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.

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.

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…

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…

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

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?

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.

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.

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?

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.

The next question comes from Jeff Farmer with Gordon Haskett.

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?

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. And as we focus on enabling a better service model, a better guest experience, we believe that, that will migrate more people into the mobile app, which will then improve our loyalty database platform. So there's a number of different initiatives, both in the app itself as well as the service model and the way we engage with the guest at the store level. But that's just one component of growing, achieving our goals for marketing and optimization and improving our ability to be better -- get better return on our investment dollars for digital marketing.

Okay. That's helpful. And two other hopefully quick ones. First is just on staffing. A lot of that the restaurant companies, admittedly, you guys were not a restaurant company, but have this earnings season pointed to much better staffing levels, much lower turnover, turnover numbers driving some efficiencies, some labor efficiencies. As it relates to your model, anything that you guys can add as it relates to staffing?

No. I think we're seeing the same things. The -- go back a year or 2 years ago where it was difficult to find staffing to get stores even remotely close to par, we're effectively at par and managing our hours accordingly based on business levels.

Okay. And then last one for me. I apologize for being long-winded here. But probably 3 or 4 years ago, arguably pre-COVID, a lot of focus with the Dave & Buster's name as it relates to both cannibalization and competitive encroachment, and some of the cannibalization concern obviously disappears with the Main Event acquisition. But as you're opening up those 16 boxes or stores this year, and you're thinking about both of those 2 metrics or drivers of potential headwinds, cannibalization, competitive encroachment. Any update on how you guys are thinking about that or what you've seen?

That's obviously something that we take a close look at and we can tell you that there's no significant concern at all in cannibalization, we were getting phenomenal returns on the 16 units that we've opened. We feel great about that. I think one of the advantages is now that we designed a smaller prototype, and we're going into -- that's opened the door for markets that we were interested in pursuing because of the level of investment. And so as we've shrunk our prototype, that's provided us access into new markets. And so that's helped cannibalization. But when we've gone through and looked at our performance against the stores nearby, at this point in time, we're not seeing anything at all that's a concern. And we feel very confident in the white space opportunity that we laid out in Investor Day and achieving that without significant cannibalization.

Our next question comes from Brian Mullan with Piper Sandler.

Just a question on the remodel program. You shared some encouraging stats in the prepared remarks. Just a clarification. The pace for next year, specifically, is that accelerated versus your prior thinking? And then if so, any color on what made you decide to accelerate? It sounds like the test is going well, but I would also think you expect it to go well. So just any color would be great.

So the answer is yes. We've now laid out a plan to be able to have -- to be in a position to have 40 to 45 remodel stores done by the end of 2024, and that is an accelerated pace. However, we're moving forward in a very controlled way, and we will only get to 40 to 45 if we continue to see the same level of results. And continue to not only hit, but exceed our return on investment thresholds. And so we're being very controlled. But at the same time, we're wanting to move fast in order to get maximize the opportunity that we see. The reason for that, yes, I mean, you're absolutely right. We did expect the remodel program to be successful. However, we're exceeding our own expectations, and our expectations were pretty high. I think the thing that has us very encouraged is not only the results that we're driving, but the underlying -- the underpinnings of those results, so specifically, what's leading to the improvement in the store. And we can point to the strategic initiatives, the strategic objectives that we had when we designed the remodel. So when we see our overall sales up double digits over prior year and up 30% over 2019, that's encouraging. But when you're -- when you look at it and say we specifically designed the entertainment platform to bring news to the market and provide more variety to the guest. And we're driving more entertainment revenue through that entertainment product. When we specifically designed it to give our sales team more opportunity to drive special events because now we have items that appeal to group activities and our special events are up 45%, that gives us confidence that we're approaching it the right way. We specifically designed the remodel program to drive throughput on the dining room because our belief is one of the reasons why we've seen a decline in our F&B mix is because we haven't set our operators up for success. So we've addressed that in the remodel. We've reconfigured the dining room to set our operators up for success and drive that throughput. And even though we've grown our revenue in a very significant way, our F&B mix, our F&B revenues actually outpaced everything else that we're doing. So that gives us confidence. And then the impact we're having on the guest experience, our Net Promoter Scores are up 15 points. So that just, again, just bolsters our confidence. And so we're feeling very good about what we've been able to achieve in Friendswood, and because we see those data points, we really believe that, that validates our strategies, and that gives us confidence to start to move faster, but at the same time, being very controlled, so we don't get ahead of ourselves on the investment.

Okay. That's great color. And then just a question on G&A. If we make all the adjustments, it seems like the underlying G&A has been running in the $18 million to $20 million range per quarter for the last several quarters. Is that a good run rate to think about for 4Q and into next year? Or are there any investments or some other items you'd want us to be mindful of as we think about next year?

That's about -- $20 million is a fair pacing for where we would expect core G&A to be after you take out those adjustments.

Our next question comes from Brian Vaccaro with Raymond James.

My question, I wanted to circle back on demand. And the percentages can sometimes get a little confusing given the big seasonal swings. I think the comps versus '19 are quite a bit different between the 2 brands. So I guess, how would you characterize what you're seeing in terms of underlying demand in the third quarter maybe compared to the second quarter? Are there any changes in behavior worth noting? Any color on how the quarter progressed or anything else you'd be willing to highlight?

