Good day and welcome to the Dave & Buster's Second Quarter 2024 Earnings Conference Call. All participants will be in 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, VP of Investor Relations. Please go ahead.

Thank you, operator, and welcome to everyone on the line. Joining me on today's call are Chris Morris, our Chief Executive Officer; and Darin Harper, 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 second quarter 2024 results, I'd like to call your attention to the fact that in our prepared remarks and 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 these risks 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 release this afternoon. And 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. In our second quarter of fiscal '24, we generated revenue of $557 million and adjusted EBITDA of $152 million. We are pleased with the progress we're making on our strategic initiatives and on the strong financial results achieved during the quarter. During the quarter, we grew revenue and adjusted EBITDA, expanded our adjusted EBITDA margins, and generated strong operating cash flow, which allowed us to invest in the business and return cash to shareholders. We've also continued to make significant progress toward our strategic goals. Our initial fully programmed remodels continue to perform well and we are excited about the remodels that have recently opened and will open throughout the remainder of fiscal '24 and beyond. Our new menu continues to be well received by our guests, as indicated by improving F&B performance and guest satisfaction scores. We continue to refine our menu and are excited about the next phase of our menu rollout that just occurred in August. We've also continued to test our games in F&B pricing levels, which we have benefited our top line and margins, and which we expect to bear more fruit going forward as we optimize our pricing strategies. Additionally, we have seen material improvement in our special events business with substantial growth in same-store sales in the quarter and year-to-date and with the forward bookings for fiscal '24 currently significantly above the prior year period. Further, we have continued to open new domestic stores which have consistently performed in line with or above our expectations. We've also managed our cost structure well, which has enabled us to expand our adjusted EBITDA margins while still delivering a high quality experience to our guests. While we are disappointed with our…

Thanks, Chris, and good afternoon, everyone. Let me first start by saying how excited I am to be here and working as alongside Chris again. It's truly an honor to represent this great company and to work with the fantastic team that we've got here. So, turning to the results for the second quarter, comp store sales decreased 6.3% on a calendar basis in the second quarter versus 2023. We generated second quarter revenue of $557 million, which reflects year-over-year growth of $15 million or 3% and adjusted EBITDA of $152 million, which reflects year-over-year growth of $11 million or 8% and an adjusted EBITDA margin of 27.2% which is 130 basis point margin expansion versus the prior year and a 360 basis point margin expansion versus the same period in 2019. Net income in the second quarter totaled $40 million or $0.99 per diluted share. We reported $46 million of adjusted net income or a $1.12 of adjusted earnings per diluted share and reconciliations of all non-GAAP financial measures can be found in the press release from earlier today. We generated $102 million in operating cash flow during the second quarter, ended the quarter with a net cash balance of $13 million for the total liquidity of $494 million when combined with the $481 million available on our $500 million revolving credit facility nets of outstanding letters of credit. We ended the quarter with a net total leverage ratio of 2.3 times as defined under our credit agreement. Our decisive plans for the Dave & Buster's store remodel program are progressing at an impressive cadence under the leadership of our best-in-class development team. We now have 18 completed remodels under our belt with 26 additional scheduled for the completion in the balance of fiscal 2024 as we approach critical…

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. Thank you so much for taking the question. My first was on the top line and so far you have your initiatives in place. It seems like you're feeling very confident in them. Same-store sales have decelerated, though, so it looks like macro headwinds are offsetting it. The question is, you expressed confidence in accelerating same-store sales in coming quarters and that your initiatives are going to do that. I guess how can you feel so confident given the macro headwinds? Maybe in that answer, you could talk about whether you see the macro headwinds building or decreasing or just staying consistent as well as whether you're seeing kind of improved or increased contribution from your initiatives in the last few months?

Yes. Hey, Jake, great question. The first thing I'll say is we continue to be very bullish about the long-term prospects of our initiatives. And I think that's what you're hearing from us. The initiatives that we're focused on, we've shared with all of you the math and the upside. And there is still very -- there is still a tremendous opportunity to add incredible value to this organization through executing on those initiatives. And as we've always said, the one thing we can't control is the macro environment. But make no mistake, there's real value creation opportunity on these initiatives and our stance really hasn't changed. It is a tough kind of consumer environment, it's complicated, and there are headwinds in this business and we felt those headwinds in the second quarter. And they're still there. I think what has us excited as we move forward, more of our initiatives are starting to come online. And when we look forward, we really like what we're seeing on our remodel program. And the remodel program is, you've heard us talk about it as a strategic reset. It's the culmination of everything we're doing all wrapped up into one. And we continue to see very nice improvement on the remodels. And so we've got the nine that we just opened this quarter. They opened towards the end of the quarter, but now we have 11 in Q3 and then 15 in Q4. And so those remodels at this point in time, we continue to believe that they're going to continue to see the same results that we've seen in previous remodels. And so that gives us a lot of optimism. In addition to that, the other initiatives we're focused on, that I outlined with special events and the banquet season coming up and so on and so forth. So I think that's what you're hearing from us is just confidence in the things that we're working on.

