Dave & Buster’s Entertainment, Inc. (NASDAQ:PLAY) Q3 2022 Earnings Call Transcript

Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) Q3 2022 Earnings Call Transcript December 6, 2022

Operator: Good afternoon, and welcome to Dave and Buster's Entertainment, Inc. Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask question. Please note that this event is being recorded. I would now like to turn the conference over to Corey Hatton, Vice President of Investor Relations and Treasurer. Please go ahead, sir.

Corey Hatton: Thank you, operator, and welcome to everyone on the line. Leading today's call is our Chief Executive Officer, Chris Morris; and Michael 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 results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed, which are not entirely based on historical fact. Any of these items should be considered forward-looking statements relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties have been published in our filings with the SEC which are available on our website. In addition, our remarks today will include references to financial measures that are not defined under Generally Accepted Accounting Principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP measure contained in our earnings announcement released this afternoon, which is also available on our website. Also, pro forma financials including main event for the trailing four quarters ended October 30, 2022 are available at the bottom of the Events and Presentations section of our IR website.

Now, I will turn the call over to Chris.

sigmund-By-tZImt0Ms-unsplash

Chris Morris: Okay. Thank you, Cory, and good afternoon, everyone, and thank you for joining our call today. We are pleased to report strong financial results for the third quarter, which are clearly indicative of the progress we are making on our growth strategy. We delivered record revenue for the quarter, driven by double-digit comparable sales growth, which in turn led to record adjusted EBITDA for the quarter despite the challenging macro and inflationary environment. I want to recognize the outstanding effort of our teams, both in the field and here in our support center that produce these record results as we continue the work of integration to become a more efficient organization. Since our last analyst call, our team has been focused on three key work streams; one, effectively managing the merger integration; two, long-term strategic planning; and three, managing sales and profitability in the near term to offset the ongoing inflationary pressure in our business.

I'm pleased to say we are ahead of schedule and exceeding in all three areas. As it relates to our merger integration, our team's excellence in execution has accelerated the pace of realizing the anticipated benefits. To-date, over $17 million of annualized synergies were implemented and we continue to be confident in our $25 million target. The pace of implementing these synergies has accelerated as we swiftly addressed all redundant staffing continue to combine our purchasing power to offset inflation and move toward combining the best-in-class systems across both brands. We are moving -- we are moving aggressively to fully capture synergy opportunities, implementing superior operating initiatives and leveraging the scale of our combined operations.

Secondly, our teams have been aggressively focused on developing our long-term strategic plan to further cement the Dave & Buster's and Main Event brands as undeniable leaders in location-based entertainment and add meaningful long-term shareholder value. Based on a thorough strategic review of the business, anchored and deep consumer research and spending considerable time learning directly from our operators, our core brand position for our Dave & Buster's brand going forward will bring greater focus to executing adult occasions aged 21 to 39, who are visiting our locations to have a great time with their squad. These crew connectors, as we like to call them, are energized by social situations and in the now on culture and social trends happening at the time.

Over the months and years to come, this refined brand positioning will guide our marketing strategy, entertainment innovation pipeline, food and beverage offering, store design and layout and tech-enabled hospitality model. This long-term holistic approach to managing the business anchored in strategic planning and operational execution led to the successful reinvigoration of the Main Event brand, and we're excited to apply the same approach to the larger Dave & Buster's enterprise. We look forward to sharing more details with you at our Investor Day in the early part of next year. Lastly, our teams have been focused on mitigating inflationary pressures with thoughtful pricing and increased operating efficiencies. Despite ongoing inflationary cost pressure in the business, we have made great progress and continue to find opportunities to manage our cost and increase our profitability.

In addition to the work on cost controls, we are very pleased with the top line momentum throughout our portfolio. As indicated by our third quarter results, guests continue to visit and spend at healthy rates. On the marketing front, in Q3, we launched our National winners watch football campaign, featuring Kansas City Chiefs great Travis Kelce, designed to drive awareness of Dave & Buster's as a great football viewing destination, which contributed to our strong Q3 performance. In November, we recently completed our Eat & Play Combo promotion at Dave & Buster's. We've had tremendous success with our local focus on World Cup Watch activations and are excited about the launch of our impossible holiday hangout contest, which will bring together four friends from around the country to spend the holiday together at Dave & Buster's in Kansas City.

As we head into Q4, our Special Event sales teams and operating teams are aggressively focused on delivering a strong holiday banker season. We are optimistic that the upcoming holiday season will provide additional momentum as we enter the New Year as our Special Event's business has nearly recovered to pre-COVID levels. We are excited about the future of this organization. We have two industry-leading brands in Dave & Buster's and Main Event. These brands have exceptional business models, strong assets and talented teams, bringing these brands together under one umbrella presents our company with exceptional growth opportunities, which will benefit all stakeholders. We have a clear line of sight on the strategic opportunities ahead for the Dave & Buster's brand and a world-class management team with a proven track record of superior execution.

We believe there is meaningful upside potential for this company and our stakeholders, and we are working diligently to realize that potential. Let me take a minute to recap a few growth initiatives that have me excited about the opportunity in front of us. The continued development and rollout of our improved hospitality-based service model. The brand awareness work that's driving innovation of our product offering and in turn, how we approach the refresh program for our stores. The continued recovery of our special event business, our development pipeline of new stores for both brands, our progress on developing our international franchisee network, the tenacity of our teams to identify and implement our synergy opportunities, and last but certainly not least, the proven capabilities of the executive management team which gives me confidence in our ability to succeed.

To put it succinctly, everywhere we look, we are seeing significant growth opportunities, and we are poised to unlock long-term shareholder value. So now, with that, let me turn the call over to Mike to review our Q3 results.

See also 10 Cheap Gaming Stocks To Buy Now and 12 Best Grocery Stocks To Buy.

Michael Quartieri: Thanks, Chris. We're pleased with our financial results for the third quarter and encouraged by the trends continuing into the fourth quarter. Amidst considerable economic uncertainty, we remain focused on successfully managing our newly combined business, which generated record revenue of $481 million and produced a record $90 million of adjusted EBITDA in the third quarter, which I'll remind you is holistically our seasonally softest quarter of the fiscal year. We produced an 18.7% adjusted EBITDA margin in the third quarter, which represents a 320 basis point improvement above the 15.5% margin of the third quarter of 2019. We continue to be laser-focused on optimizing our cost structure and unlocking our synergy target of $25 million from the combination with Main Event.

With regards to pro forma comparable store sales figures, I'd like to direct you to the supplemental schedule titled December 2022 supplemental pro forma financial data posted in the Events and Presentations section on our IR website. I'd like to highlight that the strong comp sales figures in the third quarter of 13.3% versus 2021 and 17.5% comp versus 2019 on a consolidated basis. Notably, our SMB business has continued to improve with our tailored new menu offerings and SMB represents an increasing mix of our total revenue versus the prior year period. Additionally, our special events business continues to provide tremendous upside, as it continues to normalize the pre-pandemic levels with the pro forma combined comps down only 6.7% this quarter versus 2019 in comparison to last quarter when it was comping down 13.4% versus 2019.

We generated $68 million in operating cash flow during the quarter, contributing to an ending cash balance of $108 million for total liquidity of almost $600 million when combined with the undrawn revolving credit facility. We ended the quarter with a net total leverage ratio of 2.2 times. Turning to capital spending. We invested a total of $64 million in capital additions and opened three new Dave & Buster stores, one in Lynnwood, Washington, one in Long Beach, California and the other in Bakersfield, California. We plan to open one new Dave & Buster's branded store and two Main Event branded stores in the fourth quarter of fiscal 2022. Finally, let me update you on comparable store sales through the first five weeks of the quarter. Pro forma combined comparable store sales has increased 3.1% compared to the same period in 2021 and 9.2% compared to the same period in 2019.

We estimate that the calendar shift of the holiday season as it specifically relates to our special events business in 2022 versus 2019 for this five-week period represents a temporary negative 3% overall comp headwind, which will reverse in the remaining weeks of December. To summarize, we are excited about the strong execution in our business, our progress capturing synergies, the numerous growth opportunities for us to pursue and the talent and experience of our team to drive growth despite the challenging macroeconomic environment. We remain focused on closely managing costs and capital spending to ensure we strategically unlock the maximum value of these two great brands and deliver the highest returns possible for our shareholders. Now operator, please open up the line for questions.

To continue reading the Q&A session, please click here.