Good afternoon, everyone and welcome to the Dave & Buster’s Inc. Second 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 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, Shannon and thank you all for joining us for the Dave & Buster’s Entertainment Incorporated 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 would 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 relate 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 that are not defined under Generally Accepted Accounting Principles.

Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website. Now, I will turn the call over to Steve..

Thanks, Jay and good afternoon everyone. We appreciate your participation in today’s conference call and interest in our company. Once again, we are excited to be sharing with you another record-setting second quarter at Dave & Buster’s.

As the numbers demonstrate, we leveraged our robust comparable store sales increases and strong revenue contributions from newer stores into our best store level EBITDA and adjusted EBITDA margins today.

In addition, we are gratified that our 8 non-comparable store sales in the 2014 class are generating returns far above our 35% targeted year 1 cash-on-cash and that our 2015 class of stores is off to a good start.

Our stellar performance during the recent three-month period on top of a solid beginning to the year in the first quarter has positive implications from our – for our full year guidance as Brian will explain.

But for now, my takeaway is that we are driving exceptional results through effective execution of our strategic plan and that our brand is truly seemed as highly differentiated from conventional casual dining.

This is because our guests can take advantage of multiple entertainment options and customize their experience in a mirror that cannot be replicated elsewhere thereby maximizing their fun. Comparable store sales rose 11% against a 5.7% increase in the prior year.

And we continue to expand our outperformance relative to Knapp-Track with an approximate 1,000 basis points differential over the effective 13-week period. We have now outperformed this industry benchmark for 13 consecutive quarters and we were the top performing brand in Knapp-Track for each of the first six months of our fiscal year.

On a 2-year basis, we accelerated comparable store sales relative to the first quarter with a 16.7% gain compared to about 14.6% in the first quarter and 11% in the third and fourth quarters of last year.

And similar to the recent periods, we experienced sales gains across day parts, days of the week, weekend and geographies demonstrating the power of our Eat Drink Play and Watch brand positioning.

With our comparable store sales gain, our primary driver was walking sales, which grew an impressive 12.1% and points to our core demographic appeal, while our special events business increased a modest 2.2%. In terms of marketing, we once again featured our popular Summer of Games promotion with an all new line-up of 10 exciting games.

The roster included the marquee Jurassic Park Arcade as well as Candy Crush, Gold Fishing and Subway Surfers among others. We then transitioned to a tie-in with a Pixel’s movie and promoted an older title, Pac-Man Battle Royale as Pac-Man was featured prominently in this film.

In late July, we were the exclusive venue for a new Angry Birds game, which we are still actively promoting. So, we noticed that unlike last year’s second quarter, we ran three promotional windows this year versus two in the previous year.

These promotional windows were enhanced by featuring a variety of games with immediate call to action enabling our guests to play three of our featured games to play. We believe that having these three separate promotional windows helped us to drive traffic.

We also shifted our media strategy relative to the second quarter of last year as we advertised for 7 weeks on Nickelodeon starting in June 2015, whereas last year, we ran only four weeks on Nickelodeon during July.

These targeted messages to younger guests were incrementally beneficial as we experienced a lift in kid entrees and sales growth during day parts when we normally see more young people.

Providing new experiences to our guests is of course not limited to amusements alone, we also introduced new entrees such as the Short Rib & Cheesy Mac Stack sandwich and the Hottie Burger with jalapeno and poblano peppers.

Our visually striking and unique cocktails included a new line of tiki drinks, featuring the zombie and painkiller, which both became top 20 selling cocktails. We also introduced mega mojitos, featuring ruby red and passion fruit flavors.

Although, food remains our slowest growing category, it still rose 7.3% on a comp base in the quarter, a 150 point sequential improvement from Q1, while beverages rose an even more impressive 8.3%.

Our electronic ticket initiative that we discussed on prior calls was all, but completed by the end of the second quarter with only 2 stores left, which were converted early in the third quarter.

We therefore did not experience the full impact of this initiative during the second quarter itself, but are seeing some favorable benefits beyond just the ticket savings, which by itself should equate to about $3 million on an annual basis.

So far and it’s certainly early in terms of evolving usage patterns, we have noticed an increase in simulation game play as a consequence of this transition resulting in fewer e-tickets issued and lower redemption costs.

We, of course, don’t know yet if this trend will continue, but it is widespread and directly correlated to the timing of the rollout. We do note for sure that guests have embraced a change with an opt-in rate of nearly 90% and that our guest satisfaction scores in the amusement area remained very strong.

