Dave & Buster's Entertainment Inc (PLAY) 2015 Q1 法說會逐字稿

Good afternoon, everyone. Welcome to the Dave & Buster's, Inc. first-quarter 2015 earnings conference call. Today's call is being hosted by Steve King, Chief Executive officer.

I would like to remind everyone that this call is being recorded and will be available for replay beginning later today. Now I'd like to turn the conference over to Jay Tobin, Senior Vice President and General Counsel, for opening remarks. Sir, please go ahead.

Thank you, Renee. And thank you all for joining us for the Dave and Buster's Entertainment, Inc. quarterly conference call. On the call today are Steve King, Chief Executive Officer, and Brian Jenkins, Chief Financial Officer. After comments from both Mr. King and Mr. Jenkins, we will open the call for your questions. This call is being recorded on behalf of the Company and is copyrighted.

Before we begin our discussion of the Company's results, I'd like to call your attention to the fact that in our remarks and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such 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 at daveandbusters.com under the Investor Relations section.

In addition, our remarks today will include references to adjusted EBITDA, store level EBITDA, and pro forma net income, 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 earlier this afternoon, which is also available on our website.

Now, I'm going to turn the call over to Steve.

Thank you, Jay, and good afternoon, everyone. We appreciate your participation in today's call and your continued interest in Dave & Buster's.

As our Earnings Release demonstrates, we began the new fiscal year from the position of strength, which together with other factors that Brian will address shortly has enabled us to increase our annual guidance. Specifically, we set new standard of excellence for adjusted EBITDA, adjusted EBITDA margin, with record results for the first quarter. We also delivered healthy gains in our top line through a combination of comparable store sales increases and contributions from the more recently opened stores in our non-comp locations.

Comp-store sales rose 9.9% against a 4.9% increase in the prior year. And we continued to expand our outperformance relative to Knapp-Track with an over 900 basis point differential over the affected 13-week period. We've now outperformed this industry's benchmark for the last 12 consecutive quarters.

On a two-year basis we accelerated comp store sales in the first quarter to about 14.5% compared with the 11% in the third and fourth quarter of last year. The overall comparable store sales increase in the first quarter consisted of gains across day parts, days of the week, weekends, and geographies. In our estimation, our positioning as the first choice for fun through eat, drink, play and watch, while enabling guests to customize their experience, is clearly resonating.

Diving deeper into our comparable store sales gain, you'll note that walk-in sales, which are the most indicative of our core demographic appeal were our primary growth driver with a 10.5% increase, while our special events business, which helps expand our brand awareness, grew at a very healthy 4%. It's also worthwhile to note that our 2014 class of eight stores, and in fact our non-comparable stores collectively, are performing extremely well and are ahead of our first-year expectation of 35% cash-on-cash returns.

From a marketing standpoint the quarter began with our focus on a new limited edition exclusive Star Wars battle pod game, which was very well received for our guests as we offered it as a play for free. We then ran a seven-week promotion called everyone's a winner that we first rolled out last year. We rewarded every guest that came into our store and recharged a $10 power card with prizes such as a 50% bounce back on game play, free appetizers, et cetera. Beginning in late May we transitioned over to our Summer of Games promotion, which includes nine new games, among them Jurassic Park Arcade, Gold fishing and Subway Surfers.

Our media strategy during the first quarter included advertising on Cartoon Network as we explored targeted messages to our younger guests around spring break. We also ran D&B Sports on ESPN's Mike and Mike in the Morning show, which yielded great results once again.

Note that while we featured the Mayweather-Pacquiao boxing match on May 2 across nearly all stores, it did not have a significant impact on our business. Despite that, we think that the investment in this content was important as a brand-building mechanism that helped solidify our position as the premier place to watch destination viewing sports.

We also introduced new and appealing food and beverage items during the first quarter including some decadent sandwiches, visually striking and unique cocktails and tempting deserts. Although food remains our slowest growing category it still rose 5.8% on a comp base in the quarter while beverages rose an even more impressive 8.2%.

