Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q2 2023 Earnings Call Transcript September 6, 2023
Dave & Buster’s Entertainment, Inc. misses on earnings expectations. Reported EPS is $0.6 EPS, expectations were $0.94.
Operator: Good day, and welcome to the Dave & Buster’s Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I’d now like to turn the conference over to Cory Hatton, Vice President of Investor Relations and Treasurer. Please go ahead.
Cory Hatton: Thank you, operator, and welcome to everyone on the line. Leading today’s call will be Chris Morris, our Chief Executive Officer; and Mike Quartieri, our Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster’s Entertainment, Inc. and is copyrighted. Before we begin the discussion on our company’s second quarter 2023 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 measure contained in our earnings announcement released this afternoon. With that, it is my pleasure to turn the call over to Chris.
Chris Morris: All right. Thank you, Cory. Good afternoon, everyone. Thank you for joining our call today. We are pleased to report record results for the second quarter of fiscal 2023. We generated revenue of $542 million and adjusted EBITDA of $140 million resulting in an adjusted EBITDA margin of 25.9% for the quarter. In a few moments, Mike will walk you through the details of our financial performance. As we take a step back and reflect on where we are, we remain as confident as ever in our ability to execute against the numerous and sizable growth initiatives that we laid out in our recent Investor Day presentation, and which we have already begun implementing. During the quarter, we are pleased that we continue to open new stores at a highly attractive returns on invested capital that we have diligently managed our cost structure and continue to expand our adjusted EBITDA margins, and that our exceptional team has done a phenomenal job navigating our highly profitable and resilient business model through a dynamic period in our economy and against strong top-line comparisons versus 2022.
We are laser focused on optimizing our business and growing revenue, adjusted EBITDA and cash flow. We remain committed to our long-term target of adjusted EBITDA of $1 billion and are making considerable progress towards that goal. I’d like to take a moment to update you on each of the six key organic growth initiatives. First, marketing authorization. As a reminder, we strongly believe that there is a meaningful opportunity to grow traffic by making sure we get the right message to the right people at the right time. To that end, we have successfully completed our investment in the marketing technology infrastructure and are now in the process of building the digital marketing engine that we expect will begin bearing fruit in the early part of fiscal 2024.
These tools will play a key role in developing a more personalized approach to marketing through improved targeting and guest engagement. In addition, our loyalty database is now 5.2 million users, up from 4.8 million users last quarter, as our mobile app experience keeps getting better. Continuing to grow our loyalty database will be a key benefit for our top and bottom-line as customers in our loyalty database visit approximately 50% more frequently and spend approximately 15% more when they visit. As part of our broader effort to highlight our superior watch offering and to use the sports calendar to drive visitation, this week, we launched our fall football campaign along with an everyday $5 Bites menu. We’re also bringing back the successful All-You-Can-Eat wings on Mondays and Thursdays, which our guests will particularly enjoy while cheering on their favorite teams.
Second, strategic game pricing. Playing games is at the core of our business model and what we are and will always be most known for as a brand. As highlighted during our Investor Day, we believe there is a significant opportunity to implement a new comprehensive game pricing strategy to drive meaningful additional revenue, adjusted EBITDA and cash flow, while still maintaining our everyday value proposition with game prices still well below our peers. While we require certain investments to fully implement all elements of our new strategy, we are currently unlocking new ways to optimize regional pricing that we expect to have a positive impact in the fourth quarter of 2023 during our key holiday period. Third, improved food and beverage. As a reminder, significant opportunity exists to improve our attachment rate and overall revenue and profits generated by food and beverage business by simplifying our offerings, improving the quality of our offerings, investing in technology to accelerate speed of service and optimizing our labor model.
We recently completed a test of the next phase of our new Dave & Buster’s menu of the future in new hospitality focused service model, which we are pleased to report was successful. During the test, these stores saw a low single digit increase in sales, a 170 basis point improvement in food cost of sales, improved labor costs due to operational efficiency, improved speed of service and OSAT scores. We are on track to launch this phase of our new menu and F&B strategy system-wide by the end of September. Fourth, remodels. We are in the process of modernizing and refreshing the look and feel of our D&B stores, improving the layout to increase traffic and overall productivity, as well as implementing technology to support guest engagement and introducing new entertainment offerings to drive traffic for walk-in and special event business.
