Jay Tobin - Senior Vice President and General Counsel Steve King - CEO Brian Jenkins - CFO.

Sharon Zackfia - William Blair Nicole Miller - Piper Jaffray Andy Barish - Jefferies Brian Vaccaro - Raymond James Operator Good afternoon everyone and welcome to the Dave & Buster's Incorporated's First Quarter 2015 Earnings Conference Call. Today's call is being hosted by Steve King, Chief Executive 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 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 to the Dave & 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'll 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 in 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 containing our earnings announcement released 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 begin the new fiscal year from the position of strength, which together with other factors that Brain will address shortly has enabled us to increase our annual guidance, specifically we set new standard of excellence for adjusted EBITDA, adjusted EBITDA margins 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 continue to expand 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 quarters of last year. The overall comparable store sales increase in the first quarter consisted if gains across day-parts, days of the week, weekends and geographies.

In our estimation our positioning as the first choice for fun to 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 walking sales, which are the most indicative of our core demographic appeal where our primary growth driver with 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 begin with our focus on a new limited addition exclusive Star Wars Battle Pod games which was very well received by our guests as we offered it as a play-for-free. We then ran seven week promotion called Everyone’s a Winner that we first rolled out last year.

We awarded every guest that came into our store and a recharge of $10 power card with prizes such as 50% bounce back on games, 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 and included advertising on Cartoon Network as we explore 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 feature the Mayweather/Pacquiao boxing match on May 2nd 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 helps solidify our position as the premier place to watch destinations 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 desserts. 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 are 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 impressed the change within [obtaining][ph] 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 $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 slide off of debt issuance cost 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 the secondary public offering of 8.5 million shares of common stock by our existing shareholders at a price to the public of 31.5 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. Now turning to our first quarter results, total revenues increased 14.3% to $222.7 million up from a $194.8 million in the prior year.

Revenues from our comparable stores increase 9.9% to $190.4 million up from a $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 fiscal 2015, we have 60 stores in the comp base.

In addition, please note the following that year ago quarter including $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 accredited to EBITDA due to the expected sales transfers to other stores.

Also note the two stores that opened late in the first quarter of 2015 in Pelham, New York and Euless, Texas had a combine eight operating days during Q1 and thus had a negligible impact on the top line, although we did record their preopening cost 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 increased, 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 the percentage of sales increased 10 basis points, food and beverage costs were 20 basis points higher than last 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 growth margins on a holistic basis.

We have some leverage 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 growth 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 and ticker redemption liability adjustments, due impart to our strong amusements sales growth.

Total store operating expenses for the quarter were $110.2 million and as the percentage of revenue decreased 150 basis points year-over-year to 49.5% of sales as we leveraged our marketing, occupancy cost and other fixed expenses on the strong comparable store sales growth.

Store level EBITDA was $69.9 million for the quarter reflecting of 19.7% compared to $58.4 million last year, an improvement of a 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 the 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 cost.

Preopening cost totaled $2.8 million compared to $2.4 million reflecting the 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 above one of our stores opened so far this year than [indiscernible] format.

Putting all these items together, our adjusted EBITDA grew 22.3% to $61.9 million and margins rose roughly a 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 that 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 fourth -- 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 and as well as for transaction cost resulted to our secondary offerings, recall our fiscal year 2015 ends on January 31, 2016 and has a 52-week period.

Total revenues are now expected to be between $822 million and $832 million that is up from the previous range of $808 million to $822 million.

Comp store sales growth has been raised 4% to 5%, that's up a full percentage point from the previous range, with a stronger expected growth in the first half of the year given the comparisons we've faced as we move throughout the year.

We still anticipate 7 to 8 new store openings of which we have opened 4 to date with the majority of them in the large format. In addition we'll 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 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 saving expected this year because of the refinancing and excludes an expected $6.8 million pretax write off of debt insurance cost from the previous credit facility as well as transaction cost 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 10 allowances are expected to range from $118 million to $128 million driven by our new store openings, one store relocation, our planned remodel re-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 the 7 to 8 new stores this year and we've opened 4 so far. Although we have been seeing some results from both the large format and small format stores based on our 2014 and 2013 openings.

Our new term pipeline for 2015 is weighted towards larger-sized stores, also I would like to add that at particular location it could go either, way we've been erring on the side of building the larger stores opposed to the smaller stores, so all these stores with the exception of one of the 7 to 8, will, are or will be the large-store format.

As Brian mentioned in the first quarter itself we opened Pelham, New York which is in Westchester County North of New York City and Euless Texas outside of Dallas. Early in the second quarter we open in Kentwood, Michigan which is near Grand Rapids and Woburn, Massachusetts outside of Boston.