Finally, we're in the process of converting all stores to provide an electronic ticket option. To date, we've implemented the E-ticket option in over 50% of our stores and anticipate completing the rollout by the end of the second quarter. Our guests have embraced the change with an opt-in rate of about 80%, which has been increasing. And we view this evolution as a win-win for us, for them and of course the environment.

And now, we'll hear from our CFO, Brian Jenkins, who will walk you through the numbers in more detail.

Thank you, Steve, and good afternoon. Before I review our first-quarter financials and update our annual outlook, I wanted to discuss two recent events of interest that will impact our pro forma earnings guidance for 2015.

First, we recently closed on a new $500 million senior credit facility consisting of $150 million term loan A and a $350 million revolver. It has a five-year term and bears a more favorable interest rate compared to our previous facility. And by utilizing 389 million of proceeds from the new facility and approximately $45 million of cash, we refinanced the entire $430 million balance outstanding on our previous term loan B, and also paid related interest and expenses. Although we will incur a pre-tax non-cash write-off of debt issuance costs from the previous facility of approximately $6.8 million in the second quarter of 2015, we will save in excess of $9 million in annualized interest expense based on current LIBOR rates, thereby meaningfully enhancing our net income and free cash flow.

Also, we priced a secondary public offering of 8.5 million shares of common stock by our existing shareholders at a price to the public of $31.50 per share. Additionally, the underwriters exercised an option to purchase an additional 1.275 million shares of common stock at the offering price. The selling shareholders received all the proceeds from the sale of these shares, which closed on June 2.

Turning now to our first-quarter results, total revenues increased 14.3% to $222.7 million, up from $194.8 million in the prior year. Revenues from our comparable stores increased 9.9% to $190.4 million, up from $173.3 million, while revenues from our non-comparable stores increased 51.5% to $31.5 million, up from $22.7 million in the prior year.

Now recall that a store does not enter the comparable base until it has been open at least 18 months as of the beginning of each fiscal year. With the onset of FY15, we have 60 stores in the comp base.

In addition, please note the following, that the year-ago quarter included $5.2 million in revenues from two stores that have since closed, namely our Bethesda, Maryland store and Farmingdale, New York. You may recall that the Bethesda store closed in early Q3 of 2014 due to a mall closure.

And while our Farmingdale store was profitable, we did elect to close it in early 2015 as we believe this will be accretive to EBITDA due to the expected sales transfers to other stores. Also of note, the two stores that opened late in the first quarter of 2015 in Pelham, New York and Euless, Texas had a combined eight operating days during Q1, and thus had a negligible impact on the top line, although we did record their pre-opening costs during the quarter.

Turning to category sales, total amusement and other sales grew 17% during the first quarter while food and beverage collectively increased 11.4%. Once again, our total sales mix shifted to the more profitable gaming side of our business. Within our robust 9.9% comparable store sales increase, amusements rose 12.9%, food sales increased 5.8%, while our bar business grew 8.2%, for a combined food and beverage increase of 6.6%.

Total cost of sales was $42.5 million in the first quarter, and as a percent of sales increased 10 basis points. Food and beverage costs were 20 basis points higher than list year which was a little better than we had expected. Food commodity inflation for the quarter was driven primarily by increases in beef and poultry, while our food pricing was approximately 2.9% and partially offset these pressures.

We still estimate that the full-year commodity inflation will run between 4% and 5%. But recall, we manage our gross margins on a holistic basis. We have some levers to pull that others don't. Specifically this is done by leveraging amusements, by taking pricing in the winner's circle, and thereby resulting in relatively stable gross margins. However, in the first quarter our amusements and other margins fell slightly by 20 basis points as a result of higher non-cash deferred amusement revenue and ticket redemption liability adjustments due in part to our strong amusement sales growth.

Total store operating expenses for the quarter were $110.2 million, and as a percentage of revenue decreased 150 basis points year over year to 49.5% of sales as we leveraged our marketing, occupancy costs and other fixed expenses on the strong comparable store sales growth. Store level EBITDA was $69.9 million for the quarter, reflecting growth of 19.7%, compared to $58.4 million last year, an improvement of 140 basis points to 31.4% of sales.

