Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q3 2023 Earnings Call Transcript

Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q3 2023 Earnings Call Transcript December 5, 2023

Dave & Buster’s Entertainment, Inc. beats earnings expectations. Reported EPS is $0.01, expectations were $-0.22.

Operator: Good day, and welcome to the Dave & Buster’s Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cory Hatton, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

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 third 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 fact. 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, and thank you for joining our call today. In our third quarter of fiscal 2023, we generated revenue of $467 million and adjusted EBITDA of $82 million, both of which are slightly below the third quarter of fiscal ’22 and but meaningfully above the third quarter of 2019 even after adjusting for the acquisition of Main Event. We are operating in a unique and complex macroeconomic environment as we lap challenging comparisons to the prior year, driven by robust post-COVID demand. Despite these dynamics, I am proud that due to the efforts of our talented and dedicated team as well as the strength and resiliency of our business model, year-to-date in 2023, we have grown both revenue and adjusted EBITDA and have expanded adjusted EBITDA margins relative to the same period in fiscal 2022 on a pro forma basis.

We’d also like to highlight that year-to-date, our revenue and adjusted EBITDA are also up meaningfully relative to 2019 even after adjusting for the acquisition of Main Event, and our adjusted EBITDA margins are up 390 basis points relative to 2019, nearly double the previously communicated goal of 200 basis point margin improvement. Additionally, we are pleased to report that during the quarter, we have made significant progress against our key growth initiatives. We will provide further detail in a moment, but on the organic growth front, we have seen meaningful success in the test we have implemented in our marketing, pricing, food and beverage, remodels and special event initiatives, which we will be rolling out across the broader portfolio in the coming weeks and months, in which we expect will lead to a substantial improvement in revenue, profitability and cash flow.

As it relates to cost, we have maintained a relentless focus on finding efficiencies and have successfully reduced our recurring cost base. Furthermore, we have continued to open new stores at a highly attractive returns on investment and have continued to opportunistically return capital to shareholders in a highly accretive manner. We remain as confident as ever in the $1 billion adjusted EBITDA target we indicated during Investor Day and remain laser-focused on delivering that result in the coming years. I’d like to take a moment to go into more detail on the progress on our 6 key organic growth initiatives. First, marketing optimization. We believe there is a huge opportunity to improve both conversion and guest frequency by making sure we get the right message to the right people at the right time.

During the quarter, we made significant progress towards that goal. Through targeted investments in our new marketing technology infrastructure, we are building out our digital marketing engine, which we remain confident will begin bearing fruit in the early part of fiscal 2024. With a particular focus on quick wins, we have already launched pilots across both owned and paid channels designed to provide a specific data-driven learnings on how to effectively target both known and unknown guess. That will enable us to engage with our guests more effectively and efficiently with personalized communications. We will scale the learnings from the initial pilots and additional tests scheduled for the fourth quarter to inform our digital strategy efforts in 2024.

Ultimately, this digital marketing engine will help us acquire more high-value guest, an increased frequency as well as lifetime value from our existing guests by better leveraging our data and technology to increase personalization and enhance the guest experience. We already know the immense value of getting this right. As previously disclosed, guests in our loyalty database, which is now 5.4 million users, already visit over 50% more frequently and spend approximately 15% more on each visit versus non-loyalty guests. Second, strategic game pricing. We historically have not had a robust games pricing strategy. As game prices were stagnant for decades and game prices were also consistent across all regions nationwide, despite obviously different economic conditions in different parts of the country.

We believe there is a significant opportunity to grow same-store sales by strategically increasing game prices while still maintaining our strong value proposition. During the quarter, we initiated certain technology investments to facilitate our new gaming system, which will give us our desired capabilities to optimize the price of our games. In advance of implementing the new system, we have been testing a number of strategies to unlock a portion of the pricing opportunity in certain areas within our current system. These tests have shown encouraging results, which we will continue to fine-tune ahead of rolling out across the broader portfolio in the coming weeks and months. Third, improved food and beverage. We’ve talked a lot about the substantial improvement — or I’m sorry, the substantial opportunity we see to improve the overall quality of our F&B offering.

