Good day and welcome to the Dave & Buster's First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Cory Hatton, Vice President, 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 first quarter 2024 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. Also, the presentation we will be referencing today will be made available on the events and presentations page of our Investor Relations website shortly after the conclusion of the call. And with that, it is my pleasure to turn the call over to Chris.

Alright. Thank you, Cory. Good afternoon, everyone and thank you for joining our call today. I will begin with some brief highlights from the quarter, turn it over to Mike to walk through our first quarter financials, and then we will spend the remainder of the call presenting a status update on our strategic growth initiatives as we lap the one-year anniversary of our Investor Day last June. In our first quarter of fiscal 2024, we generated revenue of $588 million and adjusted EBITDA of $159 million. While these top-line results were well below the potential we see for this business with the choppiness we alluded to in February, we are encouraged by more recent improving top and bottom-line trends in May and early June as we have scaled some of our more successful organic growth initiatives. Additionally, during the quarter, we realized more than $10 million of incremental labor and marketing costs associated with the rollout of new initiatives and certain marketing tests, which we do not expect to repeat going forward. We continue to make material progress advancing our key organic growth initiatives. We have seen meaningful success growing our loyalty database through our new marketing engine, highlighting our enhanced food and beverage offering through compelling promotions, refining our games pricing strategy, driving incremental special events, and clear outperformance in our remodel initiative, which we expect would lead to substantial improvement in revenue and profitability over the medium term. We also continue to open new stores at highly attractive returns on our investment and have continued to opportunistically return capital to shareholders via our share repurchase program in a highly accretive manner. I'm proud of the hard work of our dedicated team as we continue to deliver strong operating performance and generate significant free cash flow in the face of a difficult prior year comparison and the complex macroeconomic environment. We remain laser-focused on delivering the $1 billion adjusted EBITDA target in the coming years. I'd now like to turn the call over to Mike to walk you through our first quarter financial results in more detail before turning to the update on our strategic growth initiatives.

Thanks, Chris. We generated first quarter revenue of $588 million and adjusted EBITDA of $159 million for an adjusted EBITDA margin of 27.1%, a 200 basis point margin expansion versus the same [period in] (ph) 2019. As Chris mentioned, adjusted EBITDA in the quarter decreased in part due to $11 million of incremental costs, which we do not expect to repeat, which includes labor and marketing costs related to the rollout of our new menu, our new service model, and the deployment of several new systems, as well as an unsuccessful incremental marketing campaign test. Net income in the first quarter totaled $41 million, or $0.99 per diluted share. We reported $46 million of adjusted net income or $1.12 of adjusted earnings per diluted share. Reconciliations of all non-GAAP financial measures can be found in today's press release. Comparable store sales decreased 5.6% on a same-week basis in the first quarter versus the prior year period. As Chris mentioned, we have seen an improving trend in this important top-line metric through the first five weeks of this quarter. We generated $109 million of operating cash flow during the first quarter, contributing to an ending cash balance of $32 million for total liquidity of $516 million when combined with the $484 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the year or should say the quarter, with a total net leverage ratio of 2.3 times as defined under the credit agreement. We entered into a sale-leaseback agreement for the sale of two additional Dave & Buster's stores that opened in 2023 and anticipate generating $45 million of gross proceeds from the sale in the second quarter. After this sale, we still have four owned and operating real estate assets and two additional…

All right. Thanks, Mike. As I mentioned at the start of the call, tomorrow marks the one-year anniversary of our Investor Day where we first unveiled our medium-term strategic plan. So we thought it was important to provide a more wholesome status update on how we are tracking against this plan. We have made meaningful progress on all of our initiatives, which in their own right are meeting or exceeding expectations. We've also discovered new opportunities and initiatives ranging from F&B realized check to our optimized remodel strategy to additional incremental cost savings. We expect a substantive impact over the next several months from these initiatives scaling and rolling out from the successful test we have run. Consequently, I remain confident in our target of over a billion dollars of adjusted EBITDA. We have made significant strides advancing each of our six key organic growth initiatives. However, as you can see on the right-hand side of the slide, we are still in the early innings of most of these initiatives with meaningful upside to come. Within marketing optimization, which remains our largest revenue and adjusted EBITDA opportunity we began by getting the right team in place and hired a new top-notch CMO in December of 2023. Megan has been a phenomenal -- has been phenomenal. In her first six months, she has embraced our culture and added a significant amount of data-driven rigor to our marketing engine. Under her leadership, we have engaged a new creative agency, meaningfully grown our loyalty program metrics in terms of both members and spend, and substantially improved our customer engagement. Within our strategic game pricing initiative during Q1 2024, we successfully completed the first increase in chip prices in over 20 years with a significant overhaul of our game system. This was just the…