G&A expenses were $12.8 million, an increase of $2.4 million compared to last year, and as a percentage of revenues were 40 basis points higher at 5.8%. This was primarily a function of higher incentive compensation expenses due to our strong financial performance, along with higher legal costs.

Pre-opening costs totaled $3.8 million compared to $2.4 million, reflecting timing of new store openings relative to last year. And recall that we typically spend about $1.4 million on a large store and about $1 million on a small, and all but one of our stores open so far this year have been of large format. Putting all these items together, our adjusted EBITDA grew 22.3% to $61.9 million, and margins rose roughly 180 basis points to 27.8%, representing another quarter of record setting performance.

Interest expense for the quarter fell to $4.7 million from $12 million in the prior year, and that was driven by the lower interest rate under our recapitalized debt that occurred back in July of 2014, and also reduced debt level due to the debt repayment that followed our IPO. We generated net income of $19.5 million or $0.45 per share on a diluted share base of 43.6 million shares, compared to net income of $11.5 million or $0.34 per share in the first quarter of last year on a diluted share base of 34.1 million shares.

However, just as we did in Q4, we have included in our press release a reconciliation of our GAAP results to our pro forma results. We believe that our pro forma results provide the best baseline view of the business. On a pro forma basis for the first quarter, our net income improved to $20 million or $0.46 per share, compared to $14.2 million in 2014 or $0.33 per share.

Now, turning to our annual outlook, we are raising some of our guidance in light of our performance to date, the refinancing of our senior credit facility, which was completed in the second quarter of this year, as well as for transaction costs related to our secondary offerings. Recall our FY15 ends on January 31 of 2016 and is a 52-week period.

Total revenues are now expected to be between $822 million and $831 million, and that is up from the previous range of $808 million to $822 million. Comp store sales growth has been raised to 4% to 5%. That's up 1 full percentage point from the previous range, with a stronger expected growth in the first half of the year given the comparisons we face as we move throughout the year.

We still anticipate seven to eight new store openings, of which we have opened four to date, with the majority of them in the large format. In addition, we will also relocate one existing store in Buffalo, New York.

Our adjusted EBITDA is now expected to be between $187.5 million and $191.5 million. That's up from the previous range of $182 million to $187.5 million. We are still anticipating an effective tax rate of 37% to 38%, which is unchanged.

And our pro forma net income is now expected to be between $43.5 million and $46 million, which includes interest savings expected this year because of the refinancing, and excludes an expected $6.8 million pretax write-off of debt issuance costs from the previous credit facility, as well as transaction costs associated with our recent secondary offerings. Our previous range for GAAP net income was $36.7 million to $40.4 million.

Diluted share count is expected to range between 43.8 million and 43.9 million shares. And, finally, our net capital additions after ten allowances are expected to range from $118 million to $128 million driven by our new store openings, one store relocation, our planned remodel activities along with some further investments in our D&B sports venue, as well as the expenditures associated with our E-ticket initiative.

With that, I'll turn the call back over to Steve to make some concluding remarks.

Thank you, Brian. As Brian mentioned we're on track to open seven to eight new stores this year and we've opened four so far. Although we've been seeing solid results from both the large-format and small-format stores based on our 2014 and 2013 openings, our near-term pipeline for 2015 is weighted towards larger size stores.

Also, I'd like to add that if a particular location could go either way, we've been airing on the side of building the larger store as opposed to the smaller store. All these stores, with the exception of one of the seven to eight, are or will be the large-store format.

As Brian mentioned, in the first quarter we opened Pellum, New York which is in Westchester County, north of New York City, and Euless, Texas, outside of Dallas. Early in the second quarter we opened in Kentwood, Michigan, which is near Grand Rapids, and Woburn, Massachusetts, outside of Boston. We have previously guided to three or four more store openings this year, and two of these are under construction.

Our next opening will be in the third quarter in Edina, which is outside of Minneapolis, Minnesota. And the other store under construction is in Brentwood, a suburb of Houston, Texas. We also have the one location that Brian mentioned in Buffalo, New York at the end of the year, which is not included in that seven to eight store new store guidance that we've talked about previously.

Looking ahead, we have great visibility in terms of development, with 13 signed leases for stores to open in 2016 and thereafter. So, to sum things up, we enjoyed a great start to 2015 and are energized and excited as to what the full year holds for us at Dave & Buster's.