During the last quarter, we spoke about the multiphase approach we are taking to roll out the D&B menu of the future. We also told you about the success we saw during the initial test phase, Phase 2, which was designed with a sharp focus on operational execution by removing unnecessary complexity in the back of the house and improving speed of service to improve overall food quality and drive more throughput at peak. We are pleased to report that we launched Phase 2 system-wide on September 25, and it has had a positive and an immediate impact. In only 5 short weeks of contribution to the third quarter, the Phase 2 menu drove an approximately 5% increase in food and beverage revenue per check, an almost 100 basis point improvement in F&B COGS, all while improving the speed of service and overall food quality of the guest dining experience.

Simultaneous with the go-live of Phase 2, we started testing Phase 2 of our D&B menu of the future in 10 stores, that assuming success, we would plan to launch system-wide in April of 2024. Phase 3 is particularly exciting for us as it is designed with the objective to further increase F&B sales through targeted culinary innovation around our appetizers, bowls, desserts and sides, that aligns with our new hospitality model and better meets the need states of our entertainment-oriented guests. Already in Phase 3 testing, we are seeing incremental improvement in food check, overall satisfaction scores and F&B attach rates above and beyond the favorable Phase 2 results. Fourth, remodels. While we believe our current stores deliver a very high-quality experience to our guests, we believe there is significant scope to remodel our store base as the majority of our boxes today essentially have the same look, feel layout and offerings as they did more than a decade ago.

After significant research and analysis, we have designed a remodel program that not only approves the physical appearance of our stores, but also represents the culmination of an interrelated strategic reset in how we will run our business more efficiently and better meet the need states of our guests. Specifically, our remodel program was designed to accomplish the following: grow overall revenue through the introduction of disruptive entertainment product news; improved F&B sales through: one, a reconfigured dining room, improving operational execution; and two, an elevated and relevant new design. Grow special event sales through the introduction of more group-related entertainment options, improved guest engagement and gather important guest data analytics through the introduction of a digital guest platform, and finally, improve brand relevancy and attempt to return through a fresh, modern look and feel.

During the last call, we had highlighted encouraging results from the first few weeks of the initial remodel test of our store in Friendswood, Texas. While still early and still just one store, we are pleased to report that the encouraging financial results we saw from our Friendswood store have not only continued but improved over the last few weeks and have exceeded our expectations, driving a double-digit sales uplift compared to the prior year and a more than 30% sales uplift compared to 2019. In addition to driving significant overall sales growth, our food and beverage mix is up nearly a full percentage point, special event sales are up over 45%. Net Promoter Scores are up 15%. Our loyalty membership has increased at a faster rate than the rest of the system, and we now have important guest data on thousands of guests through our digital guest engagement platform.

Notably, based on what we are seeing, we are highly confident this remodel is on pace to hit or exceed our target return threshold. And we expect to value-engineer future remodels to have even better ROIs. Given the initial encouraging results, we’ve instructed our development team to put us in the position to meaningfully accelerate the overall pace of remodels to the extent that results for future remodels remain consistent with what we’ve seen so far. As of now, we plan to complete 8 additional remodels in the fourth quarter of 2023 and 3 additional remodels in early fiscal 2024. Additionally, we have already begun permitting a significant number of additional remodel sites for fiscal 2024 and assuming the success of additional test remodels, we’ll be in a position to complete a total of 40 to 45 remodels by the end of fiscal 2024, with the majority of the remaining D&B system remodeled by 2025 and 2026.

The upcoming remodel test results will continue to formulate our go-forward plan with a strict stage gate process to ensure achievement of our target return on capital thresholds for all remodel capital. Fifth, special events. We continue to reinvigorate and put additional resources behind our special event business, which has allowed us to take a more aggressive approach to outbound prospecting at the Dave & Buster’s brand. We are already seeing dividends in the 20 stores where we embedded the dedicated sales manager earlier this year, as they are pacing 80% higher in terms of special event upsell revenue growth in the stores without dedicated sales managers. We have implemented several additional items at our special events product offering that are empowering our sales teams to drive more incremental revenue.