Got it. And just building on the commentary around the remodels. Last quarter and I think in prior quarters, you've been a little more specific. You said double-digits sales lift for the fully-loaded remodels. Is that true? I'm wondering whether the omission is conspicuous or not or whether it just kind of the message remains the same, but anything changed there in terms of what kind of lift you're getting from the remodels?

No, no, it's still, no, nothing has changed. We're still seeing a double-digit increase in those first four fully programmed remodels. And the nine that just came on, as I said, it's still very early they were towards the end of the quarter, but at this point in time, we're seeing a nice lift there. And there's no reason to believe that they're performing in line with what we would expect. And I think on those in particular, we're seeing nice separation in sales and we haven't even fully put our marketing muscle behind those yet. And so that's and as we start getting more critical mass, there'll just be more we can do from a marketing standpoint to get out and tell the story of store of the future. So and then the last thing, the one thing that has changed is we now have Friendswood in year two and that's always been -- we've been very open about that, that we don't you know time will tell you know what this looks like in year two. And so far Friendswood is green on green. So that's very encouraging as well and it just speaks to the staying power of what we're doing.

Okay, great. And last question for me, a pretty interesting or impressive feat to grow margins as you did, 170 basis points at the store level with such negative same-store sales. So the question, I just want to make sure there's nothing in there that's abnormal, that's not maybe enough non-recurring to be backed out, but just that will not happen or benefit you in the future or coming quarters. Anything in there that we should be wary about? I guess the idea, the real question is, can you drive, if we expect negative same-store sales for the next quarter or two, is it feasible to continue to drive restaurant level or store level margin expansion?

Yeah, I'm going to answer the first part of that and I'll turn it over to Darin to kind of comment on the second part. I mean, we're very proud of the work that's going into managing our bottom-line, given the uncertain top-line environment. And that's really you know it's so important that we do that as we're starting to continue to execute these initiatives in a period of time where the consumer environment is challenging and the team really stepped up and delivered. And we've implemented a number of cost-cutting initiatives that are coming through the P&L that we expect will continue to benefit the rest of this year. We're managing our you know all the things within our control. The team is just doing an outstanding job managing those things, but we've seen very significant improvement in cost of sales. We're tightly managing labor in all areas. It's not it's wage rates are flat to down on a year-over-year basis. Our productivity has improved and we're doing all that at the same time our guest experience metrics are improving. And as I said in my prepared remarks, that's not easy to do. And the team is doing it just through managing the details every single week and just being absolutely maniacal about protecting the bottom line. And then we've been able to capture some considerable G&A savings. And so there's real margin improvement in the numbers that will that's not going away. And that's going to put us in the best possible position to navigate a challenging top-line environment. And with respect to other items, I'll let Darin kind of jump in on that.

Yeah. Just to echo what Chris said. Yeah, we feel like we have a number of levers here and I think the brand has demonstrated that in being able to manage margins despite some sales headwinds. And every quarter there's noise in the prior year and there's always certain adjustments in the current year and the prior year that frequently just have an offsetting impact as we go along. So I wouldn't raise anything of note that is reflected in this quarter that we don't think is reflective of our ongoing trends of the business.

Great. I really appreciate it. Thank you.

Yeah. Thank you.

The next question comes with Jeff Farmer with Gordon Haskett. Please go ahead.

Thank you. A little specific here, but I think on the last call you presented that presentation that showed that I think you had 33 of the 165 stores running at that highest price increase tier as of Q1. I'm just curious where that stands as of Q2 or currently in terms of the number of stores running at that highest pricing increase tier?

We've made no material changes to the tiers. We feel like we're in a really good spot right now. As you know, we've gone through an extensive testing and learning process and we feel like that we've got the right formula. It's an area that we're going to continue to evaluate and we now feel like that's a lever that we're going to be able to adjust or pool as we move forward. And so as we start planning for next year, there could be potentially some changes. But as of right now, we feel like that we're in a good spot and don't anticipate -- there haven't been any material changes and we don't anticipate any material changes for the rest of this year.

Okay. Unrelated, just in terms of trying to understand whether or not the demand headwinds are sort of further mounting or you're seeing some stability. At the beginning, actually, when you reported the Q1, you pointed to low single-digit same-store sales declines through the first. I think it was four or five weeks of Q2. You finished the quarter down 6%. The math implies sort of mid-to-high single-digit same-store sales declines over the balance of the quarter. So can you help us sort of reconcile what went on there? It sounds like you have more initiatives that were kicking in, but the comps got softer. So, what was it, the demand headwinds that mounted? Just any color there would be helpful?

