Good afternoon, everyone, and welcome to the Dave & Buster's Entertainment Incorporated Second Quarter 2016 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. Please go ahead.

Thank you, Kevin and thank you all for joining us. On the call today are Steve King, Chief Executive Officer; Dolf Berle, President and Chief Operating Officer; and Brian Jenkins, Chief Financial Officer. After comments from Mr. King, Mr. Berle and Mr. Jenkins, we will be happy to take 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 daveandbusters.com under the Investor Relations section. In addition, our remarks today will include references to adjusted EBITDA, store 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'm going to turn the call over to Steve.

Thank you, Jay and good afternoon, everyone. We appreciate your participation in our quarterly conference call and interest in Dave & Buster's. On this call, I'm going to review the quarterly highlights and also take us through some of our current initiatives, and then Brian will walk us through the financials and guidance and then I'll conclude with our development and remodeling efforts. We grew total revenues by 12.4% on the strength of sales contributions from our newer stores and also significantly leveraged our operating cost resulting in net income of $21.5 million, driven by a 21.9% growth in adjusted EBITDA and a 210 basis point improvement in adjusted EBITDA margins. Given our results for the first half of the year, we are increasingly confident in our annual guidance for total revenues, net income, and adjusted EBITDA even as we lowered the range for comparable store sales growth. For the 86 stores we operated during the second quarter, 20 stores or 23% of the total are non-comp stores. They're performing well demonstrating the broad appeal of our brand as we expand our footprint and supporting double-digit growth on our top-line despite our modest 1% growth in comparable store sales. Our comparable store sales growth consisted of a 0.9% increase in walk-in sales, while our special events business increased 1.9%. From a cadence standpoint, comp trends were as we had anticipated in May, but dipped in June only to rebound in July. We believe the Memorial Day shift one week later than the previous year was more of a factor than we had estimated previously, although there was significant amount of week-to-week volatility. You may recall that we called out cannibalization, competitive intrusion, and economic pressures related to the oil industry during the first quarter and these considerations continued into the second quarter as well. However, the macroeconomic environment and especially the casual dining industry also slowed relative to the first quarter and that also weighed our results. Note that our year ago comparisons for comp store sales was 11% on a two year stacked basis, comp store sales still increased a robust 12%. With the 1% increase in comparable store sales, we were able to extend our outperformance relative to Knapp Track to 17 consecutive quarters, although our gap to Knapp narrowed relative to the first quarter. As we previously said, the uniquely customizable experience we provide across our core platforms, eat, drink, play, and watch provides us some degree of insulation from casual dining trends, although we're certainly not immune from what's going on all around us. So now, let's hear from Dolf on the steady stream of new products and promotions, how we're working to improve margins, and how we are ensuring that our stores open successfully in both new and existing markets for our brand.

Thank you, Steve. I'd like to begin by thanking our many D&B leaders and team members across the country for their efforts during the second quarter. They are driving the programs that contribute to our ongoing sales and profit growth on a daily basis. As I’ve shared in recent calls, D&B's primary guest target is Play Together Young Adult, 21 to 39 year olds. Our products development emphasis taps into their interest in exploring new entertainment offerings, as well as new and creative food and beverage items. Also we appeal to two secondary targets, which are families who visit us on a walk-in basis and corporations who book party events. By way of background, we knew that the strong results in 2015 would be a challenge to exceed. With this in mind, we pushed ourselves to develop new initiatives in order to keep driving comparable store sales growth. From an amusement standpoint, we ran our annual Summer of Games promotion, which featured nine new games this year. Significantly, six out of nine of these games are based on popular and familiar licensed products, which are exciting to play and memorable and placed on a TV ad. Games such as Ghost Busters, Mario and Sonic at the Rio Olympics, and the new level for the Star Wars Battle Pod exemplify the strategy. You may have seen D&B in the new Ghostbusters movie, which is a demonstration of our continued efforts to partner with other popular entertainment properties. I also want to make special mention of our new Star Trek game. It is based on the platform of our very popular Wizard of Oz game and features collectable cards from the original Star Trek series. We owned the proprietary license for this Star Trek game, and therefore it can only be enjoyed…

