Dave & Buster's Entertainment Inc (PLAY) 2015 Q3 法說會逐字稿

Good afternoon, everyone, and welcome to the Dave & Buster's Incorporated third-quarter 2015 earnings results 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 would like to turn the conference over to Jay Tobin, Senior Vice President and General Counsel, for opening remarks. Sir, please go ahead.

Thank you, Noah, and thank you all for joining us. 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 Dave & Buster's Entertainment Incorporated 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 and 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 has 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 adjusted EBITDA, store-level EBITDA, and pro forma net income, which are financial measures which 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'll turn the call over to Steve.

Thank you, Jay, and good afternoon, everyone. We appreciate your participation in today's quarterly conference call and your interest in Dave & Buster's. As you might imagine, we're extremely pleased with how 2015 is progressing. We're delighted that the flow-through from our robust comparable store sales, along with strong revenue contributions from newer stores, has enabled us to set a new bar of performance for store level EBITDA and adjusted EBITDA margins during the third quarter. And based upon our record-setting year-to-date results, we're raising our 2015 annual guidance for the third consecutive quarter.

Brian will walk you through the details and then provide some key top-line metrics for 2016, shortly. In the meantime, let me say this: we attribute our exceptional results and momentum to our highly differentiated business model, which provides guests with numerous ways to be entertained while enjoying great food and drinks, and drinking one-of-a-kind beverages. Our guests continue to recognize the unique experience that Dave & Buster's provides, especially when compared with conventional casual dining. We remain the only national competitor in our space and provide an experience that's highly customizable and cannot be replicated at home.

Overall comparable store sales rose 8.8%, and that includes a negative 110 basis point calendar shift because of Halloween, and that is up against an 8.7% increase in the prior year. We also extended our out-performance relative to Knapp-Track to 14 consecutive quarters, with approximately an 830 basis point differential over the affected 13-week period. On a two-year basis, we accelerated comparable store sales sequentially with a 17.5% gain during the third quarter, compared to a 16.7% gain in the second quarter, and a 14.6% gain in the first quarter. And once again, we exhibited strength across day parts, days of the week, weekend, and most geographies, demonstrating the power of our Eat, Drink, Play & Watch branding. Within our comparable store sales gain, our primary driver was walk-in sales, which grew 9.4% and marks a clear reflection of our core demographic appeal, while our special events business increased 3.9%, our highest rate of growth thus far this year.

On the marketing front, we wrapped of our popular Summer of Games promotion during the third quarter, with a focus on Angry Birds game, which was an exclusive launch for us in August, before transitioning to football-related messaging tied to our D&B sports branding in September and October. The latter included an all-you-can-eat wings special for the first three Sundays and Mondays of the NFL season, for $19.99 with a bonus $10 Power Card. The promotion was hugely popular with our guests, but it did have a negative impact on cost of goods sales. Still, we thought the investment in kicking off the first three weeks of the NFL football season was a compelling offer, was a great way to build awareness for Dave & Buster's as a destination for one-of-a-kind sports viewing, and it could have a positive implication for building this brand for this entire series and beyond -- season and beyond -- excuse me.

Our media strategy consisted of an additional week of cable advertising focused on D&B sports, while in August we also had greater focus on kids-related channels such as Nickelodeon than in the prior year. And while targeted messages to our younger guests are only a small subsection of our national cable advertising buy, we did experience a lift in kids entrees and sales growth in off-beat day parts when normally we see more families. Some of our new items included Bang Bang chicken, Pepperoni Pretzel Pull-Apart, and Short Rib & Cheesy Mac Stack sandwich, while the new beverage options included our new line of Glow Kone drinks. Comp food sales rose 7.3%, and comp beverage sales increased 4.1%.

Our electronic ticket conversion initiative was also completed early in the third quarter, and was the primary driver of the 170-basis-point improvement in amusement cost of sales. Our guests have clearly embraced the change with an opt-in rate of approximately 90%. And our guests satisfaction scores in the amusement area continue to remain strong even after the conversion. Also as mentioned on our prior call, we've seen an increase in simulation gameplay because of this transition, resulting in fewer tickets issued and lower redemption cost. We can't say definitively that this trend will continue, but it is directly correlated to the rollout.

