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.

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.

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…

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…

[Operator Instructions] Today's first question comes from Jake Bartlett at Truist.

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?

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.

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?

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.

And to add on to that. When you look back a year ago, we comped plus 17.5% in Q3. And so that is a huge number to overlap. And so when you go back versus '22, yes, it's a tough comp. We look back at '19 and we see still the growth in the business that we wanted to see, which is that 2% type growth on an annual basis going forward, which is a more normalized environment that you would expect to see in businesses like ours. What has us at this point, we can't control the macroeconomic factors that are driving traffic into those effect. What we do control is what happens in the four walls of our business. And that's the type of attitude and the -- I'd say -- I call it bringing it every day to control those four wall EBITDA margins. And that's the value that you're seeing in that EBITDA margin today, even in this type of environment where we can expand on those EBITDA margins. The actions that we're taking today around that are permanent in nature and will be able to benefit us even further as traffic and economy returns back to more normalized levels.

Our next question today comes from Jeff Farmer of Gordon Haskett.

Just wanted to start with following up on Jake's question. So is there anything you guys can share as it relates to how the Q2 same-store sales sort of finished relative to your internal expectations? Anything that caught you guys off guard either positively or negatively?

No, I think as you look at the back end of Q2 and what we're seeing today, it's a relatively consistent level of comp store sales. Unfortunately, it's a decline, but those levels are pretty consistent across the board. We evaluate each of the different demographics within our business, I'd say demographics of our consumer, but also from a geographic perspective. And at this point we're not seeing any one particular group that's underperforming the rest of the demographic area as well as the geography of those types of results.

That is helpful. And then it looks like you guys saw roughly 250 basis points of food and beverage cost favorability year-over-year. The question is -- so a lot of things can impact that, so either cost initiatives, menu pricing, commodity inflation. Can you help us understand what drove that level of 250 basis points, which was more than doubled what you saw in Q1? And then as we move forward, how should we be thinking about that? So just understanding the drivers of that cost favorability and how we should be thinking about it moving over the next two quarters?

Yes, so when you look at the improvement in the cost of goods sold line for food and beverage, there's a couple of aspects. One, we haven't done anything from a pricing perspective between Q1 and Q2. So pricing there is consistent. The benefit comes from continued work from a synergy perspective, as we've gone through kind of the second round of contracts where contracts that were fixed in nature, needed to run their term and then we were able to then consolidate the procurement volumes and go after that from a cost base perspective. As Chris spoke to during his prepared remarks, we're testing new menu items that yield a cost benefit to us from a cost of goods sold perspective. And then lastly, as we always look for more improvement from prep time and things of that effect, the ability from a commodity perspective, we are seeing relative consistency commodities quarter-to-quarter. So we're benefiting on a commodity basis relatively, I'd say straightforward from Q1 at about 3% improvement on a year-over-year basis.

And our next question today comes from Brian Vaccaro with Raymond James.

Just wanted to ask about the comps again and just sort of the cadence itself through the quarter. Obviously comps down in the 60s now, and I'm -- just want to get your perspective on what you think is driving that sequential softness and just sort of the healthier consumer. I think you mentioned it's not concentrated in any area, but is there anything you're seeing day part or weekday versus weekend or F&B versus amusements? Just any incremental context on what you think is driving those that sequential softening?

Yes, Brian, I will take that and then let to wrap it up. The first thing I'll say is, I'll repeat, what I said to Jake earlier is, last year part of what we're dealing with is just a tough comparison to the prior year, just with the post-COVID surge and our performance last year benefited from that just as our peer group did. And so there is a bit of a tough comparison. And as I said, when we compare ourselves to 2019, first, we're pleased with the growth from 2019; secondly, there was really no material trend in the business throughout the quarter. It was fairly consistent. As we always do, we've analyzed the heck out of our business, slicing and dice it every single way. What I'll tell you is, there was nothing meaningful that came out of that. We think that it was just overall relative to [2002], there was just a decline. So there's not one thing that we could really point to that would suggest that it's related to a shift in consumer behavior in terms of how they're trading at Dave & Buster's or anything along those lines.

I think one thing to add on that, what we are seeing is for the customers that are coming in, they are spending at consistent levels of what we historically have seen in that post-COVID environment. So when you look at our mix between -- of revenues between amusement and food and beverage, we're still kind of holding at that one-third, two-thirds with the two-thirds being on the amusement side.