Thank you. We will now begin the question and answer session. [Operator Instructions] The first question comes from Jake Bartlett with Truist Securities. Please go ahead.

Great. Thanks for taking the question. My question was about the traffic. I assume that your pricing increase, your food and beverage, and your game price initiatives should have driven check-up and price up. So to me, it looks like traffic has decelerated. So the question is, what is driving that deceleration? I imagine it's macro pressures, but I'd like to hear from you. It sounds like your initiatives, you're encouraged by your initiatives, yet it does look like traffic is decelerating at this point. So any comment there would be helpful.

Yes, sure, Jake. Well, the first thing I'll tell you is, we don't -- as you know, we don't disclose the breakdown between check and traffic. And that's something that we have -- we haven't done for a very long period of time. And that's just simply a function of traffic is just an estimate in the business. It's not an actual precise number, just given how our stores are constructed and how people use our stores. But with that said, I mean, clearly, macro trends, it's a complex macro environment and it's been challenging. But as we said in our prepared remarks, we do -- we are encouraged by the fact that throughout the quarter, we've seen trends improve, and as our initiatives have started to take hold and those initiatives are a combination of both price and traffic. As our initiatives are starting to take hold, we have seen some improvement in the business, and that gives us a lot of confidence as we move forward knowing that many of the initiatives are just now starting to take hold. I'd also point you to remodels. We're very excited about what we're seeing on our fully programmed remodels and the remodel is really the best representation of our strategic vision of the future because it's everything that we're doing all wrapped into one, along with a brand new product offering and a new look and feel for our stores. And as you heard us say, we're seeing very significant improvement in our -- on our fully programmed remodel stores. We're seeing double-digit sales lift and double-digit traffic growth in those stores. So things are improving. It's a complex macro environment, and so that's creating a little bit of headwinds, but we are very encouraged by where things are going.

Got it. Great. And then just as a follow-up, you mentioned the improvement in the last five weeks, I think particularly in the last several weeks. What do you think is driving that improvement? Do you think it's more -- it's something that you are doing? Maybe in your answer you can address kind of this -- how some of these initiatives are reaching scale. Maybe just explain exactly which initiatives are getting other than having more remodels, but -- the other initiatives, how are they becoming more and more impactful as the year progresses here and maybe as the quarters progressed in the second quarter?

Yes, sure. So during the quarter, we rolled out our brand new menu. At the same time, we rolled out a brand new service model. Both of those are designed in a way to elevate the guest experience, very much focused on setting our operators up for success, to drive more throughput in our stores, as well as to grow F&B attached. So still very early in, but all signs are looking very good. Keep in mind that these are initiatives that we tested. And I think by now, I think we've proven that we mean what we say. This is a management team that is very measured, very deliberate, and we test, we learn, we refine, and then we roll. And so, the new menu and the new service model are working the way that they were designed and matching what we saw during the test. And so we're encouraged by that. But it's still -- we're very much in the early innings, but we fully expect that those initiatives are going to continue to drive incremental sales. Our Half Off food promotion, you saw -- we've had a number of initiatives that we've been fine-tuning on the marketing side of things to stimulate some demand off-peak Monday through Thursday. And so we have All-You-Can-Eat wings on Mondays and Thursdays. We have the longstanding evergreen value of Half Price games on Wednesdays, and then we wrap that with a Half Price food offer through loyalty, member engagement, and the combination of all of those we're very pleased with what we're seeing midweek. And so that helped as well. So we've just got --we've got a number of different things, as I said, both on pricing and on traffic that are all working at different levels. And as we move forward, we'll continue just to pick up more and more momentum from here.