I’m pleased to report the successful launch of our first of 12 test remodels, which went live in mid-August, introducing our enhanced entertainment offerings. Although it’s only been three weeks, the new format is being well received by our guests and performing ahead of expectations of a double-digit improvement in comparable store sales growth trends. There will be eight more test remodels coming online in the balance of 2023 with the remaining three in 2024. Once these tests are complete, we will provide more comprehensive financial observations of these test remodels and how these initial results are sharpening our strategy for the planned rollout of the remodel program to the remaining D&B locations in 2024 and beyond. However, you can rest assured that we remain laser focused on generating highly attractive returns on invested capital for the remodels.
Fifth, special events. We continue to believe that there is a significant opportunity to improve execution in our special event business. While we have recovered back to pre-COVID levels on a combined brand basis, we are leveraging the strongest elements of the main event playbook to drive additional sales at Dave & Buster’s, which is still meaningfully below pre-COVID levels. We’ve completed the initial phase of adding sales managers to the stores, which has shown encouraging results. For example, while still in the early innings of the rollout of this initiative, at the stores where we’ve made the changes, we have seen more than double the advance group bookings for Q3 and Q4 on average versus the rest of the system. While we expect significant near term improvements in the special event business, we also expect the introduction of new entertainment offerings in connection with our store remodel program to be a catalyst for our special event business.
Six, technology enablement. At the store level, we are focused on optimizing our current service model and updating our store IT infrastructure, which will lead to vastly improved data and analytics, better guest engagement and improved guest satisfaction. Our technology leaders were hard at work in the quarter, implementing a server tablet solution, selecting our enterprise POS of the future, installing new kiosks and working closely with our entertainment and operations team on our remodels. As with the remodels, we strongly believe these initiatives will lead to additional revenue adjusted EBITDA and we are laser focused on generating an attractive return on the required investment in this area. In aggregate, we are confident our organic growth initiatives will create significant shareholder value over the long-term, and our operational achievements in the quarter are indicative of the progress we’re making towards our goal.
As Mike will discuss in greater detail, our approach to running the business with sharpened cost controls, enabled us to continue to expand our margins, which grew 120 basis points versus 2022, and are now up 230 basis points in the second quarter versus 2019. We continue to find ways to permanently reduce our cost base that will be particularly powerful for cash flow generation as the momentum continues to build as we execute against our long-term strategic plan. In the quarter, we opened two new Dave & Buster’s and one new Main Event. Our strong track record of opening new stores remains intact for fiscal 2023 as we continue to expect a total of 16 new stores this year across both brands. Our new store openings continue to perform exceptionally well and generate strong cash on cash returns.
We are very pleased with the progress being made throughout all areas of the business and have high conviction that our strategic plan will deliver significant shareholder value. Despite the progress we’ve made towards our strategic plan and the demonstrated strength and resiliency of our business model, D&B remains extremely undervalued by the market. To that end, our Board of Directors has approved an increase to our current share repurchase authorization, bringing our current authorization to $200 million. While we continue to prioritize high ROI investments in the business and new stores, we will also continue to opportunistically and aggressively buy back shares when our shares trade materially below our view at fair value. So now let me turn the call over to Mike for a review of our second quarter results.
Mike?
Mike Quartieri: Thanks, Chris. We’re pleased to report strong financial results for the second quarter. We’ve generated second quarter revenue of $542.1 million and adjusted EBITDA of $140.3 million, an increase of 21.3% versus the prior year. Net income in the second quarter totaled $25.9 million or $0.60 per diluted share. We reported $40.9 million of adjusted net income, or $0.94 of adjusted earnings per diluted share, which includes an adjustment for the $11.2 million loss on debt refinancing in the quarter. Reconciliations of these new non-GAAP measures can be found in today’s press release. Pro forma comparable store sales decreased 6.3% versus 2022 as we continue to lap robust prior year period from a top-line perspective.
When we look back at a more normalized level of business, we are up 5.8% versus 2019 on a consolidated basis, led by the continued strength of our entertainment business. Our special events business continues to recover with revenues up 15.6% on a year-over-year basis in the second quarter, and remains close to flat in comparison to pro forma 2019 levels. Our second quarter adjusted EBITDA improved 230 basis points to 25.9% versus 2019. As Chris mentioned, we continue to drive margin in this environment with a laser focus on our cost base, leaving no stone unturned across cost of goods sold, labor, store operating expenses, and G&A. We are confident in the levers that we have to pull in all four of these cost buckets that will result in the annualized run rate cost savings of $40 million to $60 million as we laid out in our Investor Day presentation.