We have also begun connecting with our guests when they are not in our stores to three new Dave & Buster’s branded mobile games, Big Bass Wheel, Speed of Light and Tippin' Bloks. They are all available for free download on Androids and iOS.

These mobile Dave & Buster’s games enable players to earn points that can be accumulated and redeemed for in-store prizes.

We believe extending Dave & Buster’s beyond our stores can build brand loyalty by enabling players to redeem points they won to the mobile games at the winner circle and creates an opportunity for them to stay for drinks, food and arcade games.

We don’t want to overplay the importance of this initiative as it’s early in the life of these titles, but overall, this represents a modest investment on our part. And if these games are well-received, we plan to rollout more games in an app form. And now, we will hear from Brian who will walk you through the numbers in more detail..

Thank you, Steve and good afternoon. Before I review our second quarter financials and raise our annual outlook, I want to discuss several recent events that will impact our pro forma earnings guidance for fiscal 2015. First, as I mentioned on our last earnings call, during our second quarter, we closed on a 5-year $500 million senior credit facility.

The new credit facility bears a more favorable interest rate compared to our previous facility and we expect to save in excess of $9 million in annualized cash interest based on current LIBOR rates and debt levels at the time of the refinance.

However, you will note in today’s earnings release, we incurred a $6.8 million pre-tax non-cash write-off of debt issuance cost as a result of that transaction.

During the quarter, we also priced a secondary public offering resulting in transaction cost that along with the previously mentioned debt cost write-off have been excluded in our pro forma earnings estimates.

And finally, we recently sold a $1.2 million note receivable that was being held on our balance sheet at a discount to its full value upon settlement of the note was paid in full and resulted in approximately $500,000 in non-cash interest income, which was netted out of our interest expense line.

Therefore, I would caution you not to not extrapolate our Q2 net interest expense to subsequent quarter since this non-cash interest income was a one-time gain and is non-recurring. Turning now to our second quarter results, total revenues increased 19.8% to $217.3 million, up from $181.4 million in the prior year.

Revenues from our comparable stores increased 11% to $176.8 million, up from $159.3 million while revenues from our non-comparable stores increased 84% to $41.6 million, up from $22.6 million in the prior year.

Recall that a store does not enter the comparable base until has been opened at least 18 months as of the beginning of each fiscal year, I would like to mention that while we currently have 60 stores in our comp base, this will drop to 59 in Q3 and Q4 following the expected closure and relocation of our Buffalo store.

In addition, please note that the year ago quarter included $4.3 million in revenues from two stores that have since closed, namely Bethesda, Maryland during the third quarter of last year and also Farmingdale, New York, during the first quarter of this year.

Also of note, this year second quarter benefited from contributions from the two stores that opened late in the first quarter as well as from the timing of our two second quarter openings, which were both near the beginning of the period.

Turning to category sales, total amusement and other sales grew 22.4% during the second quarter while our food and beverage collectively increased 16.8%. Similar to recent quarters, our total sales mix shifted to the more profitable gain side of our business.

In fact during the second quarter, amusements represented 54.4% of total revenues, which reflects 120 basis points increase from the prior year period. Within our impressive 11% comp store sales increase amusements rose 14%, food sales increased 7.3%, while our bar business grew 8.3% for combined food and beverage increase of 7.6%.

Total cost of sales was $41 million in the second quarter and as the percentage of sales decreased 100 basis points. Food and beverage costs were 40 basis points higher than last year, which was in line with our expectations.

Food commodity inflation for the quarter was driven primarily by increases in beef and poultry, while approximately 2.7% in food pricing partially offset these pressures. As the overall commodity environment has turned a bit more benign, we are lowering our estimate for the full year inflation to be between 3% and 4%, down from 4% to 5% previously.

And although, protein costs remain elevated, we are experiencing more favorable trends across several items including beef and poultry. And unlike peer restaurant operators, we are able to manage gross margins holistically by leveraging robust amusement business.

During the second quarter, amusements and other margin surpassed our expectations improving 180 basis points, primarily as a result of lower paper ticket cost and a reduction in redemption costs driven by our e-ticket initiative.

Total store operating expenses for the quarter, which includes operating payroll and benefits and other store operating expenses, were $113.9 million, and as a percentage of revenue decreased 260 basis points year-over-year to 59.5% of sales as we leveraged our marketing, occupancy costs and other fixed expenses on the strong comparable store sales growth.

