Dave & Buster's Entertainment, Inc.

Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment Incorporated Second 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, Christy, and thank you all for joining us today. In addition to Brian and Margo, we also have Brandon Coleman, our Chief Marketing Officer, joining us today. After our prepared comments, we'll be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment Incorporated and is copyrighted. 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 relating 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. In addition, our remarks today will include references to 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'll turn the call over to Brian. Thanks, Scott, and thank you, everyone, for joining us this afternoon. Over the past 18 months, our team has successfully navigated COVID challenges while at the same time accelerated our strategic initiatives. We have had a single goal, to emerge as a stronger, more competitive company. I am pleased to report today that we have accomplished that goal. Our brand is back, and we are stronger than ever. The second quarter results we announced earlier today are compelling proof that this team's extraordinary efforts have succeeded. We achieved record-setting financial performance, reaching new high watermarks on virtually all financial metrics. Second quarter revenue of $378 million was an all-time quarterly high for us, surpassing 2019 by $33 million. Our success was fueled by the return to positive comp sales of 3.6% over Q2 2019 levels. Even more impressive was our strong EBITDA performance. We blew by the $100 million mark for the first time in any quarter in our history. achieving $114 million in EBITDA, up $36 million, or 44% from Q2 of 2019. Our operations team did an outstanding job leveraging new order and pay technologies, adapting our service model, and optimizing costs to deliver our first-ever EBITDA margin to crest 30%, exceeding the 2019 Q2 compare by over 700 basis points. During the quarter, we were also able to bring our two stores in Canada back online, marking the complete reopening of our store base, an important milestone for our company. Last year, when liquidity was our imperative, we successfully rebuilt a strong capital structure bolstered by equity infusion, a new bond offering, and an amended credit facility. We now have a significant flexibility to run our business and invest in our future. With the record-setting operating cash flow generated in Q2, we reduced our net debt outstanding by nearly $90 million, providing us with over $440 million in available liquidity at the end of the quarter. As further evidence of our confidence in the business, we recently announced that we intend to redeem 10% or $55 million of our outstanding bonds using available cash. We have come a very long way in just over a year. These strong results were made possible by an unwavering focus over the past year and a half to accelerate initiatives to make us a stronger company. In our second quarter, we introduced an entirely new menu that broadens our appeal and is easier for our stores to execute. Over the summer, we made a meaningful investment in our entertainment offering with the introduction of seven new games. We also took steps to widen our entertainment lens by offering programmed events in select markets. All early on, we are confident these efforts will broaden our reach and increase visit frequency, and we are accelerating our investment in our entertainment team to bring that to life. We leapfrogged traditional order and pay platforms with the system-wide rollout of our new mobile web-enabled platform. Mobile web adoption has been extremely strong, significantly exceeding our expectations. The majority of our guests now use the technology, and our success on this front has been crucial in facilitating a more efficient operation while also allowing us to deliver a great D&D experience. To solidify our team in a challenging labor environment, we provided temporary pay incentives to our team members this quarter and succeeded in attracting the talent necessary to deliver an outstanding quarter. Under the leadership of CMO Brandon Coleman, who you will hear from in a moment, we onboarded new creatives and media buying agencies and revamped our brand message and media strategy. These changes culminated with a concentrated media investment this summer to relaunch our brand with a new voice, featuring our new menu and games. This was part of our new marketing strategy to shift spending from the shorter periods to increased focus on windows that would have the most impact, and those changes were meaningful. Comp sales were up 7%. In the final eight weeks of Q2, a marked improvement from the first five weeks of the quarter that was down 4%. And despite a few headwinds, we are encouraged that our comp sales for the first five weeks of Q3, including Labor Day, are still up versus 2019, reflecting the strength and the resiliency of our brand. With dramatic improvement in our financial foundation in the first half of this year, we've also begun to rebuild our new store pipeline. With the recent opening of our store in Bellevue, Washington, and one store in Brooklyn, New York planned for Q4, we expect to open four stores in 2021. We plan to open between six to eight stores next year, representing a meaningful acceleration compared to 2021. As we have discussed in the past, right-sizing the store format for the market and sales potential is a priority for us. We are extremely pleased with the performance of our most recent new 18K small format store that opened at the beginning of this year. Our Gainesville, Florida store is the first freestanding small format unit that we have built from the ground up, generating nearly $6 million in revenue during the first half of 2020 alone, absolutely crushing our expectations for revenue, EBITDA, and return on investments. We are encouraged about the efficiency and throughput of this new format and the potential to leverage it in new markets. This quarter's performance proves that our brand is resilient and resonates with guests of all ages. We are thrilled with our record-setting performance and excited about continuing that momentum in the back half of the year. At this time, I'm going to ask Scott to cover our second quarter results in a little bit more detail and share some insights on our expectations for the remainder of the year. After that, our COO, Mark O'Hanning, and CMO, Brandon Coleman, will cover in more detail the operating and marketing innovations we've implemented this summer, as well as what we have planned for the second half. Scott? Thanks, Brian. Our second quarter results reflect a significant acceleration in sales and profitability for Dave & Buster's, which generated impressive cash flow for the business. We ended the quarter with all 142 stores open, including one new store that opened during the quarter. With