And now we'll hear from Brian who will walk you through the numbers in a bit more detail.

Thank you, Steve, and good afternoon, everyone. Well, needless to say, I echo Steve's excitement in how pleased we are with our performance to date and where we're headed. Let's now review our third-quarter results and then discuss our increased outlook for 2015 and preliminary thoughts on 2016.

For the 13-week period, total revenues increased 17.9% to $192.8 million; that's up from $163.5 million in the prior year. Revenues from our comparable stores increased 8.8% to $152.4 million, up from $140 million, while revenues from our non-comparable stores increased 72.7% to $40 million; that's up from $23.2 million in the prior year. Now, as a reminder, 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, and stores closed as of the end of the reporting period are removed from the comparable base. As a result, although we had 60 stores in our comp base in the first half of 2015, it has dropped to 59 for Q3 and Q4 because of the closure and relocation of our Buffalo store. Also, please note that the year-ago quarter included $2 million in revenues from two stores that have since closed, namely our Bethesda, Maryland store during the third quarter of last year and a Farmingdale, New York store that closed in the first quarter of this year.

With respect to category sales, we continued to experience a total sales mix shift to the more profitable gaming side of our business, as total amusement and other sales grew 20.7%, while food and beverage collectively increased 14.9%. During the third quarter, amusements represented 53.4% of total revenues, reflecting a 120-basis-point increase from the prior-year period. Despite the 1.1% Halloween calendar headwind that Steve mentioned, we generated a strong 8.8% increase in comparable store sales. Now, breaking that comp down a bit, amusements rose 11.2%, food sales increased 7.3%, while our bar business grew 4.1%, for a combined food and beverage increase of 6.2%. We believe that our continued investment in games, which featured the exclusive introduction of Angry Birds to start the quarter, is helping to fuel our strong amusement business, and the transition to our D&B sports offering with the kickoff of the football season has resonated with our growing sports viewing guest.

Total cost of sales was $36.4 million in the third quarter, and as a percent of sales, improved 90 basis points. Our food and beverage costs were 30 basis points higher than last year and in line with our expectations, reflecting in part the all-you-can-eat wings promotion that Steve mentioned. Food commodity inflation for the quarter was about 2.5%, driven primarily by increases in beef and poultry, while approximately 2.5% of the food pricing partially offset these pressures. Please note that the full-year commodity inflation remains between 3% and 4%, reflecting elevated protein cost, but will be lower in the back half of the year compared to the first, and we look forward to further relief as we move into 2016. Costs of amusement and other were 170 basis points lower than last year, reflecting lower paper ticket costs driven by our E-ticket initiative, and a reduction in redemption cost, as Steve explained.

Total store operating expenses in the third quarter, which includes operating payroll and benefits and other start store operating expenses, were $111.8 million, and as a percentage of revenue, decreased 160 basis points year over year, to 58% of sales as we leveraged our marketing, occupancy costs, and many other fixed expenses on the strong comparable store sales growth. We experienced wage inflation of about 2% during the third quarter, which we believe is a little lower than many of our competitors, and was in line with our expectations. It was also not a significant factor in our operating payroll and benefits costs, which improved 30 basis points. Although we've experienced leverage on a store management labor line, we did see incentive compensation increase due to our out-performance in the quarter.

Store-level EBITDA was $44.5 million for the quarter, reflecting growth of 32.5%, compared to $33.6 million last year, an improvement of 250 basis points to 23.1% of sales. This is the highest store-level EBITDA margin we have ever generated during the third-quarter period. G&A expenses were $12.6 million, an increase of $1.2 million compared to last year. But as a percentage of revenue were 40 basis points lower at 6.6%. The increase in dollars was primarily a function of incremental public Company costs, and also expenses associated with our international development initiative.

Pre-opening costs totaled $2.4 million compared to $3.7 million in 2014, reflecting the timing of new store openings relative to last year, and included the Buffalo relocation, which was completed during the third quarter. Recall, again, that for a large format store, we typically spend about $1.4 million, while for small format stores we spend around $1 million. And all but one of the stores this year are in the large format, whereas last year it was a little more mixed. Taken altogether, our adjusted EBITDA grew 40.3% to $34.5 million, and margin growth was roughly 290 basis points to 17.9%, representing another record quarter of performance.