Our holiday showcase events where we demonstrate our superior special events offerings to groups, both virtually and in person, had nearly double the attendance of the prior year. In addition, our new SMS launch to engage with our special event customers will have a large impact on conversion and lead to additional repeat business. All of this provides significant momentum in the fourth quarter, where we expect to eclipse pre-pandemic levels and have already booked as many $10,000-plus events for the quarter as we did in the entire fourth quarter of 2019. Sixth, technology enablement. We are powering the growth of all strategic initiatives through an optimized service model, enterprise game ecosystem, new store IT infrastructure and improved data analytics.

At the beginning of November, we completed the domestic rollout of OneDine server tablets, which enable our guest-facing team members to execute ordering and the closing out of transactions from the palm of their hands. We are on track to have 61 D&B stores with updated IT infrastructure by the end of the year, with the remainder completed in 2024. With our adoption of a new ERP, we have streamlined the integration of our back office systems to maximize real-time actionable insights for our teams and we are driving innovation with new footfall traffic technology that is being tested in 3 locations with the anticipation of a system-wide rollout in 2024. We strongly believe these initiatives will lead to additional revenue and adjusted EBITDA, and we are laser-focused on generating an attractive return on the required investments in this area.

In aggregate, we are confident these organic growth initiatives are prime to drive our business forward and create significant shareholder value. We have conviction that we are focused in the right areas, making the right investments and that our recent operational achievements are indicative of the progress we are making towards this long-term goal. Our team of talented general managers and managing partners are doing a phenomenal job driving down labor costs while improving overall satisfaction scores by implementing efficiencies in our back of house operations to reduce hours and redeploying a portion of those hours to front of house labor, particularly during peak times. We are confident that these efforts, combined with the ongoing benefit of synergies, a dramatically improved supply chain driving lower cost of goods sold and additional progress we are making in all areas of the business to sustainably lower this company’s cost base are creating a far more efficient and profitable organization over time.

Furthermore, we continue to successfully open new stores. We opened 3 stores in the third quarter, and we are on pace to open 6 additional stores in the fourth quarter, 3 of which have already been opened. This brings us to an expected total of 16 new stores in fiscal 2023. We are very pleased with the performance of our new stores, which continue to generate highly attractive returns on investment. On the international front, with our previously announced franchise partnership in the Middle East, India and Australia, we look forward to breaking ground on 4 international locations in fiscal 2024 with more announcements to come as we finalize partnership agreements in additional international geographies. Acting upon our confidence in our long-term plan, our consistently strong free cash flow profile, our desire to return capital to shareholders and our conviction in the dislocation of our valuation in the market, we repurchased $100 million worth of our shares in the third quarter and have now bought back 17.5% of our shares outstanding year-to-date in 2023.

While we will continue to prioritize high return on investments in this business, in building new stores that attracted cash on cash returns, we will also continue to opportunistically and aggressively buy back shares when our shares trade materially below our view of fair value. So with that, now let me turn the call over to Mike to review our third quarter results.

Michael Quartieri: Thanks, Chris. We are pleased to report financial results for the third quarter, which highlight our resilient business model and strong margin profile. We generated third quarter revenue of $467 million and adjusted EBITDA of $82 million for an A EBITDA margin of 17.5%, a 350 basis point margin expansion versus the same period in 2019. Net loss in the third quarter totaled $5.2 million or $0.12 per diluted share. We reported $400,000 of adjusted net income or $0.01 of adjusted earnings per diluted share. Reconciliations of these non-GAAP financial measures can be found in today’s press release. Pro forma comparable store sales decreased 7.8% versus 2022, as we continue to lap robust prior year periods from a top line perspective.