We generated $103.8 million of operating cash flow during the second quarter. Contributing to an ending cash balance of $82.6 million for liquidity of over $572 million when combined with the $490 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the quarter with a total net leverage ratio of 2.1x. Our strong balance sheet, low leverage and superior cash flow profile provides us with the ability to invest in the business to drive profitable growth and continue to return capital to shareholders. As previously disclosed, in the second quarter, we repurchased 2.1 million shares at a total cost of $74.5 million. And after increasing our share repurchase authorization, we currently have $200 million of share repurchase authorization.
Also in the quarter, we opportunistically repriced our credit facility, reducing the spread on our Term Loan B and any future revolver borrowings by 1.25%. Turning to capital spending, we invested a total of $82.6 million in capital additions during the second quarter, opening two new Dave & Buster’s stores and one new Main Event. We’ve already opened one new Dave & Buster’s store during the third quarter of fiscal year 2023 and one new Main Event store as well. Also, as Chris mentioned, we are on track to open a total of 16 new stores and relocate one store across both brands during fiscal year ’23. To summarize, we are pleased with the progress we made in the quarter, strengthening our company’s financial position with the favorable repricing of our Term Loan B, returning capital to shareholders via our share buyback program, and establishing a quantifiable roadmap to execute upon by unveiling our long-term strategic plan at our Investor Day in June.
There are numerous opportunities for us to pursue in the immediate, near-term and long-term, and we remain focused on managing costs to unlock the maximum value of these two great brands and deliver the highest possible returns for our shareholders. Now, operator, please open up the line for questions.
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Q&A Session
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Operator: [Operator Instructions] Today’s first question comes from Jake Bartlett at Truist.
Jake Bartlett: My first is on the three-year plan, the $1 billion in EBITDA that you’re targeting by year three. When you presented that, it was a little — I wasn’t sure what the base year was? I think it was ’22, but you kind of qualify that it depends on the macro environment. So my question is, are you on track with that three-year plan? Has that been pushed out a little bit or should we kind of think about year three as 2025?
Chris Morris: Hey, Jake, this is Chris. As we said during Investor Day, we’re very enthusiastic and confident in our ability to deliver on that plan. The three year timeline that we put out there, what we’ll tell you is that that’s not a fixed timeline. But there’s clearly a path towards $1 billion in EBITDA over the medium term. We haven’t shifted at all our thinking on delivering on the outcome of that plan. But we really want to stay away from putting like a fixed timeline on it. It was merely just simply saying, look, there’s incredible opportunity in this business. We feel confident that we can deliver on that in the medium-term. In terms that might shift a month or two or six months or two, or even a year or two, depending on things that are happening in the external environment.
But make no mistake, the opportunity is there. In terms of the progress that we’ve made, I’ll tell you that we are right in line with our plan. We’re very encouraged with the results that we’re seeing with respect to the items that we’ve implemented thus far. Investor Day was June 13th, so we’re only just a few months into this. But from what we’re seeing right now, we’re even more confident than we were three months ago, and where we’re going and what our team’s focused on and our ability to drive meaningful value over the medium term.
Jake Bartlett: And my next question is just on the trajectory of the business. Obviously, we’re — the comps versus ’19 have been decelerating pretty consistently now for the last four quarters. What is your confidence that that’s going to stabilize, the excess demand essentially that was kind of — that occurred post-COVID has worked its way out and that you should see a reacceleration? And I guess within that question, are you seeing that yet? Is there any — as you look at the trends within the quarter, the quarter to date, any indication that you’re seeing that stabilization, even outside of some of the initiatives that seem really promising coming up in the next quarter or two?
Chris Morris: Yes. Let me — I’ll start, and then I’ll turn it over to Mike to just to add some additional color, commentary. What you’re going to consistently hear from us, this is the team that’s very much focused on delivering on that long-term plan, and that’s where our focus is. We’re excited about what we’re doing. As I said, there’s a clear line of sight in our ability to deliver on that plan over the long run. And so we don’t really get caught up in month to month trends. What I’ll tell you is, it’s like — look, the comparisons to the prior year are challenging. Last year at this point in time, we benefited from the post-COVID surge along with all of our peers. And as we’re lapping that period of time on a year-over-year basis, comps are challenging.
We’re pleased that compared to 2019, we’re still up 6% over that comparison. And we’re particularly pleased and proud of the work that our team has done to navigate through this environment and still deliver on the bottom-line. And most importantly, we remain as confident as ever in the initiatives that we outlined during Investor Day and the exciting opportunity in front of us to drive meaningful value.
