Dave & Buster's Entertainment Inc (PLAY) 2020 Q3 法說會逐字稿

Good afternoon, everyone.

Welcome to the Dave & Buster's Entertainment, Inc.

Third Quarter 2020 Earnings Results Conference Call.

Today's call is being hosted by Brian Jenkins, Chief Executive Officer.

He will be joined on the call by Scott Bowman, Chief Financial Officer; and Margo Manning, Chief Operating Officer.

I'd like to remind everyone that this call is being recorded and will be available for replay beginning later today.

Now I would like to turn the conference over to Scott Bowman for opening remarks.

Please go ahead.

Thank you, and thank you for joining us today.

Before we begin our discussion on the 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 related 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 risk factors and uncertainties have been published in our filings with the SEC, which are available on our website at www.daveandbusters.com, under the Investor Relations section.

In addition, our remarks today will include references to EBITDA, adjusted EBITDA and store operating income before depreciation and amortization, which are 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 results contained in our earnings announcement released this afternoon, which is also available on our website.

Now I will turn the call over to Brian.

Well, thank you, Scott.

Good afternoon, everyone, and we appreciate you joining our call today.

On behalf of the entire D&B team, we hope you and your families are remaining healthy and safe during what continues to be a challenging time in our nation's history.

I continue to be extremely proud of our team for their tremendous agility, their resilience and commitment to succeeding under extremely difficult circumstances.

As we have discussed on previous calls, our 2 key near-term priorities are to: number one, reopen and operate our stores safely and efficiently as quickly as possible; and two, to thoughtfully accelerate change in our service model, menu, programming and marketing.

We believe our focus on those 2 priorities will position our business to thrive in a future beyond COVID.

And on both of those fronts, we had a very successful third quarter.

I'll speak to the first of those priorities now.

And then Margo and I will provide an update on the second.

After Scott has had a chance to review our Q3 results but also our expectations for the fourth quarter.

During the third quarter, we made significant progress reopening stores and driving improved operating performance.

We began the quarter with 84 opened stores and finished with 104, representing 75% of our total store base.

This included the opening of 2 brand-new stores, 1 in Manchester in New Hampshire and 1 in Lehigh Valley, Pennsylvania and the permanent closure of 1 store in Houston, Texas.

Over the quarter, we also made progress rebuilding our revenue with an average of 74 reopened fully operational comp stores, generating revenues at 57% of 2019 levels.

That's up from 35% in the second quarter when we had an average of 39 fully operational comp stores.

Comp sales at our reopened stores improved as the quarter progressed, peaking in late October at a 68% index to 2019 levels with the top quartile reaching a combined index of 91%.

Four stores generated sales above their 2019 sales for that same week.

With improving sales over the course of the quarter and continued discipline around a lean operating model, we drove meaningful improvement in our EBITDA trend relative to the second quarter and reduced our cash burn rate as well.

In fact, 68 of our 104 reopened stores achieved positive store-level EBITDA during the third quarter, and 80 stores did so in the month of October bringing us to within a few million dollars of breakeven on an enterprise level for that month, even with all of our California and New York stores still closed.

We believe the strong sales recovery for the third quarter and return to store-level profitability at the majority of our open stores clearly illustrates the resilience of the Dave & Buster's brand, and validate our game plan for navigating through this unique COVID environment.

Also during the third quarter, we solidified our balance sheet, and significantly enhanced our liquidity by successfully issuing $550 million of senior secured notes due in November of 2025.

We used the proceeds, along with available cash to completely pay off our term loan and to pay down our revolving credit facility.

As a result, our total available liquidity under our revolver stood at $314 million at the end of the quarter, significantly extending our liquidity horizon.

In conjunction with the bond offering, we also secured modifications to certain debt covenants through 2022 and a 2-year term extension on our credit facility resulting in no debt maturities until August of 2024.

On the whole, we are very pleased with our performance and accomplishments during the third quarter.

Now as you are all aware, the resurgence of COVID infections around the country was causing states and local jurisdictions to place renewed restrictions on restaurants and arcade operations, and has led to store reclosings in the month of November.

As a result, the pace of our overall sales recovery moderated over the first 5 weeks of the fourth quarter, causing a sequentially higher EBITDA loss in November.

And we expect these pressures to intensify over the remainder of the quarter.

Despite this recent turn of events, we are well positioned with an exceptional team.

A strong plan, significant liquidity and a resilient brand.

And I view this as a temporary setback.

And we are extremely optimistic about our ability to navigate through another COVID resurgence period and really come out on the other side of this even stronger when this wave passes.

At this time, I'm going to ask our CFO, Scott Bowman, to touch on the financial highlights in the third quarter.

And provide some broad insights on how we're managing through the fourth quarter in the midst of renewed COVID limitations.

Scott?

Thanks, Brian, and thanks, everyone, on the call for joining us today.

I'll first spend some time summarizing our third quarter performance and our current liquidity position.

And then I'll provide some expectations for the fourth quarter.

For the third quarter, total revenues of $109 million decreased 64% compared with the prior year period, reflecting a 66% decrease in comparable store sales.

By month, comparable store sales were negative 75% in August, negative 62% in September and negative 59% in October.

For our comparable stores that were open and fully operational for these periods, I would also like to provide some performance details by month compared with the same period last year.

For August, our 68 open comparable stores produced a sales index of 46%.

For September, 76 open comparable stores posted a sales index of 65%.

And for October, our 77 open comparable stores produced a sales index of 61% compared to the prior year.

As for sales mix, amusements and other continued to outperform food and beverage, accounting for 65% of total sales compared to 58% last year.

Turning to the balance of the P&L.

Gross margin improved 101 basis points to 83.6% in the quarter, primarily due to higher mix of amusement sales, partially offset by food and beverage spoilage that was expensed as stores reopened.

Operating payroll and benefits expense was $27.7 million, a decrease of 64% from the prior year, primarily due to fewer open stores and continued execution of the leaner labor model.

Despite the lower sales base, we succeeded in managing these expenses to 25.4% of sales, equal to the same period last year.