So now we're ready to take some questions. Operator, could you please open the line for questions?

(Operator Instructions)

We move first to Sharon Zackfia with William Blair.

Hi, good afternoon and congratulations on a nice quarter. A couple of questions. More recently with all of the rains in Houston and broadly Texas, could you give us any update on how that may or may not impact your business? And then, secondarily, we're lapping the World Cup and I don't know if that was a tremendous driver of your business last year but maybe if could you give us any insight on that.

In the past we've talked a little bit about the World Cup. There were a few days that were significant for us in terms of it but I wouldn't call it overall a significant driver to the second quarter of last year.

And then as it relates to Houston and Texas specifically, we just pulled some analysis again last week on it and we're just not seeing anything, whether it's because of oil or rain or what-not, that's negatively impacting Texas at this point.

Okay, great, thank you.

Our next question comes from Nicole Miller with Piper Jaffray.

Thanks, good afternoon. When you think about the box office being relatively strong this summer and if that continues into the fall, what opportunities and/or challenges does that present to your business?

In the past we've tried to correlate box office receipts and big box office blockbusters with whether or not that positively or negatively impacts our business and we've really just never been able to draw that correlation. I think a part of that is because, for all of the stores that we have that are adjacent to or near movies, where having a blockbuster probably helps the overall traffic and helps with people deciding to have dinner or whatever before a movie, there's those stores that are a little further away that probably get some negative impact from that. So, net-net, as we've measured it in the past, it's really not been a significant factor and aren't really seeing anything right now.

Thank you.

Our next question comes from Andy Barish with Jefferies.

Hi, guys. Intrigued on the Pacquiao call out and why you don't think it was significant. Because it was already a Saturday night or something? And then what do you think caused an acceleration on the two-year comps? You were running 11% and the first quarter accelerated up to the mid teens, so what would you point to on that front?

First on the call out, I think that most of you probably read the fact that the Pacquiao-Mayweather fight was one of the single biggest pay-per-view home events of all time. And I think what happened there was that it ended up influencing the walk-in part of our business. The part that we actually went out to attract people for, to sell tickets to, and we had the fight on in some of our showrooms or our private event space and what-not, that was very well attended and we sold out in a lot of places. But, at the same time, I think net that big an event that is happening from a national perspective was a negative for the overall for walk-in, particularly on that night.

As Dolf described it, he was in our Dallas store, he said you went into the showroom and everybody was cheering and what-not, although it wasn't that great a fight so I'm not sure what they were cheering about. But, anyway, the midways were empty, so I think it negatively impacted us that way. So, net-net it was an okay day for us. It was a positive day but it wasn't some massively better day than the average of what we had for the overall quarter.

As it relates to the acceleration of our comp store sales, we've been running the same sort of playbook. We ran approximately the same number of points on a year-over-year basis. We ran the same number of weeks on a year-over-year basis. I'm talking about marketing now. We ran some similar strategies to what we had run on a year-over-year basis.

Although, I did allude to the fact that we did a couple of things to change up the media mix to more specifically address our younger audience, and did that on a comedy network. In the past you've heard us talk about doing that on Nickelodeon, as well. And we think that's an effective way for us to reach that younger audience with a very specific message that's actually cut, a spot that's cut for them. And we think there's some benefit from that.

But I think, overall, I'd point back to the strength of the brand and what we think that we've done over the last several years in order to make it more contemporary. And that's about investing in the physical plans, adding sports, games, a percent of the game floor every year, in addition to the food and beverage that we've been rolling out. So, I think, again, back to the underlying strength of the brand seems to be continuing to build momentum.

And then just one quick follow-up on the E-ticket initiative with half the stores, how is that flowing through in terms of the labor savings you've expected? And can you just update us in terms of what you think that will be annualized?

In the past, it was really a play on the paper ticket part more so than on the labor. We think there will be some ancillary labor benefits. But we spend about $3 million a year on tickets themselves. We think at this opt-in rate continues to drift up -- it's about 80% right now when we're first starting -- the more mature stores are up around 85% to 90% -- we think we're going to be able to save the vast majority of that $3 million in paper ticket costs, and then some additional labor savings.

