Good afternoon, and welcome to the Dave & Buster's Entertainment, Incorporated Fourth Quarter and Fiscal Year End 2022 Conference Call. All participants will be in listen-only mode. [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.

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, Incorporated and is copyrighted. Before we begin the discussion on our company's fourth quarter and fiscal year-end 2022 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, which is also available on our website. Also, pro forma financials, including Main Event for the trailing 4 quarters ended January 29, 2023, are available at the bottom of the Events and Presentations section of our IR website. Now it is my pleasure to turn the call over to Chris.

Thank you, Cory. Good afternoon, everyone, and thank you for joining our call today. We are pleased to report another strong quarter of financial results to mark our fiscal year-end driven by strong comparable walk-in sales growth and the tailwind of our Special Events business continuing its recovery toward pre-pandemic norms. As a testament to the strength as well as the confidence we have in our future growth initiatives, our Board authorized a share repurchase program of $100 million. Fresh off the heels of our Annual General Managers Conference, our exceptional operators and support center employees are motivated and energized to deliver on our goals we've set for the business in 2023 and beyond to realize our full potential. We look forward to sharing our progress with you throughout the course of the year as we continue to drive value creation for our stakeholders. On our last call, we discussed our three current focus areas, one, effectively managing the merger integration, two, managing sales and profitability in the near term to offset the ongoing inflationary pressure in our business, and three, long-term strategic planning. I'm pleased to report we have made meaningful progress in all three areas. Starting with our merger integration. Our team has continued their exceptional work on this important focus area. We have now implemented all the initiatives necessary to achieve $25 million of annualized cost synergies, exceeding our original target by $5 million. We are extremely pleased that we were able to achieve these synergies and do so ahead of schedule. Next, our teams have continued to work on mitigating inflationary pressures with thoughtful pricing and increased operating efficiencies. We rolled out the first phase of this work, which enabled us to expand store operating margins to 30% in the fourth quarter, a 50-basis point improvement…

Thanks, Chris. We're pleased with the financial results for the fourth quarter. We generated record revenue of $564 million and produced a record $138 million of adjusted EBITDA in the fourth quarter. Aligning with guidance provided by the SEC, you will notice in our release that we changed our definition of adjusted EBITDA. We generally believe adjusted EBITDA should reflect the normalized earnings power of the business. As a result, in addition to certain one-time nonrecurring and noncash items, our definition of adjusted EBITDA historically excluded preopening expenses because preopening expenses were not associated with the earnings of the existing base of stores. While we still believe exclusion of preopening expenses from adjusted EBITDA reflects the true normalized earnings power of the existing base of stores, for certain regulatory reasons, we will no longer be adding it back to adjusted EBITDA. Please note that we have added credit adjusted EBITDA to our disclosures along with the appropriate reconciliations to provide readers with the relevant measure for our compliance with our debt covenants. Credit adjusted EBITDA includes the add back of preopening expenses along with other items as defined in our credit agreement. Under our new definition, we produced a 24.5% adjusted EBITDA margin in the fourth quarter which represents an increase of 300 basis points above 2019. For comparability, under our prior definition, which included the add-back of preopening expenses, adjusted EBITDA margin would have been 25.2% for the quarter, a 280 basis points above 2019 levels. As Chris mentioned, we have successfully achieved our annual synergy target of $25 million from the combination with Main Event. While we completed this ahead of schedule, we remain laser-focused on driving operational excellence, continuous improvement and additional cost savings, all of which are ingrained in what we do every day at Dave…

Thank you. [Operator Instructions]. Our first question comes from Andy Barish from Jefferies. Please go ahead.

Hey, good afternoon, guys. Can you give us a little sense just how the fourth quarter unfolded? Obviously, starting out November will be up 3% with some calendar shift. And then, just some color in terms of where you saw upside versus your expectations and the strength kind of continuing into the spring here?

Yes, Andy. So to start with, as you noted, November seemed to be a little lighter than what we were expected. December played out as we were expecting, given the calendar shift. And that was some of the commentary we made on the prior call, when you looked at the number of days leading up on the Special Event business prior to the Christmas holiday. Having the Christmas holiday on the Saturday and Sunday, provided a bit of a headwind, I would say on a comparability perspective for December. But we knew all of that would come through in early January as we turned the calendar given the timing of the holiday winter break for students. So from that perspective, we saw great results in January. February continued that momentum. And we've been pretty much relatively flat to this very low single-digit number that we've seen on the quarter-to-date basis through the end of last week.