Other store operating expense was $70.8 million, a decline of 36% from the prior year, primarily due to lower variable costs, compounded by savings in marketing, repair and maintenance and rent abatements.

As a percent of sales, other store operating expense was 64.9% of sales versus 37.1% last year.

The higher percentage was mainly due to the deleveraging effect of lower sales on occupancy expense.

G&A expense of $11.7 million decreased 28% from the prior year mainly due to savings in compensation expense, consulting expense and legal fees.

Consulting expense declined $2.6 million, partially due to a $1.5 million accrual reversal related to outside advisory fees.

As a percent of sales, G&A expense was 10.8% compared to 5.4% for the same period last year, mainly due to the deleveraging effect of lower sales.

Third quarter EBITDA loss was $21.7 million, reflecting an average EBITDA burn rate of $1.7 million per week, which compares to a burn rate of $3.5 million per week in the second quarter.

Adjusted EBITDA loss was $16 million for the quarter.

Turning to the balance sheet.

We ended the quarter with $8 million in cash and $314 million of availability under our revolving credit facility, which was net of our $150 million minimum liquidity covenant.

Total long-term debt stood at $576 million at the end of the quarter, consisting of $550 million in recently issued senior secured notes and $26 million outstanding on our revolver.

Additionally, at the end of the quarter, we had approximately $17 million in deferred vendor payables, which compares to approximately $35 million at the end of the second quarter.

We plan to have approximately $6 million of deferred payables remaining at the end of the fiscal year.

Deferred rent totaled approximately $48 million at the end of the third quarter compared with approximately $40 million at the end of the second quarter.

We continue to negotiate with landlords for further rent deferrals, but expect to begin some level of repayment beginning in January and extending over a 12- to 18-month time period.

Also during the third quarter, we received a 2019 tax refund of approximately $10 million related to the CARES Act and expect additional refunds of approximately $11 million over the next couple of quarters.

Excluding financing activities, our weekly cash burn rate improved to $2.4 million primarily due to an improved EBITDA burn rate.

When netted together, the temporary working capital adjustments related to deferred payables and deferred rent, offset by the CARES Act tax refund had an overall de minimis effect on our weekly cash burn rate.

Turning to capital spending.

We recently completed construction in open 2 new stores in Greenwood, Indiana and Gloucester, New Jersey, and plan on opening one additional store by the end of fiscal 2020.

Additionally, we plan on accelerating 2 capital projects in the fourth quarter, which have contributed to efficiency gains in our stores.

These projects include investments in tablets to improve our service model efficiency, and in high-speed kitchen equipment to gain efficiency for certain menu items.

Including these investments, we expect to spend approximately $60 million to $65 million in CapEx for fiscal 2020, net of tenant allowances.

In summary, our operating results for the third quarter reflected encouraging sales trends that reopened stores and validated our lean operating model.

Additionally, as a result of the improved liquidity position in the company's projected cash flows from operations, the company believes it has alleviated the substantial doubt about the company's ability to continue as a going concern, and the company has sufficient liquidity to satisfy its obligations over the next 12-month period.

While we are very encouraged by recent performance, COVID resurgence around the country has resulted in new operating limitations, store re-closures and further delays in the company's ability to reopen stores.

This has naturally had a negative impact on our performance during the first 5 weeks of the fourth quarter.

After ending the third quarter with the 104 open stores, we now have 90 open stores, or 65% of the chain, and have experienced overall comparable store sales of negative 71% for the first 5 weeks of the quarter.

For our average of 71 fully operational comp stores, we have experienced an index of approximately 49% compared to last year, which has been mainly due to heightened COVID concerns and mandated reductions in operating hours.

For the month of November, the slowdown resulted in $32.6 million in sales at a negative 69% comp and an EBITDA loss of $11 million resulting in an -- a weekly EBITDA burn rate of $2.7 million.

We currently anticipate that the trend of COVID cases and resulting actions by local jurisdictions will intensify over the balance of the fourth quarter.

And that reopening of our California and New York stores will likely be delayed until early 2021.

These conditions will be especially impactful to our December sales and profitability, a month in which we have historically benefited from high foot traffic and a robust special events business.

Given these expectations, coupled with anticipated cost pressures, we expect further erosion in our fourth quarter comparable store sales and EBITDA.

One of the primary expected cost pressure during the fourth quarter is store labor, reflecting our decision to recall key store leadership positions to maintain talent and to ensure store restart capabilities.

We also plan to incur increased repair and maintenance costs to ensure stores are up to standard, above-normal spoilage costs due to prolonged closures, reduction of rent abatements due to the expiration of landlord agreements and the G&A as we recall select positions based on need.

While this temporary setback will impact our results in the near term, we have the playbook to navigate through this resurgence and feel confident that demand will return once the resurgence subsides.

With that, I'll turn it back over to Brian.

Thanks, Scott.

Despite the recent temporary setback in our business, we're very encouraged about our future potential due to the resilience demonstrated in our third quarter sales trends and our enhanced liquidity.

Another reason we feel very confident is that even before COVID arrived, we were developing and preparing to implement strategic initiatives to accelerate change in our menu, service model, programming and marketing.

Over the past 9 months, our team has worked to create a new future for Dave & Buster's beyond COVID with a plan designed to broaden our relevance and enhance guest engagement while at the same time enabling us to operate more efficiently.

As we've reopened and welcome guests back to our stores, we gained confident in each element of that plan.

Much of the execution of our reopening game plan and implementation of our future forward strategic initiatives is being driven by our Chief Operating Officer, Margo Manning.

Margo is a 29-year veteran of Dave & Buster's and has been in her current role for the past 4 years.

And she and her team, together with our store managers, have led our store-level COVID response with incredible professionalism, teamwork and discipline.

I'll ask Margo to join us today to share more information about the investments we're making in our service model and menu initiatives, which we believe will help put us in a very strong competitive position when we begin to emerge from the current COVID limitations.

Here's Margo.

Thank you, Brian, for this opportunity to highlight the exceptional job our operating teams have done reopening our stores.