Net interest expense for the quarter fell to $2.2 million; that's down from $6.1 million in the prior year, and that was driven primarily by the lower interest rate under our recapitalized debt and also the reduction in debt levels due to our debt repayment that followed our IPO and recent refinancing. One other item to note as it relates to our capital structure, in mid-October, we entered into an interest rate cap agreement on $200 million, or approximately 56% of our outstanding debt, that capped the LIBOR interest rate at 3% over a four-year term. This will result in an incremental $920,000 of interest expense on a mark-to-market basis through 2019. And while this was not a full-blown hedge, we do consider this a fairly inexpensive means to protect against rising interest rates.

We generated net income of $4.6 million, or $0.11 per share on a diluted share base of 42.9 million shares, compared to a net loss of $4.6 million, or a loss per share of $0.13 in the third quarter of last year, on a share base of 34.9 million shares. On a pro forma basis, which we believe provides the best baseline view of the business, net income improved to $5 million, or $0.12 per diluted share, compared to a net loss of $2.3 million in 2014. We have included in our press release a reconciliation of our GAAP results to our pro forma results.

Turning now to our annual outlook, we are once again raising some of our guidance metrics to take into account our performance to date, our senior credit facility refinancing, as well as for transaction costs related to our secondary offering. Recall that our FY15 year ends on January 31 of 2016 and is a 52-week period. Total revenues are now expected between $857 million and $861 million; that's up from our previous range of $844 million and $853 million. Our full-year comparable store sales growth has been raised to 8.5% to 9% from our previous range of 6.5% to 7.5%.

Recall that in the fourth quarter, we are lapping our most challenging year-ago comparison of 10.5%, and our special events business represents a more significant portion of our sales mix than at any other time of the year. And while we have delivered consistent growth in this category, it's certainly not been as strong as our walk-in business. Also, we are facing a holiday timing shift of Christmas and New Year's Eve toward the weekend, which is a little more onerous this year compared to the prior-year period. We continue to expect eight to nine new stores, of which is seven have already opened year to date. In addition, we also relocated one existing store in Buffalo, New York during the third quarter.

Adjusted EBITDA is now expected to be between $207 million and $209 million. The high end of the range is up $6 million from the previous range of $199 million to $203 million. Our effective tax rate is expected to range from 34.5% to 35.5%, and our pro forma net income is now expected between $59 million and $60.5 million, which does include interest expense savings that would [capture] this year because of our refinancing and does exclude a $6.8 million pre-tax write-off of debt issuance cost associated with our previous credit facility and also excludes some transaction costs associated with our secondary offering. The high end of this range is approximately $5.5 million, or 10% higher than our previous range of $52.5 million to $55 million.

Diluted share count is expected to range from 42.8 million to 42.9 million shares; that's up just slightly from previous guidance. And finally, we have increased and narrowed our range on net capital additions after tenant allowances to be between $144 million to $149 million, primarily due to higher expected pre-spend on our 2016 class of new stores.

Finally, while we're not yet in the position to provide detailed guidance related to 2016, we do feel it's important to relay our preliminary view on the upcoming year. Coming off this record year at Dave & Buster's, we believe a move towards more normalized growth is most likely for 2016. We anticipate delivering results that are above our long-term financial targets of approximately 10% growth in revenues and low double-digit growth in adjusted EBITDA, respectively. That said, we will provide specific guidance for 2016 when we report our fourth quarter of 2015 results.

In terms of development, we are projecting 9 to 10 store openings in 2016 that we expect will strike a more even balance between large and small format than the 2015 class, which included only one small format store. With that, I'll turn the call back over to Steve to make some concluding remarks.

Thank you, Brian. I want to reiterate we couldn't be happier in terms of how 2015 is shaping up what we've achieved so far as we look forward to a strong finish in the fourth quarter. We have a great team, a great brand, and a great future at Dave & Buster's.