And then, the only thing, I'll just add a couple of comments to that, Andy, by the way. So as Mike mentioned, when we started the quarter, we communicated to the Street that there is a mismatch in weeks relative to the timing of Special Events. And so the one thing I'd point out is that the fourth quarter played out with respect to that shift, the fourth quarter played out exactly the way we anticipated. And so at the time of the call, we had a lot of confidence in our business. We saw a lot of momentum and even though the beginning of the quarter started off slow, we could tell that it was due to those calendar shifts. And that momentum, when you look through that shift, there was pretty steady momentum throughout the entire quarter. And things did kind of pick up a little bit towards the end of the quarter. Where we sit today, it's a very similar story. There's just a lot of noise in our numbers as we're starting this quarter just with time in the spring breaks and lapping of omicron, the return coming out of omicron last year, and there's just a lot of noise in the numbers early into Q1. But looking through all of that noise, we still have just tremendous confidence in this business. We're excited about the momentum that we've created. We feel very good about where we're going in our long-term strategies, and we feel great about things.

Thanks for the color, Chris. And one quick follow-up just on the unit opening cadence [indiscernible] to start the year is fantastic. How should we think about the other 12 that are too open for the rest of the year?

Yes. I think when you think about it, 6 in the first half of the year, 10 in the back half with 4 being in Q1. We'll have 2 planned store openings in Q2 and then the remaining 10 stores will be equally split between Q3 and Q4 at 5 apiece, included in Q4, we'll also have the relocation of the Vernon Hills store.

Our next question comes from Jeff Farmer from Gordon Haskett. Please go ahead.

Thank you, and good afternoon. So just a little bit of a follow-up on some of Andy's conversation, but flat to down low single digits quarter-to-date same-store sales. Sort of given where the comparisons are for the balance of the quarter, you called out some other noise. What ultimately does that mean for Q1 same-store sales? So just to give you a little bit of context, Street's looking for a low 2% comp. Is that in play based on what you guys have already seen and understanding what the comparisons are for the balance of the quarter?

Well, I'll take that. This is Chris. As you know, we don't provide quarterly comp store sales guidance. But here's what I can tell you is, there's tremendous momentum in this business where we continue to be very pleased with what we see in our trends. We've looked at our sales figures to try to understand if there's anything more than just timing of spring breaks and lapping a difficult comparison. We're not seeing anything that would suggest that there's a significant change in the fundamentals of this business. And so our best guess is where things are going to play out is, we think that when we get through this tough comparison that the business is going to continue to perform nicely in the near-term and over the long-term. But at this point in time, it's just really hard to get a beat on it just because the sales numbers are so choppy with the tough comparisons and the shift in spring breaks. And so there's just a little bit of uncertainty around exactly what that baseline is going to be. But based on everything that we know and everything that we see, we still feel very good.

Okay. And the follow-up is mid-May Virtual Investor Day. So what investors are looking for? You gave us the unit development guidance for '23. It doesn't sound like there's anything beyond that, that you're offering today. But when we get to this mid-May Investor Day, should investors be expecting to get a little bit more fulsome level or degree of sort of either short-term or longer-term guidance across unit same-store sales margin structure, et cetera?

Yes. Our approach is to provide reasonable guardrails for what we're going to call a near-term, long-term kind of view of the company. What we really want to be accomplishing with Investor Day is to really lay out the strategy and how we view the company on a longer-term basis. And we realize that I know you guys all have models, you all are desperately looking for a specific data point, but the reality of it is we have a great business that has some near-term opportunities in front of us that we are executing against. And we feel like there's tremendous opportunity on the upside on a mid- to longer-term basis and that's what we want to be able to highlight for you guys.

Our next question comes from Chris O'Cull from Stifel. Please go ahead.

Hi. Good afternoon, guys. Just as a follow-up, Mike or Chris, can you help us understand how traffic has trended in the quarter-to-date period as you kind of lap the more normalized comparisons or maybe at least give us what the check or pricing has been for this period?

Sure. So look, we've always kind of given the overall perspective of the company. We haven't gotten into the details of traffic versus price. We see overall strength in the business, and it's relative against the omicron comp. Things are moving in tandem. So it's not that we're seeing a dramatic drop-off in traffic, say, like at the lower end consumer. We're just not seeing that at this point in time. So from our perspective, the business is performing and call it, weekly noise that we see is sporadic and relatively, I'm going to say, consistent in that, it's across the board and not tied to any one specific component of the business itself.

Okay. And then I had a question about development. I know you guys are clearly accelerating unit development here. So can you walk us through the unit economics or how they've changed today relative to maybe 2019? And what I'd like to understand is, what are you targeting for average unit volumes, margin and maybe investment costs today versus what the company was doing in 2019, 2018, something like that?