As a reminder, in the third quarter, we are lapping over a third quarter of 2022 that had a 17.5% comp to 2019. On this same pro forma consolidated basis, when we look back at a more normalized level of business, we were up 8.1% versus the third quarter of 2019, led by the continued strength of our entertainment business. Importantly, this 8.1% growth versus 2019 marks an improvement in trends relative to the second quarter of fiscal ’23, which we interpret as a positive indicator that our most challenging comps are behind us. Our special event business continues to recover with comparable sales up 4.8% on a year-over-year basis in the third quarter and down only 3.5% in comparison to pro forma 2019 levels. As Chris stated earlier, we remain confident that the recovery trend fueled by our strategic investments will continue into the fourth quarter for our special events business, where we expect to exceed 2019 levels on a comp store sales basis.

Despite the comp being down, we generated $70.8 million in operating cash flow during the third quarter, a $2.9 million more than the $67.9 million of operating cash flow generated in the prior year period, contributing to an ending cash balance of $64 million, for total liquidity of $554.2 million when combined with the $490.2 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the quarter with a net total leverage ratio of 2.3x, as defined under our credit agreement. We entered into a sale-leaseback transaction for 4 operating Dave & Buster’s stores in the third quarter, generating proceeds of $85.8 million. Net of sale-leaseback proceeds received, these stores are on track to generate significantly more attractive cash-on-cash returns than the already great returns on our remaining new store portfolio.

We are encouraged by the strong demand for our unique real estate assets and feel the long-term partnerships that we’ve cultivated with our landlords and greater REIT community is a testament to the confidence that they have in our business model and our long-term operational capabilities. Based on our current development pipeline, we anticipate having an additional 4 owned and operating real estate assets by the end of fiscal ’23, with an additional 7 owned real estate assets commencing operations at fiscal ’24, and another 7 coming online in fiscal ’25, for a grand total of 18 locations with owned real estate across both brands over the next 2 fiscal years. We believe these wholly owned assets will provide us with financial flexibility to opportunistically maximize the value of our real estate, providing us with significantly more capital to invest in our business or return to shareholders.

In the third quarter, we repurchased 2.8 million shares at a total cost of $100 million. As Chris mentioned, total share repurchases to date in fiscal ’23 are 8.5 million shares totaling $300 million and representing 17.5% of our shares outstanding at the beginning of the year. We still have $100 million remaining on our board-approved share repurchase program. Turning to capital spending. We invested a net total of $67.4 million in capital additions during the third quarter, opening 2 new Dave & Buster’s and 1 new Main Event location. We have already opened 3 new Dave & Buster’s during the fourth quarter of fiscal ’23, one in Colorado Springs, Colorado, another in Lafayette, Louisiana, and the third in Pooler, Georgia, and we are on track to open the remaining 3 Dave & Buster’s stores in the next few weeks, bringing us to a total of 16 new stores across both brands during fiscal ’23.

To summarize, we took advantage of our strong balance sheet, liquidity and credit profile in the quarter to continue to invest in the business, open new stores, advance our remodel plans entered into a sale leaseback for the 4 D&B properties and returned capital to shareholders via the $100 million share repurchase. We are encouraged by the progress we are making in the quarter, laying the foundation of investments related to our long-term strategic plan and managing costs to continue to drive our recurring cost base lower. The future is bright for this organization, and we feel the actions we are taking today are setting us up for many years of financial success to come. And with that, operator, I’ll open up the line for questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Andy Barish with Jefferies.

Andy Barish: Just trying to get a sense of kind of the underlying comparisons as we move through the fourth quarter, anything we should be aware of with calendar shifts and all that. I know there’s a lot. But I guess the bottom line is, the trends versus ’19, as you talk about sequentially better in the 3Q than the 2Q. Is that something we should expect to continue here as we move into the holiday season and such?

