Dave & Buster's Entertainment, Inc.

Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment Incorporated First Quarter 2021 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.

Thank you, operator, and thank you for joining us today. After a prepared comment, we'll be happy to take your questions. I'd like to remind you that this call is being recorded on behalf of Dave & Buster Entertainment Incorporated and is copyrighted. Before we begin our discussion on the conference 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 fact. Any of these items should be considered forward-looking statements relating to future events within the meeting 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.datainvestors.com under the Investor Relations section. In addition, our remarks today will include references to financial measures that are not defined under generally accepting 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'll turn the call over to Brian. Well, thank you, Scott. Good afternoon, everyone, and thank you for joining our call today. Scott's first quarter results we announced earlier today provide solid evidence of the strength of the D&B brand and another great example of the outstanding commitment of the entire D&B team. I continue to be inspired by what we've accomplished together over the past year to strengthen the company on many fronts. Scott will provide a review of our first quarter financial performance in a few minutes, but I want to call out a few of the highlights. After closing out fiscal 2020 with accelerating momentum, our sales trend strengthened further during the first quarter. Despite continuing to operate with capacity and other operating restrictions, we saw a significant improvement in demand across our store base, including at our recently reopened New York and California stores. The reopening of our store base, coupled with stimulus payments, expanding vaccinations, and excellent operational execution drove significant revenue recovery. We generated $265 million in total sales, surpassing the top end of our expected range for the quarter, and established a new high watermark in our post-COVID sales recovery. Encouragingly, We exited the quarter with total comp sales down only 12% in April compared to 2019 with close to half of our comp stores exceeding their respective 2019 performance levels. This strong sales rebound combined with our lean operating model produced outstanding flow-through during the quarter, driving $72 million in EBITDA, only 19% below the first quarter of 2019, and reflecting 280 basis points of EBITDA margin improvement. Through the first five weeks of the second quarter, comp sales continued to accelerate, down just 4%, and total sales are running slightly ahead of 2019 levels. This trend, coupled with our summer initiatives, points to a promising second quarter. As of today, we have all stores back online except for our two Canadian stores that we anticipate will open late in the second quarter. Clearly, we've come a long way over the past year. We are optimistic about our future as we implement strategic initiatives to modernize and enhance our food and beverage menu, service model, entertainment offerings, and guest engagement. With these initiatives and the steps we took during 2020 to bolster our financial foundation, we are now a more competitive, more guest-centric company, and positioned to be a more profitable business as our sales fully recover. At this time, I'm going to ask Scott to cover the results of our first quarter and to share some insights on our expectations for the second quarter. After that, Margo will join me to provide an update on our 2021 strategic plan. Scott? Thanks, Ryan. The results of the first quarter marked a major inflection point for Dave and Buster's as we have begun to move beyond the significant impacts of the pandemic. We ended the quarter with 138 open stores, including one new store that opened during the quarter. With most of our stores open since mid-April, our business is showing strong momentum, generating revenues well above expectations for the quarter and extending into the first five weeks of the second quarter. We've also achieved a dramatic turnaround in profitability, driven by our lean operating model and the extraordinary efforts by our entire operations and support team. For the first quarter, total revenues of $265 million reflected a 35% decline in comparable store sales compared with the first quarter of 2019. In terms of category sales, the F&B business was down 49% comp, while amusements were down 25%. Amusements outperformed mainly due to a higher average spend for power court purchases. Throughout the quarter, comparable store sales showed steady improvement compared to 2019, and were negative 59% in February, negative 31% in March, and negative 12% in April. This sequential improvement was driven by the reopening of our stores and improving comp trends in our previously reopened stores. As a reminder, we will continue to report comparable store sales against 2019, as we believe this is a more meaningful comparison. Regarding sales next, Amusements were 67.5% of total sales for the quarter versus 58.5% in the first quarter of 2019, driven primarily by a purposeful reduction in discounting and a shift to higher denomination power cuts. Even up in the quarter was 72.1 million, or 27.2% of sales, and represented a 280 basis point improvement compared with the same period in 2019. The improved performance was driven by a higher amusements mix strong sales leverage on labor costs due to lower staffing levels, and reduced marketing and pre-opening costs. From a store perspective, 84% of our stores posted positive even up to the quarter, and 90% of stores did so in April. The company also returned to profitability for the first time since the onset of the pandemic, posting net income of $19.6 million, or 40 cents per deleted share. These improved operating results also produced $77 million of property and cash flow during the quarter, of which $60 million was used to completely pay down our revolving credit facility. We ended the quarter with $20 million in cash and $340 million of availability under our revolving credit facility, net of $150 million minimum liquidity covenant and $10 million in letters of credit. Total long-term debt stood at $550 million at the end of the quarter, consisting of our senior secured notes maturing in 2025. Additionally, at the end of the quarter, we had paid down all but $3 million of our deferred vendor payables balance and had approximately $45 million of negotiated rent deferrals on the balance sheet. We expect to pay back approximately $17 million of deferred rent throughout the remainder of fiscal 2021, $25 million in fiscal 2022, and the remainder thereafter. In addition, we received a tax refund of approximately $8 million in the first quarter, resulting from CARES Act legislation, and paid $22 million in semiannual interest on our senior secured notes. We expect to receive an additional tax refund of $3 million in fiscal 2021 resulting from CARES Act legislation and expect to receive a refund of over $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 opened one new store in the first quarter and adjusted a total of $12 million and capital additions net of tenant allowances. We expect to open one additional new store in each of the remaining three quarters of the fiscal year. As we look forward to the remainder of the year, we are very encouraged with our progress and are very grateful for our outstanding operations team and supporting functions that have driven our success. Turning to our outlook, I'd like to offer some insights for the second quarter of fiscal 2021. For the first five weeks of the second quarter, we've continued to see strong demand for our brand, with comp sales down 4% compared to 2019. Two of our Canadian stores have yet to reopen. Based on current trends and barring any significant setbacks, we expect total second quarter revenues to be in the range of $335 million to $350 million, which is comparable to 2019. We expect EBITDA margins to decline compared to the first quarter due to higher commodity costs, higher labor and seasonal marketing costs, and a moderation of our amusement sales mix. Importantly, we expect EBITDA dollars to be in line with 2019 levels, a major milestone for our brand. From a CapEx perspective, we are reiterating our plan to invest $65 to $70 million in CapEx for fiscal 2021, with approximately 49% dedicated to new stores and other operating initiatives, 19% for gains, and 32% for maintenance needs. Finally, I'd like to reiterate our commitment to achieve 200 basis points of EBITDA market improvement as we reach 2019 AUV levels, which will be largely driven by structural changes in our hourly labor model, management labor, and G&A spending. With that, I'll turn it back over to Brian and Margo to discuss our strategic initiatives. Well, thanks, Scott. We're very encouraged by the first quarter results and the continuing early second quarter momentum that Scott just covered. Over the past several quarters, we've outlined our strategic initiatives to enhance the guest experience, and we've made great progress implementing them, which has set us up for what we think is going to be a really strong season for our brand. I'm going to turn the call over to Margaret to bring you up to date on the progress on several of those initiatives. and then I'll follow up with some additional commentary. Here's Margo.