Sure. Yeah, I mean, June and July were tougher months. And so the summer months were just a little more challenging than where we started the quarter. And that's we're not alone. Many others felt that same pressure. We saw equally Main Event and Dave & Buster's the two brands have really been moving in lockstep. And so which is just another data point that we're dealing with something that's a little more macro. And so it was a challenging summer, which is, again all the more reason why our team really hunkered down and manage the bottom line and did all the great things that we did to control costs, just to give ourselves breathing room to continue to execute these initiatives.

Okay. Thank you.

Yeah.

The next question comes with Andy Barish from Jefferies. Please go ahead.

Hey, guys, just wanted to dig into the highest price tier that's kind of performing well. I mean, does that show that that's a demographic that's also maybe a little higher than a broad cross section and that demos kind of hanging in there better than what we've heard from pressures being seen at the lower end? Just trying to sort of tease that one point out as an opener.

Well, it's the higher price tier certainly is reflective of higher cost of living. What we've talked about, before we started enacting all these changes, we had, one, the same price. There's a price in Times Square and there's a price in Overland Park, Kansas and they were exactly the same. And so the higher price tier is reflective of more of cost of living adjustments. We did play around with kind of like demographic profiles on household income and things of that nature, but for the most part, generally speaking, our tiers are more in line with traditional pricing tiers that have to do with the cost of living.

Okay. And then just checking in on the rest of the remodels this year, are a majority or all of those going to be fully programmed at this point?

The vast majority of them. We'll have three or four that won't have the arena attraction. They'll have everything else but the arena. And that's just simply because we don't have the space in those stores. But based on everything that we've seen to-date suggests that there's real value in a fully programmed entertainment offering. And so the plan is to continue to move forward with that type of offering. But we will continue to evaluate it as we always do and to make sure that hold ourselves to a strict return on investment threshold. And we always leave room for adjustments if necessary. But at this point in time that's the plan.

Got it. And then just finally, on food costs, you said you were managing. I assumed there is still some of the 50% off kind of promotion discounting on food that you've used. How are you kind of measuring the returns on that? Is it driving some of the incremental traffic you expected? And then does that kind of continue as we move forward? Do you use it for certain times of the quarter or things like that kind of like a boost when needed?

Yes. So we talked a lot about just this approach of testing and learning and putting different things in the market and having, not be moving away from just one big campaign, and instead of that, having an arsenal of tools that we can use to stimulate traffic. And so I would put half off food in that category. It's a tool that will be in our arsenal that we might use in the future from time to time depending on what we see. When we -- a couple -- when we look back on it, it was, it broke even. And so we spent a lot of time making sure that we designed the economics in a way to where it would break even. It's half off food, but that represents about 20% of our sales. And so it was something that we could achieve economically and we did. And so that we felt great about that. It was loyalty-fenced, so you had to sign up for the loyalty program. So that helped mitigate the risk of cannibalization and it also drove loyalty sign-ups that we were then able to use to engage. And so that's half off food is just an example of, it's more of an example of the approach that you should start to see from us is testing and learning. And when you find a product that when you find an offer that works, we go deep with it and but constantly pulsing in what we think is necessary. Does that make sense?

It does. Yeah, and then just finally, I know, quarter-to-date, basically August. I mean, industry numbers got better. Are you willing to kind of comment on how you started the 3Q?

Yeah. Andy, as you know, we don't quantify intra-quarter results. I'll say that and it's just one period, we just wrapped up our first period of the quarter, that one period, the sales performance was better than the previous two periods, but it's just one quarter. We still have two periods left of this quarter. And so our focus is on the initiatives and continue to execute at a high level, managing the bottom line and putting ourselves in a position to really get the most out of our remodels as they start to come online.

Thanks, guys.

Thank you.

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

Hey, this is Jared Hludzinski on for Andrew Strelzik. Thank you for taking the question. So you discussed the opportunity to accelerate the pace of remodels, but I'm wondering if there's an opportunity to improve returns based on what you've learned from existing remodels? And if you could provide any color on how the company is prioritizing remodels through 2026, and whether that's based on store tenure, geography or some other factor? Thank you.