As each market has been clear for reopening, our team has demonstrated their ability to get stores up and headed back towards store-level profitability quickly.

This takes enormous effort.

And I'm extremely proud of the team's performance through these unprecedented conditions.

The best part about reopening our stores is bringing back the staff.

To date, we've been able to recall approximately 8,000 team members, almost half of the number we were forced to furlough at the outset of the pandemic.

And it's been great seeing them welcome our guests back for good, clean fun.

As Brian said, our team has been implementing and refining a number of service model and menu initiatives that we had already developed before COVID arrived and we're originally planning to roll out in 2020.

The primary objective of our menu initiative is to establish a stronger differentiated food identity for the Dave & Buster's brand.

After extensive research, we have landed on inspired American kitchen as our identity.

And we have built a plan to bring it to life in 2021.

Our new food identity is rooted in enhanced flavors and quality ingredients across a convinced number of menu items, priced to maintain our historic gross margin.

It enables our guests to explore new flavors while also offering them a balanced selection of familiar dishes.

Designed to simplify operational execution, this new menu sets our staff up to deliver dishes to our guests hot and fast.

Taken together, we expect our new menu to drive an improved guest experience to increase our food attachment rate and to accelerate table turn, all aimed towards increasing Food and Beverage sales.

Our new menu is supported with a dedicated training program that educates our kitchen and wait staff on everything from flavor profiles to cooking techniques.

Additionally, we're in the process of rolling out a new piece of kitchen equipment to every store that will speed up cooking times.

And we are also upgrading our kitchen management system to facilitate a seamless flow of food, both meaningful operational improvement that will be completed the first half of 2021.

In mid-November, we began the transition to our new menu from the temporary kitchen item menu that we implemented as stores begin to reopen last spring.

We are now offering 17 items and currently plan to add 6 more dishes in early March and expand to 28 amazing items by late April.

This represents 33% fewer items than the 42 items on our pre-COVID menu.

Of course, we're prepared to remain flexible in terms of these menu expansion time lines, and we will adjust accordingly based on the status as of pandemic.

Turning to the service model initiative.

The primary goal here are to enable guests to control more of their in-store experience and to free up our team members to focus on cross-selling and upselling.

We believe that increased interaction with our guest will enhance their overall experience.

The nucleus of this effort consists of deploying a combination of tablets, kiosks and mobile web to enable a completely contactless order-pay experience.

Our 5 new stores were launched on this platform, and it's been well received by our guests, most of whom have adopted a hybrid approach initially, utilizing both the new technology and [the ways back] team member.

As we continue to refine the technology and service model, we are evaluating the potential to expand this platform to all of our stores during 2021.

Another completely new element of our service model initiative involved the November launch as third-party delivery partnership with DoorDash and Uber Eats at 105 of our stores, essentially all of the stores that we had reopened during the third quarter.

Our plan is to add the remaining stores, primarily our California and New York locations once we are able to open them for on-site dining.

And finally, to further expand our reach and leverage our kitchen capabilities, we're beginning to test several ghost kitchen concepts, highlighting specific food categories from our new menu.

We're exploring concepts that could be rolled out nationally, regionally or offered in specific markets or offered seasonally or even offered around specific major events.

An overarching objective of our menu and service model initiatives is to enhance our long-term profitability by driving increased sales more efficiently.

Obviously, many aspects of the lean operating model that we have adopted for the past 9 months will not be fully sustainable as we move back towards the full operating posture.

However, we have learned a lot and are confident that our post-COVID fully operational service model and menu will produce some degree of sustainable leverage across our major cost levers.

Now I'll turn the call back to Brian for his closing remarks, and we'll remain on the call to answer any questions.

Thanks, Margo, and thank you so much for your leadership and your team's ongoing commitment and dedication to this company that we both look love so much.

So thank you for that.

As Margo indicated, we have been working on our service model initiative even in the midst of COVID limitations.

We've also refined our menu during this period and are poised to fully execute the next 2 phases of expansion as market conditions improve to a level that will support our success.

In addition to those investments, we used some of our reopened stores to test new programming strategies that we believe will drive relevance and recovery as we are able to return to full operations.

For example, we launched a system-wide in-store radio station, D&B Live and deployed a cloud-based digital video system that enables us to centrally manage programming on our Wow Walls and other high-visibility streams in each store.

We also experimented this fall with sports program to see how our guests respond to a more immersive watch experience, featuring live DJs and engaging events like vendor-managed beverage tastings at select stores.

We're taking the learnings from these tests and we're finding our programming and event strategies to be in a position to expand them as COVID restrictions ease.

Additionally, during the third quarter, we launched our exclusive Star Wars Lightsaber Dojo VR game that quickly established itself as our top-earning, single-player nonredemption game.

In Q1, we'll test multiple game titles to determine the extent of our 2021 game buy, and we'll watch the pace of business recovery to time their broad rollout.

We also launched our new national brand marketing campaign in September.

Initial response to the campaign has been encouraging and we will continue to leverage our relationship with our new creative agency to expand the platform, along with a reimagined promotions and events calendar as market conditions recover.

We currently anticipate rolling out our game, programming and marketing initiatives more broadly in late spring to early summer time frame depending on COVID trends.

I'll close today by reiterating the themes we've been focused on for the past 9 months.

As difficult as those months have been, we are confident that our team, our plan, our liquidity and our brand put us in a strong competitive position to bounce back quickly when the threat of COVID begins to subside.

Our team is far more experienced and prepared for this current resurgence than we were back in March.

We have confidence in our COVID game plan and in our team's ability to execute it nimbly as market conditions allow.

We have a vastly improved liquidity horizon, extending beyond the projected threat of COVID with the promise of one or more vaccines expected to become widely available in 2021.

And we validated that our store reopening process and lean operating model can produce positive enterprise EBITDA at sales index of 50% to 55% of 2019 levels.

And finally, and perhaps most important, we demonstrated the resilience of the D&B brand and the pent-up demand that exists among our guests to return to Dave & Buster's unique menus.