Thank you, Dolf, and good afternoon, everyone. Well, our team is doing a great job executing our strategy in a tough environment, and they are a key reason why we believe we are in a great position to deliver on our annual guidance of total revenues, net income and adjusted EBITDA. Now in terms of the second quarter, total revenues increased 12.4% to $244.3 million, that's up from $217.3 million in the prior year, primarily due to contributions from newer stores. Revenues from our 66 comparable stores increased 1% to $195.4 million, up from $193.5 million, while revenues from our 20 non-comparable stores, including two that opened during the quarter increased 99.5% to $49.5 million, that's up from $24.8 million in the prior year. Turning to category sales, the mix shift to the more profitable gaming side of our business continued, as total amusement and other sales grew 15.7%, while food and beverage collectively increased 8.5%. During the second quarter, amusement and other represented 55.9% of total revenues, reflecting a 150 basis points increase from the prior year period. Now breaking down the 1% increase in comp sales, amusements rose 3.5%, while our food and bar business increased 2.2% and 1.4% respectively. As Steve mentioned, our second quarter comp performance exceeded the casual dining industry for the 17th constitutive quarter. This was in spite of an unfavorable shift in the Memorial Day calendar, unfavorable weather patterns and pervasive challenges facing casual dining because of the macro environment. The impact to our business from cannibalization and competitive intrusion, while notable was in line with our expectation. I would also remind you that we cycled over a lofty prior year comp of 11%, representing the toughest quarterly comparison we have this year. In terms of cost, total cost of sales was $44.1…

Thank you, Brian. I'd now like to review our recent upcoming store development activity as well as our remodeling program. During the second quarter, as Dolf mentioned, we opened stores in Little Rock, Arkansas, Florence, Kentucky. Both of those stores are entirely new states for us although Florence store represents our second location in the greater Cincinnati area. This quarter, we opened in Summerlin, Nevada, which is other to Las Vegas, also a new state for us and we will be opening in Fresno, California, next month. In the fourth quarter, we’ll open stores in Silver Spring, Maryland, in the Washington DC area, Toledo, Ohio, and our second stores in Canada, Toronto, Ontario, as well as potentially one additional location. As Brian mentioned, we have previously guided 9 to 10 openings, this year we're now raising those expectations to between 10 and 11 openings. Of these 11 stores, 4 to 5 of those store openings are in markets, where we already have brand presence, and up to 6 store openings will be in new markets for Dave & Buster's. In terms of store sizes, as was mentioned previously, we use the entire range between 25,000 and 45,000 square feet. Three of the stores will be 30,000 square feet or less or what we define as small. Three or four of those stores will be 40,000 square feet or more are large size, and the remaining four stores will be in between that 32,000 to 36,000 square-foot range. As we said in the past, there is a lot of real estate available that meets our criteria. We believe achieving our long-term goal of over 200 stores in North America is attainable, despite having built out less than half of that domestic store potential between the well-known big-box retailers and department stores…

Thank you. [Operator Instructions] We'll take our first question from Sharon Zackfia with William Blair. Go ahead.

Hi, good afternoon.

Good afternoon.

I guess a couple of questions. On the earnings guidance for the back half, I think the implication is something like flat to up 15%. And I’m trying to reconcile flat earnings growth in the second half with a comp of, I guess, 2.2, which would be the low end of guidance. I would have thought you could have gotten kind of margin on any positive comp. Maybe if you can walk me through if there are any kind of incremental investments happening in the second half that would dampen that?

Yes, Sharon, I mean, as we said on the call, we are going to roll over the e-ticket initiative in the back-half and the commodity deflation that we've seen in the first half is going to moderate in the back-half. So -- and that's been a big part of the fuel to some of the margin improvement you've seen in the first half. We also have indicated before that we were going to make some incremental investment on the marketing front. I think we've mentioned -- I talked a little bit about the two additional weeks that we planned to advertise in the third quarter, and we are looking at potential additional marketing investment in the fourth quarter, and as we've mentioned that previously. So some of those things are going to impact the ability to lift the margins like we did in the first half.

Okay. And then just wondering the special event comps outpacing the walk-ins, is there anything to read there anything you’re doing different in special events? I'm thinking about that particularly as we get into the holidays?

I don't really think there is anything to read into it as it relates to this quarter. I mean this quarter is a relatively small quarter for special events. I do think we executed at the unit level, actually outpaced our call center this quarter and which is sort of a flip-flop from what it was in previous quarters, but I wouldn't read too much into it, I mean it was a little bit better than what we thought on the walk-in side.