Before I delve further into development, I thought I would first discuss our ongoing remodeling efforts, which we believe are critical to us taking the brand to the next level, so that we can be viewed as of the destination of choice for one-of-a-kind dining, entertainment, and for our existing guests as well as new guests alike. This year we've already completed three comprehensive remodels, we've enhanced five additional stores with D&B Sports lounges, and also improved the sports viewing in a number of other stores. Over 70% of all stores now have the sub-branded D&B Sports, which is a major component of any remodel, but of course, not the only thing that we are touching when we go in and remodel a store. Looking to next year, we are planning six comprehensive remodels and enhancing three additional stores with D&B Sports lounges. By the end of 2016, we intend to be substantially complete with our sports-related remodeling project.

Turning to development, as Brian mentioned, we plan to open eight to nine stores this year, and have open seven as of today. In the third quarter, we opened a store in Edina, Minnesota, which is in the Twin Cities area of Minnesota. And in the fourth quarter, we've opened in Friendswood, Texas, which is a suburb of Houston, as well as Glendale, Arizona, in the Phoenix area. We'll be opening in Springfield, Virginia, which is in the greater DC area in a couple of weeks. And if all goes according to plan, in San Antonio, Texas sometime in January. San Antonio would be our ninth and final opening of the year of 2015. We also had one store relocation, as Brian mentioned, our store in Buffalo, New York. We kept our older store open until about three days before that new store opened. And so that is in addition to that eight to nine new-store guidance. As I mentioned last quarter, we have great visibility with respect to development, 17 signed leases for stores to open in 2016 and thereafter. Today we're less than half our way towards our ultimate objective of operating more than 200 stores in North America over the long term.

Finally, we announced in late October that we launched an international development initiative and signed a master development agreement for the Middle East for seven stores over a seven-year period. This franchise-based agreement provides Dubai-based Apparel Group with the rights to develop Dave & Buster's brand within the six country region encompassing the UAE, Bahrain, Kuwait, Oman, Qatar, and Saudi Arabia. We feel that the Apparel Group is going to be a great partner for us as they have a stellar reputation operating the 1,000 retail stores and restaurants that they have under more than 50 brands. And while we don't have any additional agreements to announce at this time in the near term, we are in discussions with several different parties throughout various geographies who are interested in learning more about our Eat, Drink, Play & Watch positioning. Above all, we think that the tremendous popularity of the D&B experience will resonate with audience across many countries, and we'll therefore continue to pursue additional international licensing and/or joint venture agreements.

So on that exciting note, we're now ready to take your questions. Operator, please open the line for questions.

(Operator Instructions)

Andy Barish, Jefferies.

Hey, guys. Just wanted to check on what you would view as the key drivers to 2016 growth, above the long-term targets? I know you've got a huge amount of momentum right now, but as -- and you don't want to talk about specifics yet. But what do we think about as the key elements that are driving your confidence in the 2016 outlook?

I think you said it, that we have great momentum right now and that we anticipate some of that to carry into particularly the first part of 2016. And as always, we're looking at different ways to get incrementally better across the board. So we're going to have some additional -- we're going to have some additional marketing. We're going to have some additional marketing twists and tactics. But I would say that the biggest reason is the momentum that we are carrying right now is our confidence in being able to achieve, again, that long-term guidance that we talked about.

And how do you -- how are you looking at and feeling about new store productivity as an incremental driver versus your pro formas at this point?

Well, I think that we're not really changing that all that much. We're saying roughly 10% unit growth is going to generate a little bit less than 10% sales growth because we are -- we do have a number of those smaller stores in the mix, as Brian mentioned. It's going to be a more even balance next year than what it was this year where we only did one small store. So we would expect that those new stores are going to be relatively evenly spread across the year. Probably even a little more evenly spread across the year than they were this year, which should provide us in that high single-digit growth for new stores. But that's what we've said before in terms of the way we anticipate that that's going to flow.

Thank you, guys.

Sharon Zackfia, William Blair.

Hi. Good afternoon.

Good afternoon, Sharon.

A few questions. Hi. I'm calling you from the sunny Caribbean.

Can we come?

Yes.

The sun is setting now, so it's not so fun anymore.

Okay.

On G&A, it looked really low this quarter, pretty low year-over-year growth if you backed out the transaction expenses. And I was just wondering if you had any shift in the timing in G&A at all that's worth mentioning?

Not really. Last year -- we outperformed so early this year. We had booked our incentive comp, heading towards max payout because of the high performance level. So and last year it was a little more measured over the course of the year. We're still targeting $52 million to $53 million of reported G&A, so I would just keep that in your thought process.