When they do, they'll be greeted by an inspired team, a fresh new menu, a more customer-centric experience and the good clean fun they've come to expect from Dave & Buster's.

I continue to be very proud of and inspired by our team for their commitment and teamwork in the face of difficult and ever-fluctuating conditions.

Each member of the D&B team is contributing their unique skills to drive our success while setting us up for a better future.

And for that, I am extremely grateful.

We will get through this together.

We're going to come out on the other side.

And we will thrive again in 2021.

Now Ally, we'd like to open up the call for questions.

(Operator Instructions) And we'll go ahead and take our first question from Jake Bartlett from Truist Securities.

Brian, my first is on the deceleration of the same-store sales.

We're actually really focusing in on the stores that remain open in the comp base, a deceleration in the quarter-to-date from late October.

Can you just aggregate what the impact has been on stores that have not had any change in restrictions?

I'm trying to -- it seems mathematical.

Obviously, if there's restrictions being reimposed.

But in the stores that have not -- for instance, stores in Florida, and you gave us such great detail in the deck from mid-October.

Have markets that have not been directly affected by reclosures, have those also decelerated fairly meaningfully?

Yes.

It's a really good question, Jake.

I hope you're doing well, by the way.

You as well.

Yes.

The deceleration we've seen in November has been broad.

So restrictions themselves, if we're still allowed to open, have not really created a big headwind in performance.

Operating hours a little bit.

Capacity restrictions.

Those sorts of things really don't impact us like they would a casual diner because we have big facilities and a lot of capacity.

And a lot of it's unused certainly over the week and many operating hours.

So that's not particularly the headwind there.

So the decline that we have seen in November have been in virtually every market.

So there's definitely a COVID overhang now in most markets, even Florida, if you look at the data we've put out on the website showing the trends by state.

And virtually every state is declining in November.

So I think you're seeing some reluctance, I think, my guess to get out really nationally right now.

Got it.

Great.

Okay.

That makes a lot of sense.

And my next question is just on the work that you're doing with your initiatives around the menu and around some of the operational improvements.

When you look out into the future, maybe it's a year, a couple of years, if you were to -- when you regain your sales how much more efficient do you think you'd be?

And I'm not sure how you know -- what the best way to frame that is.

Some companies have talked about we would need 90% of our sales to achieve the same level of profitability or something like that.

So is there a way you can frame how we should think about these -- your more efficient model coming out of COVID, just really to the extent that it's going to be more efficient.

Yes.

I mean I've always said, we've learned a lot of things.

We've been really scrappy over the last months in terms of labor.

And in some ways, a lot of initiatives we're talking about, tablets and what we're trying to do with self-service, are not really driving what's happening today.

I mean we're -- this is just grid and on the part of our operators, and they're doing a fantastic job.

And being very nimble in terms of how we're scheduling up and down the P&L and particularly labor.

So we are definitely getting some efficiencies by our operating calendar.

We're not operating 95 hours a week.

So some of the periods where we are less efficient with less revenue, that's helpful right now.

And we're going to continue to look at that, our operating calendar as we move forward because it has been helpful.

And the initiatives we're talking about, that Margo's talking about are really more forward-looking, and we have sort of stuff and test.

We think it could be very helpful to us.

But I think we've learned some things.

We don't anticipate that we're going to go back to full par level on our management team.

To the extent when we get back to our normal sales level.

I think we -- some of this stuff is going to stick.

It's not all going to stick.

And in terms of hourly labor, we're going to see some pressure on that.

As we get North -- New York and California, those are higher cost states for us.

And they're not open right now.

But you want to add anything, Margo?

I think you hit the high points.

Okay.

Okay.

And just lastly, very helpful to see what the kind of the EBITDA burn rate is in November.

Things are going to change here in December, as you talked about kind of on a year-over-year basis being much lower just because they're high-volume weeks and months.

But can you help us out on really from a free cash flow level, and that's kind of including the deferrals, interest expense, what you think the EBITDA might be.

But just trying to understand how -- what kind of cash burn do you expect in the fourth quarter.

Maybe it's a wide range, but I'm just trying to get a better idea of that.

Yes, Jake, this is Scott.

I'll give you a little bit of color as we saw kind of November numbers come in with EBITDA to about $11 million loss.

And so yes, as we kind of look at that month, our cash burn was between $3.5 million and $4 million.

And so we do expect naturally to have a little bit higher cash burn.

And I think a couple of things to think about is our rent deferrals that we have out there.

So that will be a little bit of a drag on cash.

But the other thing is we're really having some pretty good success of paying down our deferred payables outside of rent.

I mentioned that we should have about $6 million remaining at the end of this year.

And then also the potential about -- another $1 million -- $11 million or so from the CARES Act.

So I think keep those things in mind, but just from an operational standpoint.

And depending on what your estimate of EBITDA is take that kind of example from November.

And hopefully, that kind of helps you kind of model out what we may see in the future.

We'll take our next question from Jeff Farmer from Gordon Haskett.

I'm just curious if you guys can provide some color on the impact that what looks like a pretty significant drop in special event and large party bookings will have on your fiscal fourth quarter same-store sales.

Well, it's going to -- as Scott said in his prepared remarks, and I did too, really.

It's going to have a pretty significant impact.

It's December special events represents, what, 15% of our overall sales in the month of December.

And that business, early on, we were actually booking some events.

We geared up a small team to -- and some happy thoughts that things would be a little bit better.

We kind of lost that a bit.

And so we're not expecting to have a particularly big special events down here over the course of the holidays.

And so that's a pretty big headwind.

And as you know, our overall party business for the full year is around 10% of overall sales.

So we've been -- the indexes that we're talking about, and we're disclosing pretty transparently here.

Those -- we're generating those numbers in the face of special events business in the high single digits in terms of mix with really no business.

That headwind is going to get a little bit of favored here as we hit December.

Okay.

That's helpful.

And then you also, I believe, mentioned, sort of the early entry into third-party delivery.

Anything you can share with us in terms of how impactful that's been, delivery sales mix in the stores that offer delivery?

