Dave & Buster’s Entertainment Inc (PLAY) Q4 2019 Earnings Call Transcript

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Dave & Buster’s Entertainment Inc (NASDAQ: PLAY)
Q4 2019 Earnings Call
Apr 2, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, everyone. Welcome to the Dave & Buster’s Entertainment Incorporated Fourth Quarter 2019 Earnings Results Conference Call. First of all, I would like to apologize for any audio interference and distortion that you may experience on today’s conference. Today’s call is being hosted by Brian Jenkins, Chief Executive Officer.

I’d like to remind everyone that this call is also being recorded and will be available for replay beginning later today. I would now like to turn the conference over to Mr. Scott Bowman, Chief Financial Officer, for opening remarks. Please go ahead.

Scott J. BowmanSenior Vice President and Chief Financial Officer

Thank you, Cody, and thank you for joining us today. Joining me on today’s call is Brian Jenkins, Chief Executive Officer. 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 would like to call your attention to the fact that in our remarks certain items may be discussed which are not entirely based on historical facts. 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 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.

As set forth in its current report on Form 8-K filed today with the Securities and Exchange Commission, the Company is utilizing the temporary relief provided by the SEC to delay the filing of the Company’s 2019 Annual Report in Form 10-K for up to 45 days. As noted in that current report, among other factors, the temporary shutdown of all the Company stores and the related disruption to the Company’s business have necessitated a series of actions by management. This includes actions related to the Company’s outlook for the next 12 months of liquidity, exploring financing opportunities and seeking further covenant relief from our lenders as well as completion of the audit of the Company’s 2019 financial statement. As a result, our 2019 figures that we will reference today should be considered preliminary until such time as we file our 10-K.

In addition, our remarks today may 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 non-GAAP measures to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website.

With that I will turn the call over to Brian.

Brian A. JenkinsChief Executive Officer

Good afternoon and thank you for joining our call today which is taking place under completely different circumstances than any of us could have foreseen just a few short weeks ago. As we are all aware, the global COVID-19 pandemic has created a challenge unlike anything our Company, industry or the United — US economy has previously experienced. I want to emphasize that as always at Dave & Buster’s, we deeply value the health and safety of our team members, guests and each of the communities in which we operate. Our hearts go out to all of our team members and guests who are enduring so much through this crisis.

I’m going to ask Scott to very briefly review the highlights of our preliminary fourth quarter and full year 2019 results. After that I will cover the numerous steps we have taken to help mitigate the negative impacts of the ongoing COVID-19 pandemic on our business. Our prepared remarks will be comprehensive in terms of what we can share at this time. As a result, we will not be taking any questions today.

Now I will turn the call over to Scott.

Scott J. BowmanSenior Vice President and Chief Financial Officer

Thank you, Brian. During the fourth quarter, total revenues increased 4.6% compared with the prior-year period driven by strong contribution from our 37 non-comparable stores, partially offset by a 4.7% decrease in our comparable stores. Breaking down comp sales, our walk-in sales declined 5.5% while special events sales were up slightly.

In terms of category comp sales, Amusement and Other decreased 4.1% while Food and Beverage decreased 5.5%. Within Food and Beverage, food decreased 5.9% and the bar business decreased 4.8%. Total cost of sales was $59.8 million in the quarter, a decrease of 53 basis points as a percent of sales. Food and Beverage cost was 14 basis points favorable as a percent of sales primarily driven by price increases and the positive mix impact. Cost of Amusements and Other was 71 basis points favorable as a percent of sales primarily driven by favorability in the cost of redemption items. Operating payroll and benefits expense as a percent of sales was 23.9% or 10 basis points higher year-over-year due to the unfavorable impact of approximately 4% wage inflation, deleverage on comp sales and the impact of noncomp stores. Other store operating expenses were 31.2% as a percent of sales, up 110 basis points year-over-year. Higher occupancy costs were driven by higher rent costs associated with lease renewal and marketing costs were higher as a percent of sales due to deleverage associated with lower comp sales.

G&A expenses were $20.4 million and were up 27% from the prior year, mainly due to consulting expenses partially offset by decline in stock-based compensation. As a percent of sales, G&A increased 112 [Phonetic] basis points. EBITDA increased 1% to $73 million and was 21% of sales while diluted EPS was $0.80 per share versus $0.75 per share in the prior year. EBITDA was negatively impacted during the quarter by charges totaling $4.5 million and outside advisory fees, which translated into a negative effect of $3.5 million on net income or $0.11 per diluted share. Additionally, in last year’s fourth quarter EBITDA was negatively impacted by $1.2 million due to a sales and leaseback adjustment, partially offset by an approximate $400,000 benefit due to insurance proceeds related to our Puerto Rico store. This translated into a negative impact of approximately $650,000 on net income or $0.02 per diluted share. Excluding the effects of these discrete items from both quarters, EBITDA increased 6% to $77.4 million from $73 million. Recapping the full year, we generated record revenues of $1.36 billion, an increase of 7.1% including a successful opening of 16 new stores. Comp store sales decreased 2.6% and we generated EBITDA of $280.5 million, which was a slight increase from last year.

Shifting to the balance sheet, we had approximately $648 million of outstanding debt at quarter-end resulting in leverage of approximately 2 times adjusted EBITDA for our credit facility. During the quarter, we declared a cash dividend of $0.16 per share and had no share repurchase activity.

With that, I would like to thank you for your interest in Dave & Buster’s and I will now turn the call back over to Brian.

Brian A. JenkinsChief Executive Officer

Thank you, Scott. As a leading company in our industry, we entered 2020 focused on implementing a number of exciting strategic initiatives to further improve our competitive position and drive enhanced performance. Along with the rest of the world, our focus quickly changed.

