclusively at Data Busters this summer. This exciting lineup of new games includes titles such as Minecraft Dungeons Arcade, a four-player cooperative game based on the best-selling video game of all time, Hatchet Hero, which brings the excitement of competitive axe throwing to Dave and Buster's guests in a fun, safe, fast-paced arcade format. Then there's Hungry Hungry Hippos, which brings a life-size version of the classic board game for up to four players. And we'll add a brand-new VR attraction to our proprietary platform with the launch of Top Gun VR Arcade just prior to the release of the new Top Gun movie this summer. We also continue to explore a sports betting partnership to bring sports wagering and daily fantasy sports to DMV where allowed by law. We believe this could represent a mean accelerator to our appeal as a sports watching destination and better leverage our watch assets. We expect to bring our negotiations to a conclusion over the next several months. Finally, we are committed to broadening our entertainment offering by building a programming capability. We are investing in a dedicated entertainment programming function focused on creating compelling content-based events to drive broader reach and increase visit frequency. The fourth and the final pillar of our 2021 plan is to drive deeper guest engagement to fuel our sales recovery and growth. We look to drive seasonal traffic by focusing our marketing into key media windows, highlighting new product news, limited time offers, with a message that connects with our guests on an emotional level. Following the year of limited media spin, we have two campaigns planned for the remainder of 2021. The first campaign this summer will feature our new menu items, new limited time drinks, and our exciting lineup of new games. The second campaign, still under development, will target the November-December timeframe around the holidays. In response to changes in the media landscape that were accelerated during 2020, our plan also includes modernizing our media mix to reach guests where and how they consume content. This includes shifting a meaningful portion of our media spend from traditional cable to a more flexible mix that leverages advanced TV, digital, audio, and social channels. This new visual approach provides us with the ability to flex spending up or down, market by market, depending on your real-time results. Finally, even during COVID, our marketing and IT teams were pushing forward to complete the implementation of a new marketing technology stack. These investments now position us to deliver more personalized, targeted marketing messages, through a wider variety of digital channels as we return to full operation. Before I close, I want to take a moment to thank retiring Board Chair Steve King for his vision and leadership over the past 15 years at Dave & Buster's. It has been an honor working alongside Steve over the years. He has been a great mentor and friend to me and to many other members of the D&E family. His influence will be long-lasting and he will be gracing us. So I want to congratulate Steve and his family on his well-deserved retirement. Steve will sort out the remainder of his term that ends this June with our annual meeting. At the same time, I want to congratulate Kevin Sheehan, who has been elected as the new chair of our board. As a member of the board over the past 10 years, Kevin has been instrumental in shaping our success and I will look forward to his continued guidance. He will be working closely with Steve to execute a smooth transition between now and the June annual meeting. I'll close today by reiterating how encouraged we are by the momentum we've seen during these early months of 2021. We've achieved enterprise-level EBITDA profitability for two consecutive months, in January and February, and believe we'll do so for the first quarter of 2021. a significant milestone in our recovery. We are laser-focused on our strategic plan and the execution of enhanced business model with the potential to generate approximately $30 million of incremental EBITDA as annual revenues recover to 2019 levels. We are optimistic that these efforts, along with the reigning COVID challenges, will drive the D&D brand to new heights over time And I am extremely proud of every member of the D&D team for their tenacity and their creativity that they've displayed over the past year through an unprecedented challenge. We are moving forward together confidently, excited to reopen the remainder of our stores, and to thrive once again as a leader in the combined dining and entertainment space. Now we'd like to open the call to your questions. James, you can open it up.