So this is Margo.

So I'll take this one.

So just starting with -- we are an entertainment-brand first.

But in terms of third-party delivery, it's low cost, low risk.

And so it makes complete sense for us to enter into this into the space.

And for us, we view it as being incremental.

We're early days into it.

And so we rolled it out in November.

We're talking literally being live on it for about 2.5 weeks.

We're working on additional dose concept because we do feel like there's going to be an opportunity for us to expand this in addition to experimenting with promotion and marketing because, again, it's going to be sort of a new space for us.

But it's early for us to really comment on its impact, but just recognize the fact that for us, we're an experiential brand, and that's what the consumer is going to be looking for us.

So this is an incremental but probably not a game-changing initiative for us.

Okay.

I appreciate that.

And just one final question.

And I believe you guys sort of the math works out to 15 stores, other than closed in recent weeks.

And obviously, you've outlined an expectation for potentially some additional stores to close with some of the intensifying mitigation efforts.

But the question is, where would you theoretically expect those closures to take place from a state perspective?

Well, we've got a couple today.

And it's...

Yes.

They're kind of coming certainly roll at in terms of hours or even limited service.

We're seeing sort of coming at us and...

Well, we have a few in Maryland today.

Yes.

(inaudible)...

I think, Northeast, Mid-Atlantic.

We just had some fall.

And we have been eyeing some stores in the Midwest, but actually, we are expecting to fall earlier than they haven't yet.

But this is really hard to say.

I think we feel like it's going to get a little worse before it gets better.

And we're going to lose more stores the 90 we have today with a plus 2 today.

So we're going to see a further dial back here, I suspect.

And that said, I -- again, I'm not trying to minimize it, but I do view this as a temporary setback here.

And we're just -- I think the line of sight for us is much better today than when we were facing rollbacks and shutdowns of the entire brand back in March.

I mean there's a lot of optimism around a vaccine that's on the horizon here.

I don't think it's kind of an immediate thing and nobody really does.

But there's a brighter future in '21.

And I think a way forward to get our store base open.

And in my view, when we get these open the next time, some of this stop and start, close activity that we've seen and been dealing with over 2020, which has been very difficult, I think we're pretty optimistic that when we get these tools open again, we have a pretty good shot that they're going to stay open, and we're on a path to just better days.

And what we're so encouraged about is even with COVID, still running all around the country.

We hit our peak in October at the top quartile, as I said, at 90%.

That's very encouraging.

We're really confident that we're going to bounce that.

We just got to get these stores open.

We got to weather the [winter] here.

And as I said, we're very hopeful for next year.

We'll take our next question from Andrew Strelzik from BMO.

I hope everyone's doing well.

I'm curious about -- I'm curious what you're seeing in some of the stores that were farthest along in the sales recovery.

So whether that's the 15 or 20 or so from the deck that you provided in October about that we're at 100% or close or maybe the top quartile that we're at 90% sales index.

If you could just kind of compare and contrast how the business looked versus a year ago before the pandemic.

Where were the margins relative to a year ago for those stores?

What did the demographics look like?

What did the business mix look like?

And any other color nuances that you can share would be helpful.

That's a lot of questions.

It's just one overarching question.

So in terms of the stores that we're performing the best over the course of COVID -- I was -- I'm sorry.

Florida and the Southeast were the states that were really performing the best for us.

And those are the ones that are really getting close to 100% if you look at it on our website.

So with what we had done in terms of the lean operating model, those -- some of those stores were actually performing better than they were in 2019.

So that's sort of the good news.

In terms of what's happened recently with this resurgence really all boats are declining here or dropping, all sales levels across those states California -- Florida, South Carolina, some of those locations, Georgia that were performing so well.

They've dialed back quite a bit now.

And again, we think it's temporary.

It will be temporary, but they're suffering right now.

And then what the other questions were.

That was pretty much...

Demographics are -- I think we're -- Margo you are here.

We're still seeing a little more adult, a little more male, I think.

But...

And then the family starts to come back after the stores have been over for a while.

We start seeing them sort of settle back to the pre-COVID guest base.

But initially, when they open, it does look a little different.

Okay.

Great.

That's very helpful.

And then the competitive environment, competitive issues you had before COVID been very key for you, for the business?

And you think through that, kind of how that could change moving forward.

I'm just curious, have you been able to kind of quantify or dig in on kind of what you've seen so far from a closure perspective?

Or how do you expect that to evolve as we kind of move forward over the next couple of years.

So your part -- I apologize, additions on closures here?

Competitive.

Competitive closures.

Yes.

We're tracking kind of the competitive set right now.

I think you are and many others in terms of what we're seeing.

There's a mixed bag right now in terms of the competitive set.

We have some of the ones that we've talked about in recent years, main event and top up, in particular, that are largely open right now.

And then there are others where some of them are largely closed down.

So it's definitely a mixed bag.

My feeling is that we're all grappling with store closures, softer demand, dealing with liquidity issues.

And so my feeling is that we're going to see -- we definitely saw a rollback and a decrease in store openings.

Certainly, we did that.

Others do that as well.

I think we're going to see a bit of a slowdown as people are really trying to concentrate on their core business.

That's definitely what we're going to do.

We are going to concentrate our best path to recovering of the brand is getting our existing store base reopen and driving profitability in the business.

And so that's what our focus is.

And I would expect that, that's going to be a bit of a focus here for some of these other brands.

And I do think there's going to be a shakeout of a few.

And we've already seen some of that with a couple of our competitors.

And I do think with this resurgence, some of the coming-soon signs you might see on the website, I wouldn't be surprised to see some delays in those -- in that pipeline.

We're going to be very -- we're internally going to be very measured about our store development pipeline.

Again, concentrating on getting our store base open and that's the clearest path for recovery for us.

And I think we -- and I've said this before on these calls, guys, that I'm very confident that we have one of the best operating models out there in this competitive space in terms of AUVs, margins, returns on a pre-COVID basis.

And I think that's serving us really well right now.

And we're doing it, I think, better than we ever have in terms of being nimble.