Michael Quartieri: Yes. Look, Andy, I don’t think there’s anything really necessarily around the calendar shift in the fourth quarter. It should be relatively consistent with what you saw last year in fiscal ’22. I think from a trends perspective, Look, the trends relative to ’22 and ’19 have improved throughout the third quarter. Subsequent to the quarter, especially on the walk-in side, trends have continued to improve relative to last year and into 2019. However, most of the quarter is still ahead of us. Just to get perspective, November represents about 25% of our business in the quarter. So with nearly 75% still to go, I think it’s still too early to read too much into that at this point. On a special event side, since the quarter ended, there’s been a bit of a shift in the special events calendar.

So recent trends that we’re seeing over the first 5 weeks of the quarter are meaningless at this point. But any of that calendar shift, gets taken care of in the quarter. So when you’re looking quarter-to-quarter, there is no material shift, as I’ve mentioned before. But all in all, look, given what we’re seeing in the business, we remain confident that what we’re doing is working and that we’re ultimately going to be very successful in driving this business forward.

Chris Morris : And then the one thing I’ll add to that, Andy, is on special events. So as Mike said, there is a calendar shift in special events. However, when we look at our special events business this year, relative to prior year and relative to 2019, on a same week basis. So taking into account that shifts in weeks, we continue to see meaningful progress against where we were in 2019 and certainly 2022. So we feel very good about the effort we’re putting in the special events and the impact that we’re having on the business and feel very good about being in a position to come in significantly ahead of 2019, on special events.

Andy Barish : Got it. Got it. And then just one quick follow-up just to level set on pricing. I mean you laid out in the strategic plan that kind of 3-year games pricing would be about 10%, about 3% annualized. I know that could differ. But how do we think about sort of the rollout right now of changes in tiered pricing by geography and then the potential for dynamic pricing, I guess, in ’24. How should we sort of think about what’s in the numbers now or what you have visibility on for the next year or so?

Michael Quartieri: Yes. So I’ll go through the question, Chris can chime in and add to it. So when we look at the strategic pricing, we’re in the process right now of running tests. And as we evaluate those tests, we’ll make adjustments accordingly. We are very aware that we want to maintain a value proposition, especially at this juncture where the economy is in a whole. However, regardless of that, we still have full conviction that the amounts that we laid out at Investor Day over the long-term period, call it, that 3-year period will be achieved and part of our ongoing process. To get to some of the other components of that pricing increase, we need the new game system to be installed, that is on the road map to be done next year in ’24. So we’ll see more things like you’ve had, like a dynamic pricing, and other intricacies to that effect would probably not hit until very late ’24 or probably into ’25 at this point.

Operator: The next question comes from Jeff Farmer with Gordon Haskett.

Jeff Farmer: A few quick questions. So first would be, just on the loyalty membership understanding how that will be incredibly important in sort of that digital marketing journey. But can you help us understand the efforts that you guys have in place or will have in place to help drive loyalty membership ranks?

Chris Morris : Yes. Sure, Jeff. Well, the first one, we were — when we walk through all the opportunity in marketing optimization, there is — as we’ve said many times, there’s tremendous opportunity to be more effective with our approach to marketing. Within that, we believe strongly that there is incredible opportunity to improve our approach to digital marketing. And that is — the past year, we’ve been hard at work at putting all the foundational building blocks in place, so investing in all the technology that will help us drive digital marketing and to maximize that opportunity. So when we think about the benefit of growing the loyalty database, clearly, there is an opportunity for us to — as the more engaged we are with our guests and the better position, we’re going to be able to deliver a service model for that guest, that’s tailored for the guest and a better position to deliver personalized messages to the guest.

And so we clearly see an opportunity to build out our loyalty platform, and as we do that to improve both sides of it, the service model as well as our marketing performance. The ways that we will do that is, first, we rolled out a mobile app. And so that was step 1. We intend over the next several years, we’re just going to continue to make that app better and better. And so we’ll continue to refine it. And as we do, we’ll be testing and learning. And so we believe that there is incredible opportunity there. Secondly, we believe that there is an opportunity to — and we’ve seen this in our remodeled store to improve our digital guest engagement platform at the store level. And so being very deliberate about how we how we migrate a guess through the entire guest journey and do it in a way to where the mobile app should enhance that guest journey, to enhance the overall service model.