Note that wage inflation was not a significant factor in our operating payroll and benefit costs, which improved 30 basis points. Although, we experienced leveraging on the management labor line, our incentive compensation rose due to our outperformance in the quarter.

Store level EBITDA was $62.5 million for the quarter, reflecting growth of 37.1% compared to $45.6 million last year, an improvement of 370 basis points to 28.8% of sales. This is the highest store level EBITDA margin we have ever generated during the second quarter.

G&A expenses were $13.5 million an increase of $3.9 million compared to last year and as a percentage of revenues were 90 basis points higher at 6.2%.

This was primarily a function of higher incentive compensation expenses due to our strong financial performance as well as incremental public company costs related to stock-based compensation and cost to comply with Sarbanes-Oxley in 2015.

Pre-opening cost totaled $2.6 million compared to $1.8 million in 2014 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 around $1 million on a small store and all that one of our store openings this year are large format.

Taken all together, our adjusted EBITDA grew 37.1% to $52.7 million and margins rose 300 basis points to 24.2%, representing another quarter of record setting performance.

Net interest expense for the quarter fell to $2.2 million from $11.7 million in the prior year, driven by the lower interest rate under our recapitalized debt and reduced debt levels due to the debt repayments that followed our IPO and recent refinancing.

As I mentioned earlier, this line item included approximately $500,000 in a non-cash interest income, which was a one-time gain and non-recurring.

We generated net income of $12.6 million or $0.29 per share on a diluted share basis of $42.7 million shares compared to a net loss of $13.9 million or $0.42 per share in the second quarter of last year on a share base of 33.2 million shares.

However, similar to the first quarter, 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 second quarter, our net income improved to $17.2 million or $0.40 per diluted share compared to $6.8 million or $0.16 per diluted share in 2014.

Now turning to our annual outlook, we are raising some of our guidance metrics once again taking into account our strong performance to-date, the recent refinancing of our senior credit facility as well as for transaction costs related to our secondary offering. Recall, our fiscal year 2015 ends on January 31 of 2016 and is a 52-week period.

Total revenues are now expected to range between $844 million and $853 million that’s up from our previous range of $822 million and $831 million. Comparable store sales growth has been raised to 6.5% to 7.5%, up from the prior range of 4% to 5%. Remember that we do anticipate comp growth to taper off following a very strong for six months.

And I will address that a little bit shortly. We now expect to open eight to nine new stores, an increase of one additional store versus our previous range of seven to eight. We have opened five new stores to-date, with the remainder under construction and all in the large-format.

In addition, we will also relocate one existing store in Buffalo, New York, during the third quarter, which will incur pre-opening cost. Adjusted EBITDA is now expected to be between $199 million and $203 million, that’s up $11.5 million from the previous range of $187.5 million and $191.5 million.

We are now anticipating an effective tax rate of approximately 35% to 36%, down from 37% to 38%, primarily driven by lower expected state tax.

Our pro forma net income is now expected to range between $52.5 million and $55 million, which includes interest expense savings, that will be cash for this year because of the refinancing and excludes the $6.8 million pre-tax debt – write-off of debt issuance cost related to the previous credit facility and also excludes transaction cost associated with our secondary offerings.

This is approximately 20% higher than our previous range of $43.5 million to $46 million. Diluted share count has decreased to a range of 42.7 million to 42.8 million compared to 43.8 million and 43.9 million shares previously. And finally, we now expect our net capital additions after 10 allowances to range between $132 million and $142 million.

This represents an increase of $14 million from the previous range driven by one additional new store opening and higher pre-spend related to our 2016 store class. We are obviously very pleased with our performance to-date and feel very comfortable with the revised guidance we have provided.

That said we would like to highlight two factors that we expect will impact our cost performance in the last two quarters of the year. As we have noted before, we will be lapping very challenging year ago comp store comparisons of 8.7% in the third quarter and 10.5% in the fourth quarter of this year.

Furthermore, our special events business represents a more significant portion of our sales mix in the fourth quarter and while we have delivered consistent growth in that area, it has not been as strong as our walking business.

Also, the holiday timing shift of Halloween, Christmas, and New Year’s toward the weekend will be more onerous this year compared to the prior year. Given these factors, we are being proven in our comp stores sales guidance for the year despite our outsized results thus far in the fiscal 2015.