Yes.

Okay. But that's reported though, but not pro forma.

Yes. The only thing that we're backing out of G&A is the secondary cost, which I think is about $1.650 million through the third quarter. So you can --

Okay.

Pro forma that out in terms of the pro forma results.

Great. And Steve, it sounded like you were saying something as well?

Yes, I was just saying -- I was just going to reiterate, more or less what Brian said. Last year we saw more acceleration in the second half of the year, which drove the overall performance, both on a comp basis and EBITDA basis. Again, this is all about how you accrue incentive comp. This year it was clear very early on that we were going to be close to the max, and we began accruing at that rate very early in the year.

Okay, perfect. And then in the fourth quarter, I know you mentioned the holiday shifts. I don't know if you have any estimate on what that might do to same-store sales. I was just curious on Star Wars, do you think the Star Wars movie is a good thing or a bad thing for your business? I can see it both ways, but I'm interested in your history with a big movie opening like that what it might mean for Dave & Buster's.

Well, I'll take the second one first. We have been unsuccessful in correlating blockbuster movie openings with our comparable store sales. Meaning it literally has no correlation when we run analysis. So I'm not really anticipating that Star Wars is going to be any different. We do have the Star Wars Battle Pod game that we rolled out earlier this yea, but there's really not a very effective way to talk about that for us. So I don't think we're really going to get any balance, per se from that. So I think that it will -- it's an event and we have a lot of stores that are very near because of where they're located, are very near movie theaters, they tend to benefit from this kind of thing, when there's a blockbuster movie. We've got other stores that are nowhere near a theater and they probably lose a little bit. But that's my thesis for why we don't see any correlation between the two, where we just don't -- they're just not correlated to those blockbuster movies.

The first part of the question around holiday shift, obviously, it remains to be seen what the impact of that is. But the only -- we think it's going to be less than 1 percentage point. So it's a number, but it's directionally lower than that hopefully. And I think that probably the bigger number is thinking through the special events versus walk-in mix issue. Because obviously, the fourth quarter is by far the largest special events quarter of any of our four quarters, just to give you some perspective on that. On a year-to-date basis, our SE business -- our special events business is around in the mid-9% range. I think it's 9.2%. And in the fourth quarter, you're [scaring] 16% or so. And as we've indicated, we're not seeing the kind of walk-in strength; special events is not [a shuffle] producing the same kind of strength as our walk-in business which is -- it's been just phenomenal this year. And we'll take that trade. We like the strong walk-in business, but it will have some impact on our -- I think our reported comp in the fourth quarter.

Okay. Great. Thank you.

Nicole Miller, Piper Jaffray.

Thank you, good evening. On the development for next year, the 9 to 10 stores, are these going to be in new, what you would call new markets or will they -- or how many will go into existing markets?

They skew more towards new markets, I believe, next year. I'm looking over to my compadre here.

Than what they did this year.

Yes. This year we clearly skewed more in existing markets and it flips around. I want to say roughly four of them are existing, six new.

Okay. Great. And then, just on the private party business, can you talk about if that's driven more by corporate or social? And then, what are you seeing so far for holiday bookings? Thank you.

I'll answer the first part -- the second part first, which is we don't typically disclose or we haven't in the past ever disclosed where we are in bookings and whatnot. But I'll let Dolf answer the question on where we skew social versus corporate.

Our experience is that there we're about 55% corporate and 45% social and nonprofit. So the nonprofit would include schools; we do quite a bit with lock-in events in the summer, so it's about 55%, 45%.

Is strength still coming from both -- they're evenly split and the performance is similar?

That mix hasn't changed dramatically in the last number of quarters.

Great. Thank you so much.

(Operator Instructions )

With no further questions at this time, I'd like to turn the call back over to Steve King for any additional or closing remarks.

Thank you, Noah. As a final note, we are planning to present at the ICR conference in January, so we may see some of you there. But if not, we look forward to speaking to you again when we release our results from the fourth quarter towards the end of March. We appreciate your continued support and interest in Dave & Buster's. Have a good afternoon.

And that does conclude today's conference. Thank you for your participation.