Great. Thank you.

You bet. Thank you.

Your next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon. I had some questions around the kind of full remodels. When we think about that and the ramp you're having, can you talk about kind of the downtime that you see or the inefficiencies while you're doing the remodels? And then how quickly kind of the labor normalizes once the remodel is complete? I've noticed there does seem to be some kind of labor optimization that has to occur when the new units or I should say the revamped units are kind of fully out there. And just curious on how we should think about that as you ramp this up aggressively.

So, in terms of the construction period, I'd say it's about eight weeks, where the units have some negative pressure. We keep the units open. Our teams, we've got a world-class construction development team. They've been doing this for a very long period of time, and they are very skilled at going through a remodel and doing it in a way to where it's not -- it's less intrusive on the guest, and so it allows us to stay open. But we do see somewhat of a negative impact on comps for about eight weeks. And as we start to do more and more remodels, we will start to quantify that to the extent that we feel it's necessary to understand our comp performance. I do think it's important to note when we refer to the lift that we're seeing in sales, we are excluding that construction period. So the lift that we see in remodels is a pure lift. As it relates to the labor optimization it's -- now that we have the service model out there, the teams are getting -- they're very efficient now. We've been working on this for a very long period of time, and so we don't expect there to be any inefficiency from a labor standpoint post-remodel. So our expectation is we're at the optimal level day one.

Can I ask a follow-up? I know you just have a handful right now. How are you planning to kind of grow customer awareness of the revamped offerings as this rolls out more broadly?

Yes, no, that's an outstanding question, and another reason why we're so excited about this is the results that we're seeing are all done just through that local awareness. As you can imagine, once we get to a certain amount of scale, we'll be able to bring more awareness at a national level on the new product offerings and the new experiences. And so we think that that's just going -- that's just going to be additional fuel to the fire. And so our teams, each one of these remodels, we are doing local activation. We get the community involved before the opening to try to generate some excitement. We partner with micro-influencers to get the word out. We do some earned media and then we have some paid media as well. All done in the zip code -- in the general zip code of the store. So all done at the local level.

Okay. Thank you.

The next question comes from Andrew Strelzik with BMO. Please go ahead.

Hey, good afternoon. Thanks for taking the questions. I guess my first one and then I have a follow-up, but my first one, there's obviously a lot of initiatives that you guys are working on, and so I'm just trying to think about the sequencing or how you guys are going to be layering those in. And so can you kind of help frame what could be most impactful in fiscal 2024 versus what will be more kind of 2025 and beyond?

Sure. So without getting into a lot of specifics, I will tell you that the price initiatives that we've rolled out through our strategic game pricing are working very well. And as you heard me say, no noticeable impact at all in the guest satisfaction scores. In fact, we've seen guest satisfaction scores go up in the stores where we had the highest price increase. And so the reason that's so significant is that -- it does two things for us, is one, from a pricing standpoint, is now we have the ability to process, to take price across the entire universe of product offerings. Up until this point, we were limited to only managing price through food and beverage and so now we have the ability to drive price through the game offering, which is two-thirds of our business. So that's number one. Number two is towards the end of the year, we believe that if things move accordingly, that we are continuing to evolve the technology and we will have the ability at towards the end of 2024 to start to have more of a flexible pricing model to where we can continue to drive business between peak versus off-peak. And so that has us very excited. So I would say the pricing on strategic games is very meaningful. But at the same time, the work that we've done through our food and beverage offering and the new service model should -- should not be underestimated because we believe, and we're seeing in our guest experience metrics, that we are making a very noticeable impact on the guest experience. And we strongly believe that the best way to grow this business is through elevating the experience that happens in the four walls of every one of our stores. And so I truly believe that the combination of the food and beverage menu and the new service model will continue to gain momentum as we move forward. The teams are going to get more skilled. We're going to continue to just take care of the guests at a higher -- at an elevated manner, and we believe the guests will return back with a repeat business. So the combination of those two, I feel very good about.