Okay, great. Thank you.

We'll go next to Andrew Strelzik with BMO Capital Markets. Go ahead please.

Hey, good afternoon everyone.

Afternoon, Andrew.

I just wanted to quickly confirm so I think that you said, you said July improved and then you're running in that kind of the range for the comps that you mentioned for the back-half of the year? You said you're running there now. And then secondarily to that, you said the guidance allows for some softening in the macro. I didn't fully understand if you could just explain that please?

So let me take July first, July was the best period of the quarter. So we saw strengthening towards the end of July, and I guess what Brian's reference was to when you look at a 2.25% to 4.25% for the balance of the year, we're not seeing anything in the current data that suggest that's not a reasonable estimate.

And then the softening -- allowing for some softening on the macro?

Yes, I mean we've talked previously about kind of the back-half. We have significantly easier rollovers in the back-half, I think we are in the mid-7s if I remember the number right compared to 10 for comp in the first half we are rolling over. So I think the comparisons get easier in the back-half. We expect cannibalization to moderate in the back-half and then you may recall we were impacted significantly by storm Jonas in the fourth quarter last year, so all of those things still exist, that would call for a better second half than first. So 2.25% which is essentially where we're at year-to-date, we think that gives some room for some softening in the macro environment.

Got you, I appreciate that. I wanted to ask also, you've been talking for the last several quarters that eventually there would be some realignment with the long-term algorithm in terms of you guys have obviously been doing better than that. Do you think that we’re now at the start of that or do you think this is kind of a bit of a period of aberration given what's going on in the macro environment? I'm wondering just how you're thinking about that conceptually?

I mean, I think conceptually we're still guiding to something that's ahead of our long-term guidance. But we said I think at the beginning of this year that we believe that we would begin to move towards were the words we used I believe our long-term guidance. And clearly this is a move towards the long-term guidance. Specifically, as it relates to the second quarter, I think by virtue of what we're guiding of the balance of the year, we view it as somewhat of an aberration.

Okay. And then my last question if I can, you mentioned that you're working on some efficiencies from a pre-opening perspective and then also in the first 90 days. I don't think this is the first time you’ve actually mentioned that, but is there anything you're seeing from a new unit productivity perspective that's causing that or is it just best practices in trying to be as efficient as possible or you’re trying to preempt something, any comment around the new unit productivity would be great?

We are not trying to preempt anything, what we are doing is we are steadily improving the ways in which we bring stores up to our standard and what we've done to initiate a program that's very specific benchmarks in terms of not only the guest feedback but also labor and cost of goods sold efficiencies that has stores marching towards our standard over a prescribed amount of time. And so I as well as members of our finance team do a 90 day audit and then again at 120 days and checking with the team and ensure that we are on track, and this is a way to really teach the organization how to make steady progress towards our standard on a more rapid timeframe than what we might have seen in years past.

Just to add-on to that, I mean Andrew we've got what 20 of our 86 stores that are in our non-comps that's roughly a quarter of our store base that this was a big number and new stores typically start out not as efficient on the two prime cost, cost to goods sold and labor. So what Dolf and his team are working on is really trying to own those stores in a quicker pace because it's a big part of our store base right now. So back in the days when we were building a couple of stores the main efficiencies on those two lines didn't matter is more impactful now. So program around that's important for us today.

Great, I appreciate the color. Thank you very much.

Sure.

The next is Nicole Miller from Piper Jaffray. Go ahead please.

Thank you. Good afternoon. I want to ask about the RFID technology, besides feeling good about the reliability what else have you learned in the five store tests?

I think that the biggest thing we've learned I would say is that there are a group of guest who are interested in buying this technology and using this technology and it does not seem to have a negative impact on the remainder of their spend of what they are putting on a power card. So we were -- I think we mentioned previously we were essentially selling this for $10 with $5 worth of chips, which is a good deal for us relative to selling them at $2 power card. But in addition it doesn't seem like whatever they were going to put on their normal power card purchase was negatively impacted by buying the RFID technology. So we are optimistic that it’s a technology that again it's not going to have a huge uptake in terms of the number of people who select to or elect to buy it, but we do think there is some incremental there.