all of our stores open, we are seeing strong demand for our brand, including rapid sales growth in our California stores as they ramped up during the quarter. With record sales and strong execution of our margin-enhancing initiatives, we were able to produce record profitability for the quarter. Total revenues of $378 million were an all-time record and included a 3.6% increase in comparable store sales compared with the second quarter of 2019. Average weekly sales were $208,000 per week for the quarter versus $206,000 for the second quarter of 2019. In terms of category sales, amusements were up 17% comp, while the F&B business was down 17% compared with 2019. For amusements, the increase was driven mostly by an increase in per-cap spending. For F&B, the decline was mainly due to a decline in units sold, partially offset by a slight increase in per-cap spending. Sequentially, units versus 2019 improved significantly for both F&B and amusements compared with the first quarter. Comparable store sales showed acceleration during the quarter compared to 2019, with comps of negative 4% through the first five weeks of the quarter and plus 7% for the last eight weeks of the quarter. This sequential improvement was driven by improved traffic trends, which was partially driven by more effective marketing and the ramping up of our California stores. Regarding sales mix, amusement's another with 67% of total sales for the quarter versus 60% in the second quarter of 2019, driven by fuel discounts and a shift to higher denomination power cars. EBITDA for the quarter was an all-time record of $114 million, worth 30.2% of sales, and represented a 729 basis point improvement compared with the same period in 2019. The improved performance was driven by a higher amusement's mix, leverage on labor costs due to lower staffing levels and our lean operating model, a $3 million reduction in pre-opening costs, and operating expense leverage from higher sales. Adjusted EBITDA for the quarter was $119 million, or 31.6% of sales, representing a 660 basis point improvement compared with the same period in 2019. Net income increased 63% from 2019 to $53 million in the quarter, resulting in a 19% increase in EPS to $1.07 per diluted share. These improved operating results produced $121 million in operating cash flow during the quarter, and we ended the quarter with $108 million in cash and zero outstanding on our revolving credit facility. Total long-term debt stood at $550 million at the end of the quarter, consisting of our senior secured notes maturing in 2025. As part of our capital allocation strategy and to capitalize on our current cash position, we recently made the decision to redeem $55 million of our senior secured notes using a redemption option in our InVenture agreement. As background, we may redeem up to 10% of the notes at a redemption price of 103% of the principal amount during the first 12 months after issue. We may redeem another 10% of the notes during the second 12 months after issuance, which begins at the end of October. By executing the 10% redemption, we will pay a 1.7 million premium over the principal amount to redeem the notes, but we'll save 4.2 million in annualized interest. Additionally, at the end of the quarter, we had approximately 41 million of negotiated rent deferrals on the balance sheet. We expect to pay back approximately 14 million of deferred rent throughout the remainder of fiscal 2021, 22 million in fiscal 2022, and the remainder thereafter. Regarding tax refunds, Due to current IRS backlogs, we now expect a delay in receiving approximately $60 million in refunds from CARES Act legislation and the carryback of 2020 losses. We now expect to receive these refunds in mid to late 2022. Turning to capital spending, we opened one new store in the second quarter and adjusted a total of $39 million in capital additions net of tenant allowances. Subsequent to the end of the quarter, we opened one additional store at the end of August. In the fourth quarter, we plan to open one additional new store and relocate an existing store to finish the year with four new openings and one relocation, which will bring us to 144 stores by the end of the fiscal year. Overall, we are very pleased with the second quarter results and the sound financial footing we have established going into the back half of the year. Turning to our outlook, I would like to offer some insights for the third quarter of fiscal 2021. As a housekeeping note, I would like to provide some details on reporting and guidance going forward. Regarding our profitability metrics, we will place more emphasis on adjusted EBITDA versus EBITDA going forward. This is to be responsive to investors who prefer this metric as it better represents the true normalized earnings power of the business. Regarding guidance, as the business continues to normalize, we will be reverting back to annual guidance starting in 2022 with updates provided quarterly. Regarding recent trends, comp sales for the first five weeks, including Labor Day, have been over 1% compared to 2019, reflecting broad-based strength despite negative impacts due to changes in school calendars, unfavorable weather, and COVID resurgence in our Southeast markets. Based on these current trends, we expect total third-quarter comparable store sales to be approximately in line with the quarter-to-date trends compared with the third quarter in 2019. We expect third quarter EBITDA to be significantly higher than third quarter 2019, but with some slight moderation compared with the percentage increase in the second quarter. This reflects margin improvement that exceeds our 200 basis points target, which is driven by improvements in gross margin, payroll and benefits, and pre-opening expenses. Keep in mind that the level of these benefits may change over time as we continue to work towards more normalized operations. From a CapEx perspective, we are updating our guidance and plan to invest $95 to $100 million in 2021, which compares the prior guidance of $55 to $70 million. Based on our current financial position, we are taking the opportunity to invest an additional $14 million in our stores to accelerate the rollout of new technology, upgrade our Wi-Fi capability, and upgrade equipment in select stores. These upgrades will improve the guest experience and will accelerate our technology deployment to further drive strong returns. Additionally, we are taking the opportunity to accelerate development on several of our pipeline stores to help maximize their impact in 2022. In summary, our team has done an outstanding job during the first half, fully reopening all of our stores while implementing a number of impactful initiatives that have enhanced profitability and cash flow. We're well positioned for the second half and are positioning the company for further growth in 2022 while closely managing the ongoing effects of the pandemic. With that, I'll turn it over to Margo.