Yes, I think that type of color will be something that we'll cover at Investor Day. But when we do look at just the overall business itself on the landscape around development, we don't see any diminishment in the return profile that we have today versus what we had in '19 or what we had 10 years prior to that. What I'll call inflationary concerns you would have from a construction perspective, are more than offset by the inflationary pricing that you've been able to build into the market.

Our next question comes from Andrew Strelzik from BMO. Please go ahead.

Hey, good afternoon. Maybe I'll just round out some of the near-term sales questions here. I'm curious if you could parse out, are you seeing any change in spend levels either on reloads or in F&B that may be or if you're not seeing that, maybe that contributes to maybe some of your -- confidence and can you just comment on that would be great.

Yes. I'll start and then I'll let Chris chime in if he wants to add anything else. The one thing we are seeing and highlighted this before, is as Special Events become a bigger component of the business and we are seeing that return back to 2019 levels. That piece of business skews higher to the Food and Beverage side of the business than it does to the Amusement. So we are seeing an uptick in Food and Beverage as a percentage of the overall revenues. As you know that Food and Beverage revenue does have a slightly lower gross margin than Amusement. So just the pure mix shift will put a little bit of pressure on the overall margin on a status quo basis. But given the operational team that we have in place and the things that Tony are doing, we're more than offsetting that impact in our numbers.

Got it. Okay. That's helpful. Thank you. And then, maybe a bigger picture, longer-term one. You talked about some of the operational improvements that you're implementing in this next phase, potentially unlocking this new hospitality model, which is I guess, you said more like a longer-term opportunity. Can you just describe just how you envision that playing out? I mean what is the hospitality model in your mind look like over time, what are you trying to achieve?

Yes. Sure, Andrew. I'd be happy to do that. What I'll do is I'll give you just a general sense, I'll give you more color on how we're thinking about it. But certainly, on May 16, during the Investor Day, this is an area where we'll spend some considerable time on. And so you'll be able to -- I'll touch it again on May 16, you'll hear directly from our Chief Operating Officer, and you'll hear from our Chief Information Officer. But essentially, we have very large assets, so 30,000 to 40,000 square feet, in some cases, 50,000 square feet, and we do a considerable amount of volume in a very short period of time. And so when you think about the hospitality model, I think in our business, we have to think about it certainly differently than what a restaurant would have to. And so we've really challenged ourselves how do we make sure that we create an environment where we're able to manage guest flow, all that traffic through our center and all of our different venues as efficiently as possible and in a way where we're catering to the guest needs every step of the way. And so we intend to work closely with our operators and with our head of technology on developing proprietary tools to be able to stay engaged with the guest throughout the entire guest journey. And so again, we'll walk you through this in a lot more details. This is work that we were already starting on the Main Event side that we've carried over into Dave & Busters. But it's that intersection of the human service model and the technology model where we're maniacally focused on enabling the hospitality experience. And so we think that there's just tremendous upside as we develop this. And we're able to stay more engaged with the guests throughout every step of that journey, then that gives us the advantage of being able to collect a tremendous amount of data on those particular guests to be able to tailorize our service approach just to meet their specific needs. So it will help us on managing throughput that will help us on growing average guest check. It will help us on building more engagement with our guests, which should lead to more loyalty, more frequency and an overall better, enhanced experience. So we have an entire plan that's kind of staged year-by-year on how all this is going to unfold.

[Operator Instructions]. Our next question comes from Brian Vaccaro from Raymond James. Please go ahead.

Hi. Thanks and good evening. Just a quick clarification on the quarter-to-date. It sounds like qualitatively; you don't believe you've seen a change in behavior or that the underlying is relatively stable. Correct me if I heard that incorrectly. But does that mean that your comps versus '19 were similar in February and March at each brand?

The overall trend in the business that we saw versus '19 continues and if there was anything, I would say, of note, of any 1 of the 2 brands, dramatically underperforming or overperforming that was driving the overall results, we would specifically call that out to you guys.

Okay. And then you mentioned spring break shifts. In your view, how do those shifts impact sales in March and April, does that help March and hurt April or maybe it's the other way around?

Yes, I can take that. So a couple of things. So I mentioned that it's really tough to get a beat on sales right now. And it's a combination of the timing of calendar mismatches as well as lapping the return to business coming out of omicron last year. And so as a result, it's just created a lot of volatilities in the numbers week to week. There are certain spring breaks that are different all over the country. And so there are some markets where April is going to benefit, and March was negative. And so once we get through that period of time, we're going to have a much better feel for what the underlying trend is in the business. So it's just a little choppy right now. It's tough to get a read on it. And that's the disadvantage of looking at our business over a very short period of time. And so we'd like to keep our focus more on the longer-term aspect. We've just pulled together two very strong quarters. We feel very good about our performance. We still feel very good about the underlying trends in the business. We think coming out of this period of mismatch that we're going to continue to grow the business, but time will tell. We'll be in a better position in our Investor Day on May 16 because we'll be over that period of mismatch. And if there's something that's material that we should be reporting, then we can use that as an opportunity to update you. But our plan as of right now, we believe that the business is going to work its way through this mismatch and we're going to get back to growing the business the way that we have been. We take a lot of comfort that we continue to do really well against 2019. And so we think that's still a measure of health of this business. And so that gives us confidence as well.

Plus, I'll just add to the upside. As we continue to see our Special Event business drive, that just provides more fuel for, I would say, any type of protection if there's a downturn from a walk-in perspective, and it just provides further fuel, if there's not, for the business to expand even further.

Our next question comes from Jake Bartlett from Truist Securities. Please go ahead.

Great. Thanks for taking my questions. Unfortunately, I'm going to start with another one about the first quarter trends and I apologize for that. But I think one thing that investors are looking at is April of last year was very strong. I think it was 21% comp. I think February was flat. March was up 12%. So it looks like April is difficult. So we kind of wonder where it goes from here, that typical compare. My question is, is the marketing plan similar? So I think April was really boosted by the Eat & Play coming back by kind of peaking the peak with advertising. Now you have the Slam Dunk meal. Should we think about what you have planned for April and what you did last year is similar so that we shouldn't see kind of -- it's not as difficult a compare to speak as one might think otherwise?

Yes, I think that's very fair. The structure of the deal is essentially the same structure. So Eat & Play Combo, as I said in my prepared remarks, and if you've been following the company for a long period of time, you already know this, Eat & Play Combo is that steady Eddie value-driven promotion that has worked well for the brand over time when used correctly. What we've learned, not only in our own research, but going back and looking at how it's performed over the years is that, that message can -- there's a certain amount of fatigue that comes when the company uses that message over and over again. And so the message of Eat & Play Combo is better served whenever we believe it's better served when we do it once a year. But we still wanted to take advantage of the structure of that combining food and entertainment for a great value. And so what you're seeing us do this quarter is just simply introduce that with a fresh seasonal-driven message. And at the same time, leveraging the strength of the basketball season and continue to build awareness around all the great assets that we have on the watch side of our business, which we know, again, from all of our research that there's a big opportunity to build more awareness around that side of the business. But the structure of the deal is essentially the same. When we looked at the results last quarter, when we looked at the results in April last year of Eat & Play Combo, we actually don't see that big of a difference between how it performed in April versus how it performed in November. The business overall did much better in April, but that was also a period of time when we were coming out of omicron, there was a lot of pent-up demand, and we believe that, that really fueled our business. And so we don't think the promotion was as big of a driver last year. But we're keeping an eye on it week-to-week, and we always have the ability to pivot, if necessary. But as of right now, that's our plan. We feel good about it. And again, we'll know more next time we give you an update.

Great. That's helpful. And I wanted to switch to some questions on margins. You talked about inflationary pressures. Could you just tell us how much was food inflation, Food and Beverage inflation? How much was labor inflation in '22? And then, what are your expectations for '23?

Yes. I'll take that one. So when you're looking at the -- I'm going to start with labor inflation. We are seeing some relief there. I think when you look at the hourly wages quarter sequential, they've stayed relatively flat. So we feel that we've got that stabilized. And same with the commodities, we've actually seen a nice decline. So when you're looking at, call it, quarter sequential inflation, we went from about 17% versus 21% in Q2, 17% came down to 9% in Q3. And in Q4, we saw that come down to roughly 4%. So the work that the procurement team has done in combination with this as well as the synergies that we were able to achieve, we've been able to get commodity inflation down. The biggest component of the commodity inflation that we've seen relief on is really around proteins, which is really, call it, both chicken breast and chicken wings.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Morris, Chief Executive Officer for any closing remarks.

All right. Thank you, operator. In closing, we would like to again commend our team for the exceptional results they continue to produce at our stores across the country and for all the hard work that was done at our Dallas support center to integrate the Main Event business and optimize the infrastructure to support the bright future of these two phenomenal brands. Thank you all for joining. We look forward to keeping you apprised of our continued progress on growth initiatives and revealing the more details about our long-term strategic plan at our Investor Day in May. Thank you very much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.