And just on the initiatives to optimize your pricing on the games, could you elaborate on the changes that you're making that will have an impact beginning in the fourth quarter, just some of the specifics there? And any ballpark of how much of a pricing benefit you expect that to yield starting in the fourth quarter? And then also I think you were thinking about and maybe testing, raising the buy-in, the minimum buy-in level, maybe from $15 to $20 if memory serves. Have you made a decision on that front?

Yes. So I'll give you the two main takeaways. One, towards the end of the quarter, so there was really no benefit in Q2. We did adjust the rate card, which is the buy-in at the kiosk. When you look at our pricing before, the low end entry point was $15, and then it went from $15 to $25 to $35 to $45. We adjusted those rate cards to actually start with $20. And then it goes from $20 to $30 to $40 to $50. The dollar value per chip that the customer receives is consistent. So it really wasn't much of a, call it a price change as it was a change in just the buy-in amount at the minimum level, and then it went up through there. The other aspect of what we're looking to accomplish is, as we've talked before, one of the strategic unlocks in pricing is the ability to alter pricing between geographic areas. So no different than when you look at food and beverage, costs in major metropolitan areas usually cost more from a price point than in more regional markets or smaller towns. Right now our limitation is that all pricing for all games is consistent across the entire system. We're now able to unlock that and be able to put regional pricing in place, which will start going into test in the next couple of weeks. One of the key things we want to do though in doing such is make sure that we maintain the value of our product offering in relation to our peers. So, from that respect, we haven't communicated nor would we, what we think that estimated growth would be in Q4, but we would expect there to be something there.

And then just the last one for me, if I could, I appreciate the update you provided on certain initiatives that you laid out to the Analyst Day, but I know it's early days, but can you elaborate on the customer response you've seen in the Friendswood remodel? Any specifics on how the social base are performing or other specific changes that you made that are driving the increase most meaningfully? Thank you.

Yes, happy to do so. I mean, it's -- we're very pleased with the guest response in the community on all aspects of the remodel to be perfectly frank. As we said in our prepared remarks, it's only three weeks, it's only one store. And so we're trying to be guarded in our enthusiasm. But, over the last three weeks, that particular unit has outperformed our expectations. So we're feeling very good about what we'll be able to do with remodels. And we feel very good about expanding our entertainment offering and doing it in a way that we think is at the heart and center of what a D&B guest is looking for. So, so far so good.

And our next question today comes from Andrew Strelzik with BMO.

My first one, appreciating certainly that you can't affect the macro environment. I guess it's a question on how you're thinking about balancing the multi-year strategic plan and implementation of that versus like, flexibility on the near end opportunities. And so I guess, sounds like there's more value on the F&B side, some of the other changes that you talked about, some more marketing around football. I mean, do you think that that addresses kind of what…

Andrew, we lost you.

Andrew, we're having a connection problem.

Yes, we lost you right after you said -- do you mind just starting from the beginning?

Yes. Can you hear me now? I just want to make sure you can hear me.

Yes. No, we got you.

Okay, great. All right. I guess the question really is how are you -- like, what is the flexibility of the -- of the plan in the near-term? As you kind of navigate, what is a macro that you cannot control? Do you think about the pricing opportunities differently? Are there any other programs that you can implement that you're thinking about to be adaptable to the current macro?

Yes. Well, the short answer is, we're very mindful of how we navigate the business during this period of time and still deliver on our long-term goals. A big part of that is how we're managing the cost structure. And as I said a minute ago, I'm very proud of all the work that our team is doing to manage the middle of the P&L. And when, we can navigate through this type of environment and still deliver on the bottom-line, that provides just a tremendous amount of flexibility and gives us confidence to continue to invest in the right areas of the business. With all that said, though, we're moving forward with eyes wide open and being very mindful of not getting too far ahead of ourselves on investment spending and ensuring that we're balancing all sides of the business. I don't see -- at this point in time, we're not seeing anything that would suggest that we need to rethink our strategic priorities. We're still just as committed as we were June 13th on the areas that we outlined with you. Where we see some momentum in the business is on the food and beverage changes that we're making. And so the space that we tested and that we're going to be rolling out in September, we feel great about the results that we're driving. And that's a very thoughtful approach to food and beverage. It's not just recipes, it's how we deliver on that menu at the store level and drive a great guest experience. That's something that we're going to continue to push forward on, the enhanced service model to be able to promote that phenomenal food and beverage offering; and to drive attach, that's something that we continue to be focused on. Special events is an area. So all the areas that we outlined at this point in time, we're still moving forward with the same amount of enthusiasm and the same commitment, but obviously, we're doing it in a very careful way just to make sure we don't get ahead of ourselves.