Thank you. And then the last question if I missed it I apologize. The additional store that seeking in for this year where does that opportunity come from maybe location, size and are there more of them out there? Thanks.

Yes if it is it will be a large. I don't think we'll go to another additional store although I wouldn't completely rule that out. But I don't think we'll go to a 12 store in a year. And it will be in the fourth quarter. So it's going to have some impact, but it's not a huge impact on overall sales. It's more of a -- it’s a benefit to next year clearly that you get the full year of it.

Thanks again.

Thanks, Nicole.

We go next to Brian Vaccaro with Raymond James. Go ahead please.

Thanks and good evening. I just wanted to circle back on the second quarter comps, Steve you just said July was a strongest month in the period and thinking about the broader industry the trend would seem to be pretty similarly soft and choppy in June and July. Just curious what you think is driving the sequential improvement, is it maybe just a monthly comparison issue or is there something more fundamental underlying you would attribute that to?

I'd refer back to what Brian said, I think that the period between the Memorial Day and the 4th of July had more shifting of school calendar and what not that we originally anticipated. And I think as a big part of it brought in addition we didn't have a great year-over-year weather month in that period and we don't talk a lot about weather and we really didn't talk about it last year after the second quarter. But it was a good year last year for us and in the context of a 11% comp it's not that significant, but in the context of a 1% comp, you can measure it and it's more significant.

Okay. And I guess on the last call you also had mentioned, given an update on your mall versus non-mall expense and you also touched on Texas, could you give us an update from both perspectives?

I mean, malls were actually better than the average. So that's not a drag for us. And then I don't know that we have exactly divided out Texas per se, but our oil oriented stores still remain under pressure, Oklahoma and Texas somewhat relative to remainder of the stores or the balance of the stores. Some of that once again is because of the fact that we did open a number of stores in Texas during the end of 2015 that are having an impact there as well.

Yes, definitely. Good point. And then just second topic, could you give an update on the manager re-certification program you've been working on both the food and labor side. I know it's still early, but have you started to see tangible benefits? And any guide posts on how we should think about the magnitude of potential savings or efficiencies from these initiatives as we move to later this year?

I think probably most important to say that the reason for the re-certifications was not to believe that we could make a major change in either of those areas, but really to ensure that we have ongoing discipline as we grow. And the challenge around that is that the number of new managers in our system that are either populating new stores or backfilling or managers who go to new stores, therefore, more new managers in the system means that we need to pay a lot of attention to people's proficiency in our systems. And so that's really the reason for the re-certifications. I am not looking for substantial change, but I think it’s really important that we hold the line and don't go backwards. And with our current rate of growth, so far so good.

All right, that’s helpful. Thank you.

We'll go next to Andy Barish with Jefferies. Go ahead, please.

Hey, guys. Couple of quick ones. For the 2Q was there any additional marketing or does the marketing matchup year-over-year?

Essentially the same.

Matched up.

And then for margin retention and this kind of inflationary environment as you lap e-ticket, what kind of comp do you think you need in the business to keep margins flattish?

I think given the wage pressure, it's probably slightly above the 2%. I mean, I think in the long-term, we said that we need about 2% in order to begin the leverage margins it’s probably slightly above that in light of some of the margin pressure we're seeing on labor. I mean, labor is -- as Brian mentioned, we’re anticipating between 4% and 4.5% in the second half within that range also in the first half. So it's a little more and without having kind of that fuel of e-ticket as well as some reduced reduction in cost of sales on the food side, the margin side gets a little harder.

Got you. And then just finally in the 4Q, are you planning for continued competitive pressure, particularly in the special events business, given there was a call out from last year’s fourth quarter for the first time, and obviously a bigger waiting in that quarter from some of the new entertainment type concepts out there?

I would say, yes. We’re trying to be specific around the markets where we know there is intrusion either already there or is coming, and trying to reflect that in what we're anticipating from those stores. But we know there is more of that competitive intrusions coming and it will affect our fourth quarter.

Okay, that’s it from me. Thanks.

Great. Thank you, Andy.

And this concludes the Q&A portion of the program. At this time, I'd like to turn the conference back over to your presenters for any additional or closing comments.

That's it for us. Thanks for your continued issue in Dave & Buster's. We look forward to speaking to you in early December when we will review our third quarter results. Good bye.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation.