Good day, and welcome to the Dave & Buster's Second Quarter 2023 Earnings Conference Call. Please note, this event is being recorded. I'd now like to turn the conference over to Cory Hatton, Vice President of Investor Relations and Treasurer. Please go ahead.

Thank you, operator, and welcome to everyone on the line. Leading today's call will be Chris Morris, our Chief Executive Officer; and Mike Quartieri, our Chief Financial Officer. After our prepared remarks, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment, Inc. and is copyrighted. Before we begin the discussion on our company's second quarter 2023 results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed, which are not entirely based on historical facts. Any of these items should be considered forward-looking statements relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties have been published in our filings with the SEC, which are available on our website. In addition, our remarks today will include references to financial measures that are not defined under Generally Accepted Accounting Principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP measure contained in our earnings announcement released this afternoon. With that, it is my pleasure to turn the call over to Chris.

All right. Thank you, Cory. Good afternoon, everyone. Thank you for joining our call today. We are pleased to report record results for the second quarter of fiscal 2023. We generated revenue of $542 million and adjusted EBITDA of $140 million resulting in an adjusted EBITDA margin of 25.9% for the quarter. In a few moments, Mike will walk you through the details of our financial performance. As we take a step back and reflect on where we are, we remain as confident as ever in our ability to execute against the numerous and sizable growth initiatives that we laid out in our recent Investor Day presentation, and which we have already begun implementing. During the quarter, we are pleased that we continue to open new stores at highly attractive returns on invested capital, that we have diligently managed our cost structure and continue to expand our adjusted EBITDA margins, and that our exceptional team has done a phenomenal job navigating our highly profitable and resilient business model through a dynamic period in our economy and against strong top-line comparisons versus 2022. We are laser-focused on optimizing our business and growing revenue, adjusted EBITDA, and cash flow. We remain committed to our long-term target of adjusted EBITDA of $1 billion and are making considerable progress towards that goal. I'd like to take a moment to update you on each of the six key organic growth initiatives. First, marketing authorization. As a reminder, we strongly believe that there is a meaningful opportunity to grow traffic by making sure we get the right message to the right people at the right time. To that end, we have successfully completed our investment in the marketing technology infrastructure and are now in the process of building the digital marketing engine that we expect will begin bearing fruit in the early part of fiscal 2024. These tools will play a key role in developing a more personalized approach to marketing through improved targeting and guest engagement. In addition, our loyalty database is now 5.2 million users, up from 4.8 million users last quarter, as our mobile app experience keeps getting better. Continuing to grow our loyalty database will be a key benefit for our top and bottom-line as customers in our loyalty database visit approximately 50% more frequently and spend approximately 15% more when they visit. As part of our broader effort to highlight our superior watch offering and to use the sports calendar to drive visitation, this week, we launched our fall football campaign along with an everyday $5 Bites menu. We're also bringing back the successful All-You-Can-Eat wings on Mondays and Thursdays, which our guests will particularly enjoy while cheering on their favorite teams. Second, strategic game pricing. Playing games is at the core of our business model and what we are and will always be most known for as a brand. As highlighted during our Investor Day, we believe there is a significant opportunity to implement a new comprehensive game pricing strategy to drive meaningful additional revenue, adjusted EBITDA, and cash flow while still maintaining our everyday value proposition with game prices still well below our peers. While we require certain investments to fully implement all elements of our new strategy, we are currently unlocking new ways to optimize regional pricing that we expect to have a positive impact in the fourth quarter of 2023 during our key holiday period. Third, improved food and beverage. As a reminder, significant opportunity exists to improve our attachment rate and overall revenue and profits generated by food and beverage business by simplifying our offerings, improving the quality of our offerings, investing in technology to accelerate speed of service, and optimizing our labor model. We recently completed a test of the next phase of our new Dave & Buster's menu of the future in a new hospitality-focused service model, which we are pleased to report was successful. During the test, these stores saw a low single-digit increase in sales, a 170 basis point improvement in food cost of sales, improved labor costs due to operational efficiency, improved speed of service, and OSAT scores. We are on track to launch this phase of our new menu and F&B strategy system-wide by the end of September. Fourth, remodels. We are in the process of modernizing and refreshing the look and feel of our D&B stores, improving the layout to increase traffic and overall productivity, as well as implementing technology to support guest engagement and introducing new entertainment offerings to drive traffic for walk-in and special event business. I'm pleased to report the successful launch of our first of 12 test remodels, which went live in mid-August, introducing our enhanced entertainment offerings. Although it's only been three weeks, the new format is being well received by our guests and performing ahead of expectations of a double-digit improvement in comparable store sales growth trends. There will be eight more test remodels coming online in the balance of 2023, with the remaining three in 2024. Once these tests are complete, we will provide more comprehensive financial observations of these test remodels and how these initial results are sharpening our strategy for the planned rollout of the remodel program to the remaining D&B locations in 2024 and beyond. However, you can rest assured that we remain laser-focused on generating highly attractive returns on invested capital for the remodels. Fifth, special events. We continue to believe that there is a significant opportunity to improve execution in our special event business. While we have recovered back to pre-COVID levels on a combined brand basis, we are leveraging the strongest elements of the main event playbook to drive additional sales at Dave & Buster's, which is still meaningfully below pre-COVID levels. We've completed the initial phase of adding sales managers to the stores, which has shown encouraging results. For example, while still in the early innings of the rollout of this initiative, at the stores where we've made the changes, we have seen more than double the advance group bookings for Q3 and Q4 on average versus the rest of the system. While we expect significant near-term improvements in the special event business, we also expect the introduction of new entertainment offerings in connection with our store remodel program to be a catalyst for our special event business. Sixth, technology enablement. At the store level, we are focused on optimizing our current service model and updating our store IT infrastructure, which will lead to vastly improved data and analytics, better guest engagement, and improved guest satisfaction. Our technology leaders were hard at work in the quarter, implementing a server tablet solution, selecting our enterprise POS of the future, installing new kiosks, and working closely with our entertainment and operations team on our remodels. As with the remodels, we strongly believe these initiatives will lead to additional revenue adjusted EBITDA, and we are laser-focused on generating an attractive return on the required investment in this area. In aggregate, we are confident our organic growth initiatives will create significant shareholder value over the long-term, and our operational achievements in the quarter are indicative of the progress we're making towards our goal. As Mike will discuss in greater detail, our approach to running the business with sharpened cost controls has enabled us to continue to expand our margins, which grew 120 basis points versus 2022, and are now up 230 basis points in the second quarter versus 2019. We continue to find ways to permanently reduce our cost base that will be particularly powerful for cash flow generation as the momentum continues to build as we execute against our long-term strategic plan. In the quarter, we opened two new Dave & Buster's and one new Main Event. Our strong track record of opening new stores remains intact for fiscal 2023 as we continue to expect a total of 16 new stores this year across both brands. Our new store openings continue to perform exceptionally well and generate strong cash-on-cash returns. We are very pleased with the progress being made throughout all areas of the business and have high conviction that our strategic plan will deliver significant shareholder value. Despite the progress we've made towards our strategic plan and the demonstrated strength and resiliency of our business model, D&B remains extremely undervalued by the market. To that end, our Board of Directors has approved an increase to our current share repurchase authorization, bringing our current authorization to $200 million. While we continue to prioritize high ROI investments in the business and new stores, we will also continue to opportunistically and aggressively buy back shares when our shares trade materially below our view at fair value. So now let me turn the call over to Mike for a review of our second quarter results.

Thanks, Chris. We're pleased to report strong financial results for the second quarter. We've generated second quarter revenue of $542.1 million and adjusted EBITDA of $140.3 million, an increase of 21.3% versus the prior year. Net income in the second quarter totaled $25.9 million or $0.60 per diluted share. We reported $40.9 million of adjusted net income, or $0.94 of adjusted earnings per diluted share, which includes an adjustment for the $11.2 million loss on debt refinancing in the quarter. Reconciliations of these new non-GAAP measures can be found in today's press release. Pro forma comparable store sales decreased 6.3% versus 2022 as we continue to lap a robust prior year period from a top-line perspective. When we look back at a more normalized level of business, we are up 5.8% versus 2019 on a consolidated basis, led by the continued strength of our entertainment business. Our special events business continues to recover with revenues up 15.6% on a year-over-year basis in the second quarter, and remains close to flat in comparison to pro forma 2019 levels. Our second quarter adjusted EBITDA improved 230 basis points to 25.9% versus 2019. As Chris mentioned, we continue to drive margin in this environment with a laser focus on our cost base, leaving no stone unturned across cost of goods sold, labor, store operating expenses, and G&A. We are confident in the levers that we have to pull in all four of these cost buckets that will result in the annualized run rate cost savings of $40 million to $60 million as we laid out in our Investor Day presentation. We generated $103.8 million of operating cash flow during the second quarter, contributing to an ending cash balance of $82.6 million for liquidity of over $572 million when combined with the $490 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the quarter with a total net leverage ratio of 2.1x. Our strong balance sheet, low leverage, and superior cash flow profile provides us with the ability to invest in the business to drive profitable growth and continue to return capital to shareholders. As previously disclosed, in the second quarter, we repurchased 2.1 million shares at a total cost of $74.5 million. And after increasing our share repurchase authorization, we currently have $200 million of share repurchase authorization. Also in the quarter, we opportunistically repriced our credit facility, reducing the spread on our Term Loan B and any future revolver borrowings by 1.25%. Turning to capital spending, we invested a total of $82.6 million in capital additions during the second quarter, opening two new Dave & Buster's stores and one new Main Event. We've already opened one new Dave & Buster's store during the third quarter of fiscal year 2023 and one new Main Event store as well. Also, as Chris mentioned, we are on track to open a total of 16 new stores and relocate one store across both brands during fiscal year '23. To summarize, we are pleased with the progress we made in the quarter, strengthening our company's financial position with the favorable repricing of our Term Loan B, returning capital to shareholders via our share buyback program, and establishing a quantifiable roadmap to execute upon by unveiling our long-term strategic plan at our Investor Day in June. There are numerous opportunities for us to pursue in the immediate, near-term, and long-term, and we remain focused on managing costs to unlock the maximum value of these two great brands and deliver the highest possible returns for our shareholders. Now, operator, please open up the line for questions.

Today's first question comes from Jake Bartlett at Truist.

My first is on the three-year plan, the $1 billion in EBITDA that you're targeting by year three. When you presented that, I wasn't sure what the base year was? I think it was '22, but you kind of qualify that it depends on the macro environment. So my question is, are you on track with that three-year plan? Has that been pushed out a little bit or should we kind of think about year three as 2025?

Hey, Jake, this is Chris. As we said during Investor Day, we're very enthusiastic and confident in our ability to deliver on that plan. The three-year timeline that we put out there, what we'll tell you is that that's not a fixed timeline. But there's clearly a path towards $1 billion in EBITDA over the medium term. We haven't shifted at all our thinking on delivering on the outcome of that plan. But we really want to stay away from putting like a fixed timeline on it. It was merely just simply saying, look, there's incredible opportunity in this business. We feel confident that we can deliver on that in the medium-term. In terms that might shift a month or two or six months or even a year or two, depending on things that are happening in the external environment. But make no mistake, the opportunity is there. In terms of the progress that we've made, I'll tell you that we are right in line with our plan. We're very encouraged with the results that we're seeing with respect to the items that we've implemented thus far. Investor Day was June 13th, so we're only just a few months into this. But from what we're seeing right now, we're even more confident than we were three months ago, and where we're going and what our team's focused on and our ability to drive meaningful value over the medium term.

My next question pertains to the business trajectory. Clearly, the comparisons to 2019 have been consistently declining over the past four quarters. How confident are you that this will stabilize, as the excess demand from post-COVID has subsided? Are you experiencing any signs of reacceleration? Looking at the trends within the current quarter, do you see any indications of stabilization, even considering the promising initiatives that are expected in the next quarter or two?

Yes. I'll begin, and then Mike will provide some additional insights. You can expect us to consistently focus on executing our long-term plan, which is our main priority. We are enthusiastic about our progress, and we have a clear vision of our ability to achieve our goals in the long term. We don't get too focused on short-term fluctuations. The year-over-year comparisons are tough, especially since last year we experienced a surge related to the post-COVID rebound, similar to our peers. As we compare ourselves against that period, it becomes challenging. However, we are happy to report that we're still up 6% compared to 2019. We are particularly proud of how our team has managed to navigate this environment while still achieving strong financial results. Most importantly, we continue to have great confidence in the initiatives we presented during Investor Day and the exciting opportunities ahead to create significant value.