I just wanted to quickly, as a second question, ask about some of the new stores that you guys have opened and kind of you sounded pretty excited about the return profile and the performance of the new stores in this environment. I'm just curious, kind of any other color that you can share, how those are tracking versus other prior classes, et cetera, would be glasses?

No, I'll just say, what we said is, I mean, we're consistently getting phenomenal returns. This is -- we've got a great business with great margins and a great business model that delivers very strong cash on cash returns. And we're pleased with the economics of our most recent new store openings. And so -- but we're going to continue to make new unit openings a priority in our capital allocation.

[Operator Instructions] Our next question comes from Dennis Geiger, UBS.

I'm wondering if you could talk a little bit more about the menu enhancements or the menu of the future, which sounds particularly interesting. Could you share sort of approximately how many stores were in that test? Anything else sort of on customer feedback scores to share, which I guess sounds good. And then just as a quick reminder that's rolling out across the system by the end of this month, so did I catch that correctly? Thank you.

Yes. You caught that correctly. So let me step back. So in Investor Day, we said improving food and beverage is one of our six growth initiatives and specifically grown F&B attach. That's a multi-phased -- or our approach to delivering on those outcomes, is a multi-phase approach. What we tested, and we tested it in 10 locations, was the second phase of this multi-phased approach. But through this phase, it's been highly impactful and done by design, what we intended to do was, first let's remove unnecessary operating complexity. Because we want -- for us to deliver a consistently high quality product, we want to set our operators up for success and we want to invest labor in the right areas that's going to lead to quality and enhanced guest experience. So we intentionally removed operating complexity. Everything that we're doing is anchored in deep research, and so we spent a lot of time understanding how our guests view our F&B offering and where the gaps are. And through that research, we felt like that there were some areas on the menu that either weren't necessary, our guests -- there was no loyalty to those items based on our research or we were under-delivering on the execution. And so we redesigned the menu in an effort to close that gap. That was a second piece that we did. Third is, there were certain areas in our execution that we felt like that were driving up food costs without really adding value to satisfaction. And so part of what we aim to do was to remove, reduce that added cost to our food cost, when it wasn't necessary. And so there were some steps that we're doing that added unnecessary ingredient costs that really didn't make a difference. And so we changed those. So all of those were in our phase 2. And as you can see in the results in that 10 unit tests, we're very pleased. We kind of hit on all marks and the next phase will be launched -- so to roll this out across the system, it takes time. And so we're being thoughtful about it. We roll out phase 2 the end of September, and then phase 3 will be in February next year. And at that point in time, phase 3 will include additional innovation. We'll really start to push the envelope on new products, will be very intentional about in-store marketing. And at the same time, we'll be rolling out an enhanced service model, given our operators, the tools that they need to really deliver in a big way. So it's fairly -- it's thoughtful and strategic and multi-step. So we're pleased.

Just one more. Wanted just to ask a little more on promotions and marketing campaigns going forward over the coming quarters. And you highlighted some as it relates to, for the football season, which sound compelling. But can you talk maybe a little more about, at a high-level, at least about perhaps what the next 12 months may look like in thinking about promotions and, and campaigns relative to historical? Maybe you don't want to say too much for competitive reasons, but just in thinking about where food costs are, et cetera, and maybe what that allows you to do, from a promotional standpoint. Just curious if anything additional to share there on the go forward?

Nothing to share at this point in time. We're still in the process of finalizing our marketing calendar for next year. And so, our team is very focused on building out an exciting marketing calendar. And so, more to come on that, but nothing to share at this point in time. The calendar -- the football campaign that we just launched this week, we're pretty excited about that. One, it just gives us more opportunity to highlight the great sports watch offer that we have in the marketplace. Number two is from our research, we know that the consumer is gravitating to value-driven messages. And so based on our concept testing, we feel like the $5 Bite message is a message that's going to resonate very well. And then the rolling out All-You-Can-Eat wings, we went back and looked at time, look at what -- the last time we did this and we talked to our operators and we're pretty encouraged about what we're doing on All-You-Can-Eat wings, let’s go around it, it appeared to be a nice traffic mover in the past. And what we've done is we've retooled that to be even more effective. So again, just working closely with our operators to make sure we're setting them up for success. So, we like the message, we like the marketing plan for, for the remainder of this year and we're pretty optimistic.

And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any final remarks.

Okay. All right. Thank you very much operator. In closing, we'd like to commend our team for the exceptional results they continue to produce across our growing portfolio of Dave & Buster's and Main Event stores. Thank you all for joining. We look forward to speaking with you again next quarter and keeping you apprised of our continued progress on our strategic initiatives. Have a great day.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may not select your lines and have a wonderful day.