We have previously guided to 3 or 4 more store opening this year and two of these are under construction. Our next opening will be in the third quarter in a [Dinner][ph] which is outside Minneapolis, Minnesota. And the other store under construction is in Friends a suburb of Friendswood, 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 7 to 8 store or new store guidance that we talked about previously. So looking ahead we have great visibility in terms of development with 13 signed leases for stores that open in 2016 and thereafter.

So really 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 we're now ready to take some questions.

Operator, could you please open the line for questions?.

[Operator Instructions] We will go first to Sharon Zackfia with William Blair..

Couple of questions, I guess, more recently with all of the rain in Houston and broadly in Texas, could you give us any update on how that may or may not impact your business and then secondarily, relating to the World Cup and I don't know that was a tremendous driver of your business last year, but maybe did you give us any inside on that?.

In the past, we talked a little bit about the World Cup, I mean there were a few days that were significant for us in terms of that, 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 and we're just not seeing anything, whether it because of oil or rain or whatnot that's negatively impacting Texas at this point..

Thank you. Your next question comes from the Nicole Miller with Piper Jaffray..

Thanks.

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 try to correlate box office proceeds and big box office blockbusters with whether or not that positively or negatively impacts our business and we're really just never been able to draw that correlation.

So, I think that -- and a part of that is because, for all the stores that we have, that are adjacent to or near movies were having blockbuster probably helps the overall traffic and helps with people deciding to have dinner, whatever, before a movie, there is no stores that are further away that probably get some sort of negative impact from that.

So, net-to-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. Your next question comes from Andy Barish with Jefferies..

The Pacquiao call out and why you don't think it was significant, I guess, because there was already a Saturday night or something and then, what do you think caused the -- an acceleration on the two year comps, you're running 11 and the first quarter, accelerated up to the mid-teens.

So, what would you point to on that front?.

So first on the call out, I think that, mostly you probably read the fact that Pacquiao/ Mayweather fight was one of the single biggest pay-per-view event -- home event 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 and our private events space and whatnot, that was very well intended and we sold out in a lot of places.

But at the same time, I think it's a net that big an event that is -- kind of happens from a national perspective, was a negative -- with a negative for the overall for walk-in, particularly on that night, so as [Dave] described he was in our -- [Dave] story’s said, he went into the -- he went into the showroom and it was -- everybody was cheering and although it wasn’t that great a fight, probably not sure what they were cheering about.

But anyway, but the midways were empty, so I think. It's negatively impacted us that way and so net-net it was an okay day for us, it was a positive day but it wasn't some sort of 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 playbook, we're 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 year-over-year basis.

Although I did elude to the fact that we did a couple of things to -- change up the medium mix to more specifically address our younger audience and did that on a Comedy Network and in the past we've heard as talk about doing that 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 is some benefit from that but I think overall I'd point back to strength to the brand and what we think that we've done over the last several years in order to do, make it more contemporary and that's about investing in the physical plans adding exports games, game for every year, in addition to the food and beverage that we've been rolling out.

So I think again back to the underlines strength of the brands seems to be continuing to build momentum..

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

So in the past, it was really a play on the paper ticker card more or less then on the labor.

We think there will be some ancillary labor benefit, but we spend about $3 million a year on tickets themselves, and we think this option 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 kind of $3 million in paper ticket cost and then some additional labor savings, but we’ve kind of bet that we think we’ll stay back $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.

.

Thank you. [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 4 to 5 or 4 to 4.5 range you mentioned for the year on the cost inflation..

I think we’ve 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 they need to increase to be less so in the back half of 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.

I think you said pricing year-on-year on the food side was 2.9% and if you were to take no additional pricing, can you remind us the quarterly cadence on your pricing and how should we think about it for the year, are we going to be in that 2.5 to 3 range or maybe let a little bit slow off?.

Yes, I mean we took a little more pricing this year. In the first quarter our effective tax -- effective price increased on food is about 2.9% and that’s the culmination of really three increases that 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 net 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 shooting for closer to 2.5 to 3 for the full year on the food side. .

Okay..

Which means we don’t really expect to totally offset food cost overall, but we do have as I’ve mentioned before we’ve got the amusements out of the house and we were then 10 basis points to the prior year in 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, you have been certainly, e-ticket savings that Steve eluded 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 can you just give us a little help on how you think about pro forma G&A for the year, including stock based comp.?.

Yes, our G&A for the quarter is like $12.8 million, were up 2.4. We did have some increased cost 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 little bit higher than that kind of levels from prior year.