No. I think I'll kind of refer back to an earlier question. I would just go, Q2 to Q3 haven't seen much in the change in demand. Though when we look at Q3, what we have seen starting in October is improved results versus '22 and versus '19, and those improved results have continued into November. But as I said earlier, from a Q4 perspective, given the side of the business that's still to come, with the Christmas holiday, winter break, New Year's, MLK holiday in January, those are all big events for us. And so the vast majority of business from a revenue perspective will take place in the December and January period. So it's a little hard to take into account what we've seen for November to project that out over the rest of the quarter.

Okay. And then, Mike, I think you mentioned the calendar shift on special events sort of in November or in the fourth quarter. Can you just clarify what that shift is?

A lot of events start taking place after the Halloween, call it, holiday or event. And so what happens is versus 2019, our special event calendar is 1 week lagging versus what you had in '19. All of that goes away by the time you get to the Christmas holiday, and all of that has been caught up. So a little bit of a mismatch today versus '19, but that's only on a week-to-week trend basis. For the whole quarter, it's not relevant.

Right. And you had that similar dynamic last year that you highlighted compared to '19, correct?

Correct. There was about 3 days in prior year during that, call it, 15 business days of peak period that we were lapping over which, by the way, is one of the reasons why we don't give this up to date, where we are in the quarter view anymore.

Understood. Okay. And then shifting gears to the games pricing. Could you just share some more on the tests that you've run? How much have you tested in different regions? What have you learned? How has it impacted sales? And sorry if I missed it earlier, but have you made the go decision on most of the system? What's the rollout look like on the strategic gains pricing?

Yes. Look, our test right now is not to get too much in the weeds on an earnings call, but it's roughly about, it's 12 stores. We've looked at various price points within that 12 stores. And we're just continuing to evaluate those results and the impact that would have. And we're looking at it holistically. So it's not only an impact on what your initial card load is, but it's also on the overall revenues, what kind of recharge rate do you have, we'll also look at what the impact on dwell time because we kind of look at all that in its totality to understand the real value that we're driving to the customer as part of that value proposition. So we've got a few more weeks to go in our test, and we would probably look to make some type of pricing adjustment either late into Q1 or into early -- or sorry, late into Q4 or early into Q1.

Okay. Great. That's very helpful. And then last one for me. Just back to the Friendswood remodel. I'm just curious if you could share more on what elements of the remodel you think are driving the uplift any specifics on how the social bays are performing or other new elements worth highlighting?

Sure. No, we're very pleased with social base, both in terms of the entertainment revenue as well as the food and beverage attach that we're able to drive through participants in the base. So very pleased with that. We just rolled out a brand-new attraction in Friendswood, just a couple of weeks ago, and so we'll be interested to see how that performs as well. But in terms of the other items that are driving the performance, it's everything that I just walked through just a minute ago. So we're very pleased with the performance in all areas. So the strategic objectives that I just walked everyone through in every one of those areas, we're making an impact on the business. And so that just gives us a lot of confidence as we move forward that these are results that we fully expect to continue to drive.

Our next question comes from Sharon Zackfia with William Blair.

I apologize if I missed this, but given the accelerated pace of remodels, is there any impact on the '24 development pipeline as a result? And how should we think about CapEx in '24 relative to '23?

Yes. I'll answer that. A, there will be no adjustment to our new store opening pipeline. We're looking at 15 new locations and one remodel which is consistent with the 16 that we've always discussed back at Investor Day and which will be kind of the, I'll call it, the rounded number plus 1, minus 1 as you go through from a year-to-year basis. When we look at the overall CapEx, we laid out in the Investor Day what our CapEx would be, which was roughly about $340 million, that number, I think, would be relatively consistent on a net basis going forward. Obviously, as the remodels adjust from a timing perspective, we feel very confident with our leverage profile right now and the vast amount of liquidity we have, that we're willing to put that to work to yield the returns on an overall basis for the company accordingly.

Great. And then on Phase 3 of the food and beverage plan, does that give back any of the food and beverage savings that you achieved in Phase 2?

No, it actually expands it. The numbers that Chris had alluded to would all be incremental to the savings and improvement that we've seen in Phase 2. So it's just -- basically Phase 1 is one block. Phase 3 is the next building block, and then we continue to innovate beyond that.

Okay. And then last question for me. On the remodel you've done so far, have you done anything to drive traffic to the locations? Or is it the location? Or it's just generally just word of mouth? I mean how is word getting out, that something is new at Dave & Buster's?

So it started with the launch. So on -- as we reopened Friendswood, and keep in mind that the unit was never closed. So we did all of the remodel activity, keeping the unit open. But when we were ready to when the remodel was 100% done, we treated it like a brand-new opening. So we had a VIP party, we invited a lot of very important people in the market in to -- invited a bunch of influencers in to experience their tractions. We did a big community event. And then we've done quite a bit of local store marketing since opening. But I'll tell you, we're not I don't want to leave anyone with the impression that part of the reason we're getting these results is because we've allocated significant incremental marketing dollars to the store because that's not the case. We've supported it with marketing, but it's been more in the ordinary course of business. The difference is now we have news to talk about. And we firmly believe that as we move forward, one of the items that -- one of the ways that we reinvigorate this brand and get people interested in is bringing disruptive product news to the market. And we've got 90% brand awareness. We have strong brand attributes but we haven't really innovated in a really long time. And so as we start to bring news to the market, we think that, that's going to generate trial and a renewed interest. And we believe what we're seeing in Friendswood is a proof point to that.

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

All right. Thank you, operator. In closing, we'd like to commend our team for all the hard work, the behind the success at our growing portfolio of Dave & Buster's, the Main Event stores, we're excited for what lies ahead and are enthusiastic about the direction we are steering this company. So thank you all for joining. Happy holidays. We look forward to speaking with you again in the new year.

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