Okay. That's helpful. And then my follow-up is on the visitation, I guess, between cohorts, specifically your loyalty customers, where you're seeing nice growth in membership there, and the non-loyalty customers. I think you said, if I got this right, that your loyalty members visit 2.5 times as often as regular members. A year ago at the Investor Day, you said that was, I think, 1.5 times. And so you're seeing that gap widen. So I guess is that a function of just the traction that you're seeing with the loyalty members, or are you also seeing moderation in kind of your less frequent customers underneath that? I guess I'm just trying to think about the drivers there and the implications. Thanks.

Yes. No, I mean, we're excited about that metric. I mean, you think about that, that's substantial, going from 1.5 times to 2.5 times. And we've seen a growth in our loyalty platform. So we've grown loyalty membership by 23%. And so I think it's just a reflection of us. It's a priority in the business. We have exceptionally talented people focused on the right metrics and going through a test and learn process and continue to engage with that -- with our loyalty members in a more effective way. And so -- and you're seeing it through those metrics. And so we believe that that's -- we're just going to get better and better as we move forward. So I think we're just being smarter about it and we've got the right people focused on it.

Great. Thank you very much.

Thank you.

The next question comes from Dennis Geiger with UBS. Please go ahead.

Great. Thanks, guys. Chris, I wanted to ask a little bit more on sort of some of the customer behaviors that you saw in the quarter in light of some of the macro pressures that you commented on and that the industry is seeing. I know you don't break out the traffic in the food and bev versus the entertainment piece, but anything on spend. You talked a little bit about days of the week. Any kind of additional breakdown on maybe where, where you're seeing more pressure versus where you're seeing less pressure. If there's anything on that front to touch on.

I want to -- so I want to say on spend. One of the trends that we've noticed in the business that we discussed last quarter was on our lower-income consumers. There was more weakness within lower-income consumers versus moderately income and high income, and we saw some strengthening in the higher income last quarter. Those trends continued into Q1. And one of the things that as we continue to fine-tune our marketing approach and get smarter about targeting the right guest and delivering the right message to that guest, one of the things that we've been very encouraged by is as we've started to focus on midweek promotions, we've actually been able to recapture some of the low-income consumers. And so we've been able to return them back to Dave & Buster's and as they've returned back, we've been able to convert them into our loyalty platform, and as they've converted, those individuals are engaging at a higher rate. And so we think -- that's just a testament to the type of work that we're doing now and just being very surgical about how we approach our guest. First understanding where the deterioration is occurring and then being very smart about getting the right message to the right guests at the right time. We still have a long ways to go to where we want to be. But that's a data point that things are moving in the right direction.

That's very helpful. And maybe just one more following up on the promotional side of things that you touch on there, which sounds encouraging. Just on the food promo, if there's anything more to add there on what you saw in the quarter relative to your expectations? What you attribute that to? And then what that means, maybe on the go forward you just mentioned kind of the midweek promos which, which sound encouraging. Anything more on promos going forward at a high level on how you're thinking about that? Thank you.

Well, I think what you're going to continue to see from us is just being, going through the testing and learning process, fine-tuning the process, and then being very targeted in how we approach the business. I would say based on the success that we've seen in the midweek, that's something we're going to continue to focus on. We're still running Half Off food right now. That's not going to be an evergreen marketing approach whatsoever, but for in the near term, we're going to continue to run with that. We think it still has some legs, but we like what we're seeing on All-You-Can-Eat wings. We like what we're seeing on the evergreen promotion of Half Off games on Wednesday. And so we really like the approach that we're taking to driving off-peak demand. In terms of other promotions, we're just -- that's something that we're going to just be very smart about what we're doing. We have some partnerships that I mentioned during the call that we are quite excited about, that we think are going to really give us some juice here in the summer months as well as in the fall. And so it's going to be a constant balance between having the right promotion, having the right partnerships, and having the right pricing strategy.

Appreciate it. Thanks, Chris.

Yep. Thank you.