We've said that we think we'll save about $3 million a year from that initiative. And as I mentioned we're about half way through right now so we would expect to be at that run rate by the end of the second quarter.

Okay, thanks, guys.

(Operator Instructions)

We move next to Brian Vaccaro with Raymond James.

Good evening. Just a couple of questions on the margin lines, if I could. On the food cost line, Brian, can you remind us how much you're contracted for the remainder of the year, and why you expect that inflation to tick up to hit your 4% to 5% or 4% to 4.5% range you mentioned for the year on the COGS inflation?

Yes, we had indicated on our Q4 call that we were seeing pressure on beef and poultry, and those are really the two really significant areas that are driving us to that 4% to 5% range of pressures we expect there. We do expect the meat increase to be less so in the back half of the year. We'll start to rollover a little bit higher pricing in the back part of the year. But first part most of the pressure is coming from meat and poultry at this point, improved situation on the seafood side and on oils and dressings. But all-in all it's a net increase year over year.

Okay. And I think you said pricing year on year on the food side was 2.9%. If you were to take no additional pricing can you remind us the quarterly cadence on your pricing? And how should we think about for the year? Are we going to be in that 2.5% to 3% range or maybe let a little bit flow off?

Yes, we took a little more pricing this year. In the first quarter, our effective price increase on food was about 2.9%, and that's a culmination of really three increases. We did an increase in February and then we have some increases that are working for us from the prior year. I think we're going to probably be, for the full year, in that 2.5% to 3% we had indicated because we see this pressure on the commodity side that we're going to probably be a little more aggressive than typically what's been about 2% on food for us.

And we'll probably be shooting for closer to 2.5% to 3% for the full year on the food side. Which means we don't really expect to totally offset food costs overall, but we do have, as I've mentioned before, we got the amusement side of the house and we were within 10 basis points of prior year this first quarter. And we're going to continue to try to manage our margins in that 80% range, which I think we've been very effective at for really a long period of time.

Yes, and certainly that E-ticket savings that Steve alluded to earlier will play a key part in that. One last quick one for me just on the G&A line. Obviously incentive comp is up, for obvious reasons, but could you just give us a little help on how you think about pro forma G&A for the year including stock-based comp?

Our G&A for the quarter was like $12.8 million. We were up $2.4 million. We did have some increased costs related to the secondary offerings that if you look at our pro forma statements you'll see that number was about $700,000. It was a little bit higher than that kind of level from prior year.

In addition to that, we had higher stock-based comp, higher bonuses due to, really, the outperformance we had in Q1, and some additional legal costs. I think on the last call I indicated $44 million to $45 million range, I believe, on G&A. We're thinking the number is probably $48 million to $49 million right now. Part of that has to do with very strong performance we've had in terms of EBITDA results, as well as some of the transaction costs.

In our press release, I think you saw we had about $1.4 million of expected transaction costs for the year. So, if you think about $48 million to $49 million there's about $1.4 million of secondary costs rolling through that number, if you want to pro forma that out, however you want to think about that. But it is impacting the overall number for the year and then we are anticipating a little higher legal. But $48 million to $49 million is a pretty good range.

Okay, great. Thank you.

Thank you. Our next question comes from Paul Westra with Stifel.

Hi, guys, it's actually Michael sitting on the line for Paul. Brian, this is a question for you. I was curious if you had mentioned, or Steve you had mentioned, the amusement and other comp for the quarter.

Yes, it was 12.9% amusement and other comp. It was the strongest category for us followed by bev at 8.2% and I think food was 5.6%.

Great. Very helpful. And then I'm just turning to also following up on the margins. It looks like the other store operating expenses was quite a bit more favorable than we had expected. Just curious if there's anything to call out there, if there might be some timing issues or anything maybe perhaps related to the E-ticket side that contributed to that.

No. We had 180 basis point margin improvement, and it's largely related to leveraging of essentially flat marketing costs and leveraging of what I call facility-related costs, which is occupancy, utilities, those sorts of things. Between the two of those, it's roughly 130 basis points just on that. Both of those are running through the line you just mentioned, other store operating expenses.