And I'm not sure the entire competitive set has that same situation because most of those models, I don't think were as strong and as solid as ours coming into COVID.

So we're going to concentrate on what we're doing, and we're going to do it the best we can do, and I think that's going to position us really well.

We'll now take our next question from Andrew Barish from Jefferies.

Happy holidays.

I hope to get a little break here coming up.

A couple of quick ones on just actually looking back and trying to understand a little bit of the ramp in the 3Q, there was a big jump in the store sales index, September from August, like 20 points.

So I was just trying to get a sense of what was going on there.

Is it the changes in schools?

Or was it just kind of the momentum of adding some more stores and having additional ones open?

It just seemed like a big jump.

Well, we -- I mean we were seeing -- I mean if you kind of roll back the tape, and I think we have all that laid out there, right?

We showed the (inaudible) or the -- we showed (inaudible).

But with the resurgence that happened in June and July, we dialed back pretty quickly and sharply there.

And then it was a pretty steady progression through the month of August, moving up.

And then in September, we were back on air and on TV really for the first time in a long time.

So we came out with a new brand campaign, launched that in September.

We were on air, I want to say, 5 weeks.

It was a meaningful investment.

These were some dollars that we were unable to cancel.

And it actually was a perfect timing for us because some of the fears were subsiding at that time.

The consumer appetite was improving.

And we had more stores opened.

It was sort of a perfect combination in September.

More stores open, and we have dollars when we put them to work.

Right now, we're not -- we actually delayed and canceled some plans that we had for media here over the holiday season.

Really looking to sort of save that powder for time when COVID fears are actually waning, not increasing, and the appetite for guests to get out is not something we're swimming up the stream on, which I think is what's happening right now.

But I think that was helpful for us in September.

Yes.

That's helpful in understanding that as well.

And then secondly, on the programming side of things, as obviously, it's been difficult for fans to get out the sporting events.

Have you seen kind of noticeable increases on those weekends, sports football games, et cetera?

And how are you thinking about the Wow Walls rollout in light of that as you look out to '21?

Yes.

I mean we've performed well on those days.

Thursday has been a little tougher for us as we had wings working for us in the prior year.

Took a little bit differently for us.

And we're not really discounting materially right now.

Our -- we don't have plans at this point to further roll out Wow Walls.

We've got about 50 of them out now.

Our view at the moment, number one, we're going to be very conservative and cautious with the capital in this environment.

But we've got to go to work on building a programming muscle in this company.

We have a lot of access here.

We have big facilities, sports could be -- we can improve on our sports offering and what we're doing around that from an experience standpoint.

And we're going to be focused on that.

And we're looking to see what other things we can do to drive frequency and a reason to visit within our stores.

So the programming engine is, I'd say we're running on a few cylinders right now.

It's the muscle that we're trying to develop and get at.

But I think as an entertainment brand that is trying to get beyond an arcade.

This is a natural fit for us.

Just as sports is a natural fit for us.

Just thinking about how we can create events and a reason to visit over the course of calendar and the course of a month and year.

So our SVP of Entertainment, Kevin Bachus has led -- leading that charge.

And I'd say we're in pretty early innings, and we're focused on sports here, obviously.

And the football season, tough read here.

2020 is just the year I want to get out of.

I think we've done with but was really tough to read kind of what that's going to look like.

We will now take our next question from Chris O'Cull from Stifel.

Brian, given you guys have seeing stores go through 1 or 2 cycles of closing and reopening.

What factors do you think influence the strength of sales recovery when a store reopens?

Well, I think some of it is fundamentally the market itself.

I mean we've definitely seen a stronger appetite for our experience in the Southeast, they've -- those stores developed up quickly, pretty quickly.

And many of the stores in the Southeast got -- and some of them actually were surpassing prior year.

Over the course of not recent weeks, but -- so -- and -- I think some of the Northern States and Midwest states have been a little more difficult for us so I think some of this is the underpinnings of COVID fears in a particular market because we're really not running really a different playbook when we own them.

So it's not -- it's not necessarily something we're doing differently in different markets, a little more about consumer appetite, I think.

And I think the good news is when you look at the comp recovery curve that sat on the website and the maturity curve, by and large, the good news is they all have an upward trajectory.

And we feel very confident that we're going to be able to get all of our states when we get past this thing back to a really good place.

Some of them make it there quicker, but we're pretty darn confident.

A good example of that is when we own in California, we run up in there for more than 3 weeks, but they opened and shut.

No stores opened at a 30% index in their first week of operation.

That's actually one of the highest opening week index as we had in any state.

So we're really optimistic that people want to get back to their everyday life.

And actually -- and we think that's going to happen everywhere eventually.

You guys mentioned increased labor costs in the fourth quarter to recall some key store leadership positions.

I'm trying to understand the sales level you're anticipating and when you expect to see that sales level to determine how many of those employees to recall.

Yes.

Let me explain that a little bit here.

We -- there are really 2 pieces of this.

In a month or 2 ago, was it October business, end of October?

Yes.

End of September, actually.

Early October, we made the decision to bring back our core leadership team in our New York and California stores.

Those stores represent 25% of our overall sales base.

They represent about 20% of our units.

And those stores were going on 6, 7 months of being closed.

And there is nothing more important for us right now than being able to reopen our stores quickly and effectively.

So we brought back a small team in each of those stores.

To make sure we could preserve our ability to reopen.

And not -- when you're closed that long, if you have to start with the branded leadership team, you're in trouble.

And that -- this is "win the battle and lose the war" kind of thing, and we weren't going to do it in that -- we weren't going to try and win labor battle and lose the war on being able to reopen.

So we brought those folks back -- a team of folks.

And then as we've reclosed the 15 net stores that Scott mentioned, but we are not planning to course correct and have a significant furlough at this time.

We think this is temporary.

And we need to make sure that when the time comes to reopen, which we think we're going to get some of these stores back open after the holidays.

And then California, New York, we think is going to take longer and to really our first quarter of next year or early next year.

We have to have our eye on that.

That's really important.

That's imperative.