The next question comes from Brian Vaccaro with Raymond James. Please go ahead.

Hi. Thanks and good evening. You noted the improvement that you've seen the last several weeks after the first quarter came in below expectations. I guess in the spirit of level-setting trends and reasonable expectations, could you provide some more color on the comps that you saw sort of moving through the first quarter? And how the quarter-to-date trending, or what a reasonable expectation would be as it relates to the second quarter? Could we see comps get back to flat if not positive? Just trying to level set expectations a bit.

Yes. It's Mike here. When you think about what we were experiencing coming into the beginning of, I'll say the calendar year. January and February were tougher comps on the year-over-year basis. You had the weather that we saw in January. So the beginning of the calendar year started off slow for us and everybody else. As we got into January, February, we kept still seeing that lower income, that 75,000 and below customers still being challenged. That's not news to anybody. You've heard that on the news more so for the last at least four to -- three to four months that we've seen. So sales in that period from January, February into March were choppy as we said on the call. Spring break this year was a much more shorter period. So it did cause a little bit of what I call either a mismatch or just a shorter period, which meant it was more condensed. So we didn't get a real benefit of a prolonged spring break where more activities would have taken place over that more prolonged period. But as we've moved out of that and got into, call it the end of April into May timeframe, we've seen considerable improvement in the traffic numbers. The promotions of, like what we talked about, Half Off food has helped drive in. The largest increase from a cohort perspective came in from that under $75,000 a year consumer. So that was an opportunity that we kind of continue to see and keeping that offer out there for a week day basis. And so at this point in time, we're kind of seeing that low single-digit negative comp right now, but we do see that trend getting better as we get more into the summer months at this point.

All right. That's very helpful. Thank you, Mike. And on the marketing front, could you just level set what was your ad spend in the first quarter? And what level of spend do you contemplate all things today, kind of in 2024 compared to the, I think it was $65 million or $70 million you spent in 2023. Thank you.

Yes, I would say that part of the, I'll call it lean in or a little bit more heavier spend in Q1, we had three larger events that we kind of got ourselves behind on, or at least put the muscle effort into. The biggest one being around the spring break and the season, and I should say the spring break pass, which that's the test that we alluded to in our costs of just not being as successful as we were hoping for. But we do see the marketing spend as we get further into the year to be more normalized across Q2, Q3, and Q4. It just was a little bit more heavy in Q1 that we had normally would have spent because of that, as well as helping the promotion of the Half Off food offer, which was really more about driving awareness and bringing customers into the building to experience the new food and new service menu or new service model.

I can jump in, just add a little bit more color about some of our comments on. Say, look, during the quarter, we had some things that worked. We had some things that didn't clearly in Q1, the two areas that where we -- weren't pleased with was our labor performance and the marketing spend. And so labor is very clearly it was related to we rolled out the new food, we rolled out the new service model, and we had all these different systems that were being implemented at that point in time. And we just kind of got out of line for a couple of periods. But the good news is on labor, we got it right back in line very quickly. The business has stabilized back to the numbers that we would expect, and they've been consistent throughout the month of May and heading into June. So that was a blip. We took care of it. This is a team that's always going to communicate with you directly when things are working well and also directly when things aren't. On the marketing side, the spring break paths that Q alluded to was just a -- it was a mistake, and it was constructed before our new CMO got here. I'll own it as the CEO of the company, but it didn't work. It was designed poorly. It had too high of a price point and had too short of a period of time, and it was about a $6 million spent and we got very little out of it. And so that's a mistake that we've learned and we're not going to repeat. And so when you look at our quarter, that's why we quantified that impact, so you can have a better feel for how to think about the overall financial performance. There's over $10 million there that we do not expect to occur, and we are managing this business with those learnings in mind going forward.

That's a helpful color. Thank you. I'll pass it along.

All right. Thank you.

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

All right. Thank you, operator. We continue to see a tremendous amount of upside in this business, and based on what we're seeing in terms of leading indicators of success, are very optimistic that the financial inflection point we have been driving towards is quickly approaching. Thank you all for joining. We look forward to speaking with you again soon.

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