Thank you, Brian, and thanks, everyone, for joining us this afternoon. When we talked at the end of March, we were already making progress on our key initiatives. I'm excited about the positive momentum and appreciate the opportunity to give you an update today. The overarching objective of our food and service model initiative is to efficiently drive increased sales, improve the guest experience, and enhance our long-term profitability. On the food front, we have completed the transition to a new menu with the Food Identity Inspired American Kitchen. This new menu offers 28 items, representing 33% fewer items than were on our menu prior to COVID-19. While it is still early, dishes like the IPA Fish and Chips, Hawaiian Chicken Sandwich, and Mushroom Stout Burger are big sellers on the menu and clearly resonating with our guests. As we move into summer, we'll be evaluating the performance of the fully deployed menu to better understand its longer-term impact on sales and on the guest experience. This summer, our guests will be tempted with seasonal drinks in the form of LTOs, limited time offers. Our summer LTO lineup includes elderflower tonics and bomb pop margaritas. Starting in September, we'll be offering our guests a heartier selection of fruit and beverage LTOs that pair well for both fall football and Oktoberfest. We plan to use our LTO strategy to take advantage of the freshness of seasonal product to give our guests a constant stream of amazing new culinary options to drive food attachment and sales. Additionally, we have completed the brand-wide rollout of our high-speed ovens and kitchen management system upgrades. both aimed at simplifying our operations. These back-of-the-house initiatives make it easier for our teams to execute at a high level by reducing cook times by 40% on a third of the menu and also by facilitating a more seamless flow of food in the kitchen. Our research shows that the D&D Guest defines food quality by food that is served hot and fast. The combination of our new menu, high-speed ovens, and new kitchen management system set our teams up to deliver a great dining experience to our guests. We expect our new menu to drive an improved guest experience and increase food attachment rates, all aimed towards increasing food and beverage sales. Next, we'll move our attention to the beverage menu. The same disciplined approach and extensive guest research will be used to evolve our beverage offering, with the goal of launching a freshly curated beverage menu early in Q4 to improve relevance and attachment to dry beverage sales. We need great people in order to fully bring the fun to life at D&B, and the labor market that we are facing today is the most challenging one that I have seen in my career. To improve our staffing levels for the demand that we expect this summer, we have earmarked an estimated $5 million, largely in Q2, for hiring programs and retention incentives. This is a significant investment that's been thoughtfully placed to help us attract the talent that we need to capitalize on the upcoming summer season. Another key initiative is to deliver a more integrated experience by evolving our service model to give the guests more control over their in-store experience. This involves deploying a combination of a new service model, tablets, and a mobile web platform to enable a completely contactless order pay experience. The stores operating on this platform have been able to expand the size of server sections and reduce staffing levels to be more efficient. We have over half of our stores on this new model and will have brand-wide deployment next month. Our rolling four-week average for mobile ordering adoption is over 40%. Due to the strong adoption by our guests, we are also testing a completely self-serve, mobile web-enabled guest experience in two stores. We believe this technology will help us transform our business model, allow us to operate more efficiently, and grow our culture of social fun by freeing up our team members to focus on the guest touch points that matter most. As I wrap up, I want to thank our team, the very heart of DMV, Our strong first quarter performance is a result of every team member embracing change and looking for how they can bring the fun back to our guests. D&D has an exceptionally talented operating team, and I'm very grateful for the resilience and passion for our brand. With that, I'm going to turn the call back over to you, Brian.