Thank you, Scott. I echo the appreciation for our team's tremendous second quarter efforts. We believe the new menu, games, and service model initiatives that we've been implementing over the past nine months and the concentrated focus that we have put against streamlining store execution is helping to drive our strong sales and enhanced profitability. Let's start by talking about our menu initiatives. Its design simplifies operational execution and provides our guests with quality ingredients and enhanced flavor profiles. Since deployment in May, half of our top 10 best sellers are either new or refreshed options. In addition, we conducted an extensive menu pricing test that gave us confidence to take a price increase effective late August to offset inflation pressure. Based on our guest visitation rate, we'll continue to watch the menu performance to gain a full understanding of its impact on sales and the guest experience over a longer timeframe. On the beverage front, we completed our beverage analysis and are now using the research to evolve our beverage offering. The good news here is that the research data indicates our beverage menu is attractive to our guests and simply needs some targeted refinements to expand its appeal and reach. Our goal is to launch a freshly curated beverage menu in Q4 to improve relevance and attachment in order to drive beverage sales. Next, I want to talk about our entertainment initiative, which is among some of the most important work we are doing. In Q2, we launched several tests to determine the entertainment appeal of programming. We successfully hosted themed trivia nights with geeks who drink, These events are easy to execute and they're also easy to market to our guests. We intend to rapidly expand these tests to more markets this fall based on its early success. Additionally, we continue to refine our live music test. These are highly engaging events. They're held during the week and they bring guests into our stores to have fun during what is typically considered off-peak times. This fall, we'll introduce additional entertainment formats incorporating music, film content, and live interaction. And of course, it would not be fall without talking about fall football. This year, we'll be amplifying the D&B football experience. From an entertainment standpoint, we'll lean heavily into our custom video content with new proprietary video elements to help our guests pregame before kickoff with an added integration to D&B's live radio format. In key markets, we'll introduce live hosts, to amplify select football games. These performers will engage guests before, during, and after the football game with activities and prize giveaways. Our intention is to use this program model throughout the year and expand it further in 2022 as we continue to look for ways to give the guests more reasons to come visit DMV. Now let's turn to staffing. The labor market continues to be challenging. In Q2, we made a temporary investment in hiring programs and retention incentives, and we gained significant staffing traction, which bolstered our staffing levels for what was a very busy summer. Q3 will bring a seasonal drop that, combined with our new technology tools, will put less pressure on staffing. This will give us time to lift our sights to the holiday season. Our intention is to selectively extend aspects of the staffing program as we need to ensure that we have the team in place to bring in the critical Q4 holiday season. Our brand-wide rollout of the new service model has been completed, and it provides a more integrated in-store guest experience. The new service model combines tablets and a mobile web platform to enable a completely contactless order pay experience. From full deployment to date, over 50% of our guest chats are utilizing this mobile channel. This technology will help transform our business model, and it allows us to operate more efficiently. Due to the strong adoption by our guests, we are continuing our test of a completely self-serve mobile web-enabled guest experience in two of our stores. On a prior earnings call, Brian mentioned that we implemented a new guest feedback tool, Medallia. It's a comprehensive tool that gathers in-store and social feedback to identify trends to improve the offering and the execution. Given the challenging environment, we're really pleased with the summer results, and we'll use these guest insights to continuously improve our in-store experience. To wrap up, I want to recognize and thank our entire team for the exceptional performance this quarter. During my store visits, I see team members working hard to deliver a fun experience to the guests. And here at our home office, this team has worked to provide the critical support needed to set our stores up for a great summer. We're energized by our record-setting results this quarter, and we'd love to carry this momentum forward. And with that, I'll turn the call over to you, Brandon.