We don't bounce back.

We don't recover.

And we're not going to save our way to profitability here.

We've got to have sales.

We've got to get these stores on.

I agree.

And then just one last one.

Just with the addition of those positions being filled and ramping operations back up during the quarter and some of the other investments you mentioned.

Did you guys provide an update to your EBITDA breakeven target at the enterprise level?

I think previously, you mentioned something like sales being now 40%, 50% -- 45%, 50% was breakeven.

Is there any new updates to that?

No.

We would -- I sort of confirmed it in my prepared remarks today.

I reaffirmed that we have -- if you look at October, we were pretty close to breakeven in the month of October.

Just we were at an EBITDA loss in circa $3 million.

And you could calculate that if you look at what we've disclosed out there.

So no new news here.

So we were really close in the month of October.

As I mentioned, our comp recovery index was -- we had a 68% index for the -- late in the quarter and had about 75% of the chain open.

So we feel really confident that when we get to 50% to 55%, we're going to be in that enterprise-level breakeven ahead and then the profit...

I apologize.

Is that for the fourth quarter as well?

I'm sorry?

I mean for future -- for the upcoming quarter, not the third.

No, we're not -- no.

We're -- as we said, we were close to it.

So we're confirming that when we get to 50% to 55%, we think we'll be profitable, that's not going to happen in Q4.

We're -- as Scott said, we're seeing rollbacks -- we were scaring in October.

We're seeing rollbacks in November.

So the cost recovery index is going wrong way on us.

And more of the chain has been more -- our store base is being shut down right now.

So we're going in the wrong direction.

Scott, what was the comps for November.

Did you share that?

Yes.

For November, it was negative 69%.

Yes.

So we've got an index of -- yes.

It's not close to getting to 55% of 2019.

So we've got a way to go.

I think one of the ways to think about it, Chris, is as we do get the ability to start reopening stores again, I mean, we'll have some of this infrastructure in some of these people in place already.

And so it won't be kind of as much variable cost adding on because we are taking care of some of the repair and maintenance and things like that, and with the store leadership being here.

There'll be some add back.

But we have a pretty good base to build from.

And we'll go ahead and take our next question from Brian Mullan from Deutsche Bank.

You touched on sports as an opportunity earlier, but I was curious, does the legalization of sports betting across the country, does that offer any opportunities to drive increased traffic to the stores over the long term?

Are you devoting any time or resources to exploring that opportunity right now?

Is there an opportunity?

Yes.

The short answer is there is an opportunity.

And we are devoting resources to explore that.

We -- Kevin Bachus, who is our SVP of Entertainment, is in discussions with a potential partner.

We're deep into those discussions.

And we think it is a potential fit for us.

And I don't have any more to report on that right now.

But hopefully, as we hit our next call, we'll have a little bit more to report out on that.

Okay.

Great.

And then earlier, you touched a bit on the competitive environment, some of your competitors.

But just in terms of your own unit growth coming out of the pandemic, are you -- same kind of question, are you devoting resources or time to thinking about what the pipeline could look like for the investors.

And big picture, do you anticipate being a net unit grower concept once again when we get out of this time period?

Short answer, eventually.

As we -- if you look at this year, we're going to open 6 stores.

We were well on our way with virtually every one of those stores.

So it makes sense to wrap those up, limited capital remaining, and we have one left [green day] here in the fourth quarter, and it will take us to 6.

As I look at 2021 and what our team has on their plates, our top priority is not be opening new stores but reopening a significant portion of the chain.

And as I said before, my view is that is the clear, the quickest path to the financial health and recovery of the D&B brand.

So we will be prioritizing new store growth in 2021.

And we must prioritize the recovery and the reopening of the brand.

And that's not a -- as long as some of these stores have been down, particularly California and New York, we're coming up on a year it feels a lot like a reopening, right, Margo?

Yes, it does.

And that is why we're bringing back a small core leadership team to make sure we preserve that ability.

But there's still a lot of lifting to get hourly team members that are going to do other things, get -- rebuild those stores.

So that is our top priority.

Our view also is as we have gotten these stores back up in a really lean way, our bench strength is not what it once was.

We're operating stores right now at a fraction of the prior team, typically 9 to 10 folks, and we're on average around 5 right now.

So our bench strength, actually for new stores has -- have been hurt by this right now.

And then we're going to watch liquidity.

We want to see a better line of sight, more of the store base back open and we're back on a cost recovery path that is healthy.

I like what we were seeing prior to this recent resurgence.

So there'll be a time for acceleration.

I don't view that as 2021.

We have a good solid pipeline right now in 2021.

We have about 12 locations that we have under lease, and we're working with our landlords in terms of the timing of those.

So we still view the U.S. as a great market for us.

There's a lot of potential.

We have some in our pipeline.

We think there'll be possibly a lot coming up too in the current real estate environment.

So we will pivot at some point.

It's not going to be the pivot here early into '21.

We'll now take our next question from Joshua Long from Piper Sandler.

I hope everyone is doing well.

I wanted just more of a point of clarification understand what some of the stores are closing back due to the restrictions.

Curious on what the opportunity is, or if there is a need to revisit the idea of which of those closures would be not temporary but permanent in terms of just optimizing the overall portfolio.

Joshua, that's a good question.

I think the good news for us, and I think we're maybe one of the few brands that could probably say this.

We had a very healthy seller base overall prior to COVID.

And all our store's EBITDA positive.

And we have in this environment, we have closed 2 stores.

One of them in Chicago, one in Houston.

We had made the Chicago call prior to COVID.

Older store, markets moved away in the location.

It was profitable, but we have made that decision, we just elected not to reopen it.

And then we closed Houston, which is our oldest store right now -- or one of our oldest stores in the fleet.

But we had a sister store 5 miles away, close to [St.

Louise].

It just made sense.

We expect it to be accretive because of transfer to the sister store.

So at this point, we -- I don't plan to make any long-term closure decisions based on short-term results and the disruption that we're seeing.

I think we're going to want to see how these stores recover.

And so we don't have plans to close any other stores at this time.