In addition to that we had higher stock based comp, higher bounces due to really the outperformance we had in Q1 and some additional legal cost. So I think we’re -- on the last call I indicated kind of $44 million to $45 million kind of range I believe on G&A.

We’re thinking the numbers is probably 48 to 49 right now and 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 cost. In our press release I think you saw we had about $1.4 million of expected transaction cost for the year.

So if you think about kind of $48 million to $49 million, was about $1.4 million secondary costs rolling through that number. So if you want to kind of pro forma that out, however you want to think about that. But it is impacting the overall number for the year and then we’re anticipating a little higher legal, but 48 to 49 is pretty good range..

Okay, grate. Thanks.

Steve, question for you, I was curious if you had mentioned or if you had mentioned the amusement and other comp for the quarter?.

Yeah. It was 12.9% amusement and other comp -- it was the strongest category for us followed by beverage at 8.2% and I think food was [indiscernible]..

Okay Great. That’s helpful. And then just turning to also following up in margins, look the other store operating expenses was quite a bit more favorable than the expected.

Just curious as anything to call out there, that might be some timing issues or anything maybe perhaps related to the e-ticket side, kind of contribute to that?.

No, I mean, we had a 180 basis point margin improvement and it's largely related to more leveraging of essentially flat marketing cost and a leveraging of this, what I talked facility related cost which is occupancy, utilities, those what you think. So between the two of those it's roughly a 130 basis points just on that.

So, both of those were 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 and we are at much higher incentive comp in the quarter at the store level because of the performance and that sort of offset some of the ROE savings. But all-in-all a great margin quarter for us..

Okay great. That makes sense. And I guess my last question for more on -- top down basically just you had given updated guidance in terms of comp for the full year and 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 that -- you had mentioned the 2.5 to 3; is there anything that you could attribute to maybe a little bit of slow down or anything related to that change there?.

No. I mean, 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 other balance of the year.

So, we go from the roughly 5% to 6% and then we go to almost 9% and then over 10% for the fourth quarter, so, I think we're just taking that into account, we’re looking at what we're guiding to the full year comp store sales performance..

Now, in the back half of the balance year of Q2 through Q4 of last year was over an 8% comp, 8.3 to extrapolate 4 to 5 guidance. That's sort of a 3 plus BOI at the top end of that range, but we’re rolling over an 8.3 balance-a-year comp. So we've got some pretty strong comps back part of the year..

Yeah. I understand that.

I was just curious also may be part of the question was, 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, I mean our intent would be to, as Brian said, try to offset a little more of the food cost pressure that we’re seeing by taking roughly that 2.5 or 3 on the food side. We’ve said consistently that a couple of percent in beverage and essentially we don’t take much price on the amusements side.

We're really rely on trying to drive more consumption at the kiosk, that initial purchase to drive the sales..

And just -- 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 a 1.5 on beverage and zero on amusements. So, what that does is gives us an effective price increase blended at like 1.1% of the [9.9][ph]. So, clearly the strength we have is driven by traffic next year.

There is a win-win effective price overall. .

Alright thanks guys and congrats on the quarter..

Thanks..

[Operator Instructions] We'll take our next question from Sharon Zackfia with William Blair..

Hi. So, I had a quick follow-up question.

I think if you've include EPS guidance from your net income guidance; you kind raised somewhere around the order of to $0.13 to $0.15 for the year and just curious, because I think you beat consensus by roughly a dime in the first quarter and the interest savings you make there would be more than enough to get it higher than $0.13 to $0.15.

Is there some other offsetting cost that you are factoring into the full year? How did you think about the updated guidance?.

Well, I think, we are -- our arrange right now implied in the net income and share counts that we’ve provided, it is basically $0.99 to a $1.5. So, and we have guided $0.84 at $0.92, so at the high end, it's about a $0.13 increased. .

We had taken some of the first quarter performance into account when we guided the last time..

Okay it's perfect..

We knew that we were going to outperform what -- allows the initial guidance, so we again sort of took up some that flack in our guidance when we guided after than our fourth quarter result it should be..

Okay that helps a lot. Thank you..

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

Just one quick follow-up for me, in the past you've been helpful on giving us a sense of the quarter-to-day trend just wondering if you’d be willing to give us, with May behind us now, kind of an update on what you're seeing, obviously you've talked about Texas but maybe a little bit more granularity there will 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 like 9.5 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 quarters support the revised full year guidance, but we're not going to be specifically guiding quarters at these calls..

Thank you. And there are no further questions at this time. Mr. King, I would 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'll be announcing our second quarter results. Thank you very much. Bye..

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