To recap the past month, as the COVID-19 threat level began to escalate we experienced significant declines in our traffic nationwide beginning the week of March 9. That weekend several states announced their first mandatory shutdowns of all restaurants and bars impacting about 15% of our stores. Other states quickly followed and by Friday March 20th, we had closed all 137 of our stores. This remains a very fluid situation that we are monitoring closely while complying with all federal, state and local health safety guidelines as well as government mandates. At this time we are unable to predict when mandated shutdown periods may conclude or the pace at which our business may recover after reopening.

Our objective today is to help you understand the steps we are taking to conserve the Company’s capital, maintain operating liquidity and preserve the critical store restart capabilities necessary to safely reopen our stores as soon as circumstances allow.

Over the past three weeks we have been thoughtfully and quickly implementing a comprehensive plan with one simple goal, reopen our stores as soon and safely as we can so that we can welcome back our furloughed team members, turn our games back on and bring fun back into the communities we serve, something [Phonetic] that we believe will be very important as our Company emerges from this pandemic.

To put us in the best position to achieve this goal and recognizing that all of our stores are temporarily closed, we have had to make some very tough, but necessary, decisions. Our plan has four primary focus areas. First, in order to conserve capital, we reduced plan 2020 capital spending by 70% to approximately $65 million. Nearly $55 million of this has already been incurred with the remainder primarily contingent on the pace of store reopening. These reductions include temporarily halting all construction on the remaining 14 stores we had originally planned to open during 2020. They also include curtailed capital spending on all strategic initiative, store remodels, games, information technology and store maintenance. Note that we had already opened one store in March in Chattanooga, Tennessee immediately before the temporary shutdown. Second, we made significant reductions in planned operating expenses. Given the unprecedented circumstances that we currently face with the temporary closure of our stores, we made that extremely difficult decision to place all of our more than 14,000 store fellow team members on furlough. In addition we decreased store management personnel and corporate staff by nearly 90% and reduced the compensation of our senior leadership team by 50%. We also deferred payment of bonuses and the Board suspended cash compensation to all Directors for the remainder of the year. Finally, we significantly reduced planned store operating expenses, G&A and marketing spend.

In addition to those significant reductions we looked at all other areas of the business for additional opportunities to build our financial flexibility which brings me to our third focus area, capital allocation. On this front the Board ratified management’s recommendation to suspend both the quarterly dividend and share repurchase program. Suspending the dividend will conserve approximately $5 million of cash each quarter. We have not repurchased any shares from September 2019 and do not plan to do so for the foreseeable future. Our fourth and final focus area is our balance sheet. In the current environment, preserving liquidity is of paramount importance. We fully drew down the remaining funds available under our existing revolving credit facility. Including those funds, the Company had approximately $100 million of cash on hand as of March 31st.

As a result of the aggressive actions we have taken and while we remain in full temporary shutdown mode, we reduced our shutdown period expense run [Phonetic] rate to approximately $6.5 million per week. This consists of $3.3 million in rent and occupancy expense and $3.2 million in store operating expenses and G&A. In addition, our weekly guest service is approximately $0.7 million.

We have also stopped virtually all capital projects and are aggressively managing our working capital deficit by extending payment terms in an effort to limit additional cash outlays [Phonetic] and we continue to look for additional savings across all of those areas. We are also in active discussions with landlords and vendors to identify ways to further reduce cash outlay, extend payment terms, and obtain other payment concessions. As an example, we have notified our landlords that we do not plan to make our April rent payment which represents about 50% of the previously mentioned expense run rate.

We are also in discussions with lenders and outside debt and equity providers to amend necessary terms to our credit facility and further supplement our liquidity. Given the early stages of these discussions, we are not in a position today to project the benefit of these actions. Due to the combined effects of the current environment and the factors that I just outlined, we are also not in a position to provide guidance for fiscal 2020 at this time.

Despite the unprecedented disruptions that the COVID-19 pandemic has brought to our industry and to our business, we are sustained by the strength of our enduring brand and our incredible people. As a reminder, in 2019 we achieved record sales and EBITDA result eclipsing our recent expectation and past years’ results. We remain the leading category-defining brand in our industry. Our attractive store model has consistently generated industry-leading volume and EBITDA margins over many years and through many economic cycles and none of this would have been possible without our people.

Our entire leadership team is focused on navigating through this unprecedented environment. While the aggressive actions we have taken are extremely difficult, we believe they are necessary for the long-term health of the Company and will help position us to safely reopen our stores and emerge on the other side of this crisis and an even stronger competitive position.

Before closing this call, I want to extend a special thanks to those team members across the country who are working tirelessly for Dave & Buster’s as well as our team members who have now on furlough. We deeply value your passion for the Company and your effort that have personified the brand and produced industry leading results through many economic cycles. We understand the uncertainty created by the unexpected temporary closure of our stores and wish you and your families’ good health and safety throughout this difficult time. I’m proud to be a part of the Dave & Buster’s team. We are acutely aware of the importance of doing our part as a responsible business to support social distancing and the global effort to mitigate the spread of COVID-19. At the same time, nothing will bring me and this management team more joy than the day we reopen our stores and welcome back our team members and loyal guests so everyone can get back to working hard and having fun together.

Thank you for your continued support of Dave & Buster’s and this concludes today’s call.

Operator

[Operator Closing Remarks]

Questions and Answers:

Duration: 17 minutes

Call participants:

Scott J. BowmanSenior Vice President and Chief Financial Officer

Brian A. JenkinsChief Executive Officer

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