Understood.

And then my follow-up question would be lots of interesting opportunities and initiatives about extending the brand in some new channels, whether that's through the third-party delivery.

Virtual brands and then investor sounds like Kevin and his team are quite busy on some different pieces as well.

But curious on -- if we think about work from home being a larger piece incrementally or relative to how consumers spent time pre pandemic.

Is there an opportunity to extend the gaming piece that you guys have leadership in as a category into mobile or into the home as well?

Is that something that makes sense?

And how do you think about kind of engaging with guests on that core brand equity if we're all going to be spending time and have our consumer travel patterns a bit disrupted versus through pandemic opportunity?

It's a really good question.

Our -- today, our focus is in-store experiential.

And I think we have a lot of opportunities to improve our line there right now, and that is where we're focused.

So I can't say we're actively looking at that at this point.

So I just think we have a lot of heavy lifting around the in-store experience right now, and that's where the team is focused.

And I will say this, we have a lot on our plate right now and a small team.

And I think we're focused on the right thing.

When you look at how people have responded in these markets.

How much they want to get back out of their house and not be in their home, sit in a room.

I think that's where we're going to focus our attention.

We'll take our next question from Brian Vaccaro from Raymond James.

Hope everyone's doing well.

I wanted to ask a question on the changes you're making to the menu.

And I understand you're adding the items back.

And I think you said you expected to settle just around 1/3 fewer items.

But can you help us understand where some of the more meaningful reductions have been.

Were there specific categories that we removed?

Or will it be more sprinkled sort of throughout the menu?

Just trying to understand how you view sort of that food and bev experience and how that looks post-COVID versus where you were in '18 or '19?

This is Margo.

So I'll start, and then Brian can chime in.

For us, when we did the refurb, one of the things that came out was again, just a strong interest in appetite.

So in the new menu, you will see that we have done some significant work with the new items along the category of appetizers.

But every aspect of the menu has been touched.

And really, what the objective was is to get to very few, very good items that we could execute well out to the guests quickly.

And so at the end of the full rollout, when we had 28 items, we've [distilled] it down so that there is enough variety that you don't have a veto vote.

But that it is really tightly curated to enable superb operational execution.

Sorry, do you have any on that?

Okay.

That's helpful.

And I guess shifting gears a little bit, but trying to think about the more efficient labor model in a post-COVID world.

Can you maybe expand and perhaps quantify some of the benefits you expect from the streamlined menu in the back of the house, things like prep and that sort of thing, also the kiosks and the server handhelds, how that will impact the front-of-house labor model?

Yes.

I think we're still working through that, Brian.

I -- if you look at kind of the numbers that we've put up, and the architects sitting right across me and Margo, in terms of what the operators have been able to accomplish right now in terms of managing labor.

It's quite remarkable that we're having the kind of declines in sales, which would typically result in a significant deleveraging event and hours of labor because it's not all variable.

We have a store within a store and win.

We have game techs.

There's a semi-fixed to fixed element, some of that.

And we're running that very efficiently right now.

Our labor sort of flattish, if I recall, for the third quarter.

So that's a really good outcome.

And some of the things we're talking about, some of the technology, kiosks and mobile devices will be helpful.

But I think some of that stuff is going to be a lot more helpful in terms of speed and execution for the guests, and a little less necessarily about efficiency.

I think where we're winning the battle right now is we're just being very thoughtful, and we're not going to be able to keep all this on how we're scheduling offpeak.

And it's up and down, essentially every job code within our labor, from front of house, back of house to front as to win, game tech and being very nimble in offpeak.

So we're going to try to carry as much of that, that we feel is appropriate, that doesn't damage the guest experience.

And I think we're going to add some stuff back eventually, for sure.

But I think -- and I'm going to stop because we're not going to get into guidance on how many bps we think we're going to get in 2020 -- '21 right now or any of that stuff.

Sure.

And are you thinking about on the manager side, and correct me if I'm wrong, but I think the historical structure was a general manager and maybe 10-ish managers throughout the unit on average?

Please correct me if that's not right.

But I know it will be fluid, but what might that structure look like?

Are you thinking about changing the mix of salaried versus hourly managers, maybe team leader type positions?

Just trying to get a sense of how you think that might settle out in a post-COVID world whenever sales recover towards a normal level.

This is Margo.

I'll just jump in on this one.

So one of the things about this COVID world, and it has -- it has presented the opportunity for us to look at every single thing that we do.

And so when you look at the savings, the savings have not happened by accident.

We have literally looked at every single spend in the store, and evaluated whether or not we will keep it or whether or not we will permanently eliminate it.

And so you will definitely see us look at the management structure.

Just as we are, every single line item that is going on in the store.

And so when we talk about sustaining from of the improvement in 2021.

It's impossible to take the learnings that we've had this year and not keep some of them because you won.

And so what we're doing is trying to make sure that we are selecting the efficiencies that are truly good efficiencies without diminishing any aspects of the guest experience.

So in terms of the management structure, of course, we'll be looking at that.

Just as we're looking at the hourly, and we'll put them both through the same lens to ensure that we can get the experience that our guests need and that we're doing it thoughtfully and efficiently.

So that's what you can expect in 2021.

All right.

That's really helpful.

Last one just for me.

Thinking about the sales index in the next couple of months.

Can you remind us in a normal year, how much higher are sales volumes, your average weekly sales in December versus the shoulder months?

I'll pass it along.

I don't have it.

I don't have that yet.

This is by far our largest.

Yes.

Yes, it's a good question, Brian.

And we'll -- December and March really are our 2 biggest months.

And if you look at December, I mean, versus kind of an average weekly sales across the entire year, it runs about 15% higher than that.

And we have no further questions.

I will pass it back over to our speakers for any additional or closing remarks.

Okay.

Thank you, Ally.

Look, guys, thank you for joining our call today.

We wish you and your families a safe and healthy holiday season.

And we look forward to seeing you at a D&B location really soon here.

So have a great night.

And with that, that does conclude today's call.

Thank you for your participation.

You may now disconnect.