With that, I will turn the call back over to Steve to make some additional remarks..

Thank you, Brian. We are very pleased with our solid results for the first half of 2015 and we are very enthusiastic about the road ahead for us at Dave & Buster’s. As Brian mentioned, we now expect to open 8 to 9 stores this year, slightly ahead of our prior 7, 8 store guidance.

During the second quarter, we opened 2 stores, one in Kentwood, Michigan it’s outside of Grand Rapid and one in Woburn, Massachusetts, which is northwest of Boston. After the end of the quarter, we opened the store in Edina, Minnesota, which is in the Twin Cities.

As a reminder, the store relocation in the third quarter planned for Buffalo, New York is not included in the 8 to 9 new store guidance.

In the fourth quarter, we will open in Friendswood, Texas, which is outside of Houston and Glendale, Arizona, home of last year’s Super Bowl, which is west of Phoenix as well as Springfield, Virginia, which is in the Greater DC area. All of these locations are under construction.

We also anticipate the possibility of one additional location opening before year end. That store is also under construction in San Antonio, Texas and we are in the process of confirming whether that opening will fall into this fiscal year. Looking ahead, we have great visibility with respect to development.

We have 16 signed leases for stores to open in 2016 and thereafter. I should also note that even as we are opening new stores as part of our objective to reach 200 stores in North America – more than 200 stores in North America, we are also investing back in our current store base.

This year, we are substantially remodeling three locations and creating D&B Sports lounges in five additional units, those are all completed.

These efforts are designed to strengthen our positioning as the destination of choice for one-of-a-kind dining entertainment and should enable us to better serve our existing guests and attract new guests to our brand.

And finally, we believe that we are extremely close to signing a definitive agreement to open Dave & Buster’s stores internationally and we hope to have something to announce soon. We look forward to expanding our brand beyond North America and believe our Eat Drink Play and Watch positioning should resonate far beyond our borders.

So, on that exciting note, we are now ready to take your questions. Operator, please open the lines..

Thank you. [Operator Instructions] And we will take our first question from Sharon Zackfia with William Blair..

Hi, good afternoon. Couple of questions. First, congratulations on a great quarter. When you talk about the 2016 pipeline, I know this year is going to be primarily the large format stores.

I don’t know if you can give us any insight into what 2016 might look like? And then secondarily on G&A, obviously some nice bonus accruals happening and you guys deserve it, but wondering if you could give us any update on kind of what the right G&A range might be for this year?.

Okay, let me take the first one. And for 2016 the stores that we have signed are more balanced between compared to what they were this year. As you look at this year, we are highly skewed towards the large stores. It looks like 8 of the 9 if we open 9 will be large stores. We have opened that one in Grand Rapids. Outside of Grand Rapids is a small store.

But next year, we are anticipating they are going to be much more balanced. And we think there will be even a little better spread throughout the year. They are pretty even this year now. We think we can get even a little better next year..

Sharon, on the G&A question, yes, we did have an increase in G&A in the quarter and also year-to-date largely driven by bonus accruals, particularly in the second quarter.

I think a reasonable number to think about is $52 million to $53 million of G&A and I think on the last call, we were talking about in the neighborhood of $48 million to $49 million. So, we do anticipate a bit higher G&A this year due to incentive compensation and as well as cost associated with being a public company.

In particular, we did trigger the need to be Sarbanes-Oxley, SOX 404 compliance this year and so we are part at work on that and we are encouraged from additional cost associated with that..

Okay, great. Thank you..

Thanks, Sharon..

And we will move to our next question Nicole Miller with Piper Jaffray..

Thank you. Good afternoon..

Good afternoon..

You also made a note in the press release about remodeling a few more stores in the quarter, can you give us an update of how much of the system is remodeled and how the planned definition of system, please?.

I think we talked about – we did three complete remodels this year. That’s the kind of $2 plus million remodel scope. In addition to that – that includes a D&B Sports component. In addition to that, we touched 5 additional stores with the D&B Sports branding and improved the sports viewing venue in a number of stores. We are going to be about 70%.

As we sit here today, we are about 70% of the store base has the D&B Sports branding in it, which is the major component of the remodel, not the only thing, but clearly a marking part of it. We will continue to look at and are looking at a number of stores that we will do next year.

We had to block down on the final number to the folks here on this call today, but we do anticipate doing a few more stores next year..

Thank you.

And then also, you made note that you are coming close to working some – with some international partners, how is that coming along and when can we expect an opening and maybe where, please?.