So we are still, we're in the process of building out our plans for '25 or fiscal '25 year. And that's something that obviously, we work in close partnership with our Board, and the Board ultimately approves the capital outlay for 2025. And so, what we're doing internally is we're making sure that we can, to the extent that there's data there, that suggests that from a capital allocation standpoint, it makes sense to move even faster, that we have the ability to do that. And so our development team is hard at work at building out all the plans to ramp-up as quickly as possible. But we're -- this is a team that is just very disciplined around ensuring that we're using our capital judiciously and we're looking for every opportunity to maximize return on investment. So stay tuned on what our plans are for the future. Obviously, what you're hearing from us is that we like what we see and we want to do more of it, but we need to go through the planning process for next year. We are -- the team is spending a lot of time on continuing to look for value engineering opportunities. We've already had quite a bit of success at doing that, but we're always challenging ourselves to try to get more. And we're also spending a lot of time just going through working closely with our operators to understand what's working and what's not. And what could we do to further drive the revenue opportunity with these remodels. And I'm convinced that we're very happy with what we're seeing. I'm convinced that we can even get more out of it. And so we're going to you know we're spending a lot of time on it to optimize it.

Great. Thank you. And then I just wanted to get an update on how you're tracking against the marketing optimization initiative relative to your expectation and any learnings that you can share with us. And then on loyalty, what would you attribute to the continued strength in membership growth? I believe you said it was up 25% this quarter. What gives you confidence that this growth is sustainable going forward? Thank you.

Yes. So, first, starting with, I mean, we're in the very early stages of marketing authorization. And last quarter we provided an update on our Investor Day presentation and we provided our rating. And we indicated then that we're still very much in the early stages. So this is -- there's a lot that goes into it. You've got to build the technology then you got to build the capabilities and then there's the whole testing and learning process. And so, I would say, we're just now getting really started and to where we want to be. So that's -- we're pushing ourselves to move faster there. On loyalty, I think, we're doing, the team is just really making that a priority and looking for two opportunities. One, to encourage the signups, but then once you have the sign up to stay engaged with the guests. And I think we're doing a much better job on both. The way we get more out of it is doing things like the loyalty fencing on half off food. So we had a very compelling offer. It helped drive more awareness to the great F&B offering as we rolled out the new menu. And we really drove sign-ups and then we were able to stay engaged with those guests and keep them engaged better than we ever have in the past. Another testament to all of this coming together is, in our remodeled stores, we're seeing a very significant increase in frequency for loyalty members in a remodel versus a non-remodel. And that just goes to show that when you combine the right product offering and the right execution with the right level of engagement, these tools really can pay off. And so that's just another point of validation that we think that we're onto something here. In terms of, I think, the more -- the 20 -- we're very pleased with the 25% growth. I'm not going to put a number out there on expectations going forward, but I can tell you that we have pretty high expectations. And I just think that it's all about the way we engage and it's all about being very personalized in the way we do it and earning the right to have a conversation with the guests and then delivering the right content to that guest. And we're -- that's an area that we're just going to continue to strengthen that muscle. And so as I said at the very beginning we're just now getting started.

Great. Thank you very much.

Thank you.

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

Hi. Thanks and good evening. I wanted to ask a question just on the other operating cost line and obviously leverage that line despite the negative comps. I noted in the 10-Q that it disclosed some gain on some transactions. Could you quantify that? And then maybe more broadly, talk about other sources of year-on-year favorability you saw within that line.

I'll let Darin answer that. Go ahead, Darin.

Yeah. One of the items in that line was a $4 million gain related to a termination of one of our leases in New York. That line is excluded from our adjusted EBITDA measure. But that was a big item that was in there. Really the most notable just in terms of flagging one-off benefit for the period is the additional two operating days that we had in quarter two, which added about a couple million dollars of EBITDA. And then you just have routine adjustments that come throughout the year as well. But that gain is the most notable.

Yeah, I was going to ask you about that too, Darin. The extra sales on those two days is ballpark say maybe $12 million, $13 million. I guess sales days can change depending on seasonality and whatnot but. And just how to think about the flow through on those sales, because a lot of costs are accrued for either weekly or monthly, are you able to tighten any of that math up on the two extra days?

Yes. No, they were low sales volume days. It was a Monday and a Tuesday. So it's about $4 million in incremental sales with about a 50% flow through. So it's about a $2 million EBITDA impact.

Comps, I know it's tough to measure traffic, but could you just maybe give us a sense of how much price you'd estimate is reflected in your Q2 year-on-year comps and just kind of level-set what your latest thinking is on potentially taking additional pricing in the second half, either F&B or amusements?

At this point in time, we don't have plans to adjust price in a meaningful way for the second half of the year. As I said a minute ago, we're just now in the process of building out our plans for 2025. And so we will certainly go through and have a pricing optimization plan for 2025. But we feel like we're in a good spot for the rest of this year. We don't get in. We don't disclose the granularity of all of our different initiatives. And so what we're getting on price is not something that we're going to disclose that we have disclosed.

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

Okay. Well, thank you so much for the participation today. We look forward to speaking to you and continue to give you an update on all of our initiatives. Thank you. Have a great day.

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