When you look back a year ago, we saw a 17.5% increase in Q3, which is a significant number to compare against. This makes it challenging when looking back to 2022. However, when we consider 2019, we still observe the growth we aim for, which is around 2% annually moving forward. This aligns with the more normalized environment expected in businesses like ours. While we cannot influence the macroeconomic factors affecting traffic, we can manage what occurs within our operations. Our focus is on maintaining and improving our EBITDA margins, which reflects the value we are currently achieving. The measures we are implementing now are long-term and will continue to benefit us as traffic and the economy return to more typical levels.

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

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

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

That is helpful. It seems you experienced approximately 250 basis points of favorable food and beverage costs year-over-year. Can you clarify the factors that contributed to that 250 basis points, which is more than double what you saw in the first quarter? Additionally, how should we consider this moving forward? I would like to understand the drivers of that cost favorability and how we should anticipate it over the next two quarters.

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

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

I wanted to inquire about the comps again and the overall trends during the quarter. Obviously, comps have declined in the 60s now, and I would like your insight on what you believe is causing that sequential decline and how it relates to the healthier consumer. You mentioned that the softness isn't concentrated in any specific area, but are you noticing any trends related to different times of the day, weekdays versus weekends, or between food and beverages versus amusements? Any additional context you can provide on what might be driving that sequential decline would be helpful.

Yes, Brian, I will take that and then let Mike wrap it up. The first thing I'll say is, I'll repeat what I said to Jake earlier is, last year part of what we're dealing with is just a tough comparison to the prior year, just with the post-COVID surge and our performance last year benefited from that just as our peer group did. And so there is a bit of a tough comparison. And as I said, when we compare ourselves to 2019, first, we're pleased with the growth from 2019; secondly, there was really no material trend in the business throughout the quarter. It was fairly consistent. As we always do, we've analyzed the heck out of our business, slicing and dicing it every single way. What I'll tell you is, there was nothing meaningful that came out of that. We think that it was just overall relative to 2022, there was just a decline. So there's not one thing that we could really point to that would suggest that it's related to a shift in consumer behavior in terms of how they're trading at Dave & Buster's or anything along those lines.

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

And our next question comes from Dennis Geiger, UBS.

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

Yes, you understood correctly. Let me provide some context. During Investor Day, we highlighted that improving food and beverage is one of our six growth initiatives, particularly focusing on increasing F&B attachment. This is part of a multi-phase strategy. In our tests conducted at 10 locations, we implemented the second phase of this strategy, which has proven to be very effective as intended. Our main goal was to eliminate unnecessary operational complexity to consistently deliver high-quality products, setting our operators up for success and investing labor in the areas that enhance quality and guest experience. We've conducted extensive research to understand how our guests perceive our F&B offerings and identified gaps. Our findings indicated that some menu items were unnecessary, lacking guest loyalty, or we were not executing them well. As a result, we redesigned the menu to address these issues. Additionally, we identified areas in our execution that were increasing food costs without enhancing guest satisfaction, leading us to remove those unnecessary ingredient costs. These changes were all part of our phase 2. Based on the results from our 10-unit tests, we are very satisfied as we achieved our objectives. The rollout of phase 2 begins at the end of September, and phase 3 is scheduled for February next year, which will introduce further innovations and intentional in-store marketing. Simultaneously, we will implement an enhanced service model, providing our operators with the necessary tools to excel. This approach is strategic, thoughtful, and multi-step, and we are excited about it.

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

Nothing to share at this time as we are finalizing our marketing calendar for next year. Our team is focused on creating an exciting lineup, so we will have more updates soon. Regarding our recent football campaign launch, we are quite enthusiastic about it. It offers a great opportunity to showcase our sports watch promotion effectively. Research indicates that consumers are responding well to value-driven messages, so we believe the $5 Bite message will resonate strongly. We also revisited our All-You-Can-Eat wings promotion. After consulting with our operators, we are encouraged by this offering, as it has previously attracted significant traffic. We have refined the approach to enhance its effectiveness. Overall, we are collaborating closely with our operators to ensure their success. We feel confident about our messaging and marketing strategy for the remainder of the year and maintain an optimistic outlook.

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

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

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.