So, very nice leveraging when we get this close to 10% comp store sales. Labor, as you see, was essentially flat. We had much higher incentive comp in the quarter at the store level because of the performance and that offset some of the hourly savings. But all in all a great margin quarter for us.

Okay, great, that makes sense. And my last question is a little more top down basically. You had given updated guidance in terms of comp for the full year. Just extrapolating that out based on what first quarter to date was, first-quarter actuals were, it looks like it might be just a little bit slower than we had expected. Is there anything in terms of pricing? You had mentioned 2.5% to 3%. Is there anything that you could attribute to maybe a little bit of a slowdown or anything related to that change there?

No, I don't think we were trying to message or signal a slowdown, other than we're going to start rolling over tougher and tougher comps through the remainder of the balance of the year. So, we go from the roughly 5% to a 6%, and then we go to almost 9% and then over 10% for the fourth quarter. I think we're just taking that into account as we're looking at what we're guiding for the full-year comp store sales performance.

The back half, the balance of the year Q2 through Q4 of last year was over an 8% comp, 8.3%. If you extrapolate a 4% to 5% guidance, it's sort of a 3%-plus BOY at the top end of that range. But rolling over an 8.3% balance-of-year comp so we've got some pretty strong comps in the back part of the year here.

Yes, I understand that. I was just curious also, maybe part of the question was that if you had the ability to take less price later in the year that you might have been expecting that, as well.

That's really not the intent at this point. Our intent would be, as Brian said, try to offset a little more of the food cost pressure that we're seeing by taking roughly that 2.5% to 3% on the food side. We've said consistently that a couple of percent in beverage. And then essentially we don't take much price on the amusement side. We really rely on trying to drive more consumption at the kiosk, that initial purchase to drive those sales.

And maybe I may have confused some folks. Just to be clear, the food price, effective food price, for the quarter was 2.9%, it was about 1.5% on beverage, and zero on amusement. What that does is gives us an effective price increase, blended, at like 1.1% of the 9.9%. So, clearly the strength we have is driven by traffic and mix here. But it's a 1.1% effective price overall.

Thanks, guys, and congrats on the quarter.

(Operator Instructions)

We'll take our next question from Sharon Zackfia with William Blair.

Hi. I had a quick follow-on question. I think if you impute EPS guidance from your net income guidance you raised it somewhere on the order of $0.13 to $0.15 for the year. And just curious, because I think you beat consensus by roughly $0.10 in the first quarter, and the interest savings seemed like they would be more than enough to get it higher than $0.13 to $0.15. Is there some other offsetting costs that you're factoring into the full year? How did you think about the updated guidance?

I think our range right now implied in the net income and share counts that we provided is basically $0.99 to $1.05. And we had guided $0.84 to $0.92, so at the high end it's about a $0.13 increase.

We had taken some of the first-quarter performance into account when we guided the last time because we knew that we were going to outperform a lot of the initial guidance. So, we took up some of that slack in our guidance when we guided after the fourth-quarter results.

Okay, that helps a lot. Thank you.

Thank you. Our next question comes from Brian Vaccaro with Raymond James.

Yes, just one quick follow-up for me. In the past you've been helpful on giving us a sense of the quarter-to-date trend. Just wondering if you'd be willing to give us, with May behind us now, an update on what you're seeing. Obviously you talked about Texas but maybe a little more granular would be helpful. Thank you

We have a lot less of the quarter behind us than what we've had at year end when we had nine-and-a-half weeks or so under our belt. Now we just finished our fifth week. We're comfortable that the trends we're seeing so far in the second quarter supports a revised full-year guidance but we're not going to be specifically guiding quarters at these calls.

Understood. Okay, thank you.

There are no further questions at this time. Mr. King, I'd like to turn the conference back to you for any additional or closing remarks.

Thank you very much again for your continued interest in Dave & Buster's. We'll be at conferences over the next couple of days and next several weeks and hope to see some of you there. And if not, we will talk to you on our September call when we will be announcing our second-quarter results. Thank you very much. Bye.

This does conclude today's presentation. We thank you for your participation.