I think at this point, given the timing, opening wise it would be either very, very late 2016, but much more like will be into 2017. That would have an opening. And until we sign it, we really not going to talk a lot more about the terms and where and all the rest of that, but I would anticipate openings sometime in 2017..

And just the last quick one for me, please. There is lot of pent up demand or hype around Star Wars in the retail world, did that help you in your current – for this just reported or do you see it helping you at any point for the remainder of the year? Thanks..

I think that all the games that we have we tend to put into advertising that features multiple games and so on the margin, anything that has a branded tie-in that is whether that’s Star Wars or something like that, we view that as a beneficial.

But its – we also don’t do it as the primary driver if you will but it has to be something that’s connected to a movie property or something like that, but those are helpful. They are the things we put on TV, there are the things that we promote, but we don’t intend to promote that through the rest of the year.

We are going to go shortly here, I guess starting on Thursday or so with the football promotion and we will be running that, we anticipate through November..

Thank you..

Thank you. Thanks Nicole..

[Operator Instructions] And we will take our next question from Paul Westra with Stifel..

Can you guys help us out with a little bit on I guess the second half marketing calendar how should we think about it you mentioned some same store sales headwinds with respect to some of the calendar shifts, but how should we think about calendar flight doing to detail about some more way through some more flights in 2Q, should we think what the year-over-year calendar look like for the second half?.

Yes. It’s pretty similar. We are adding one week of television versus prior year in the third quarter. And that was really, we had a gap in our calendar during the football season we have started to narrow that gap a bit, so we will be on for 10 weeks during the third quarter, which is slightly different than where we have been in the past.

The remainder of it is more about reallocation and there are more weeks and whatnot and kind of what networks we run on and how we have chosen to puff some of advertising on the younger audience, on the kids advertising. So we will be coming back again with that sort of promotion and targeted advertising in the holiday season as well..

Was the 2Q spend as a percentage of sales was the same in 2Q last year or is it just being allocated more efficiently it sounds like…?.

It is very similar in dollars. As Steve mentioned, we did reallocate some of the media into Nickelodeon kid focused advertising over the summer.

Steve mentioned in his remarks, we advertised seven weeks on Nickelodeon versus four in the prior quarter, now with essentially a reallocation we did for national radio in the prior year, so really not anymore dollars spent to speak out as a bit of an allocation.

But I would say one thing there about the kind of the differences in the back half, we are advertising some kid focused advertising as we kick off the third quarter, in August we do have some weeks of advertising that we didn’t do previously in the prior year..

Okay.

And then maybe a little more color on D&B Sports packages, you have 70% this year, what do you have in the second half last year roughly and I guess season NFL kicking off can you talk about that being last year was the big noticeable impact, do you see the impact during the summer on the sports as well sort of giving up impact in the second half of year kicking of shortly?.

Yes. I want to come back to one thing that we said that a numbers of times and that is we believe we have really good viewing across the entire system. It will be as high as Brian said its right around 70% now, and we believe it’s going to be a bit over that as we build the last couple of stores during the course of this year.

I don’t have that stat right in front of me of what it was last year and it was clearly lower, I think it was in the mid-50s, it’s 55% or something like that..

And then you are putting some more – maybe media or ad spend around packages this year – for the install?.

I am sorry, could you repeat that, you broke up..

Anymore advertising about the sports packages, anymore regional and national TV ads – it’s in the vast majority of your stores?.

Yes. So last year, there is probably the biggest difference in terms of our football advertising this year versus last year is it gets skewed a little later because the calendar is later. But we are on in the third quarter, I mentioned one additional week during the third quarter of national advertising.

We are not going to – we don’t do that much local advertising in terms of – we don’t do any spot buys on a regional basis..

And my last question, your 3.7% pricing, can you just remind me what the last day versus the year or is there some…?.

We are still, that’s 2.7% is quarter food pricing statistic is 2.7%, we were about 2.8% year-to-date. We are going to be – we are shooting for somewhere between 2.5% to 3% on the food front for the full year. So we expect to sort of maintain that general level for the balance of the year..

Okay, thank you. Congrats on a good quarter..

Thanks, Paul..

And there are no additional questions at this time. I will turn the call back to management for any additional remarks..

Thank you very much for joining us. We look forward to seeing you with another good quarter hopefully in December. Thank you..

That does conclude today’s conference. Thank you for your participation..