Dave & Buster's Entertainment, Inc.

Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment Incorporated First Quarter 2021 Earnings Results Conference Call. Today's call is being hosted by Brian Jenkins, Chief Executive Officer. He will be joined on the call by Scott Bowman, Chief Financial Officer, and Margo Manning, Chief Operating 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 Scott Bowman for opening remarks.

Thank you, operator, and thank you for joining us today. After a prepared comment, we'll be happy to take your questions. I'd like to remind you that this call is being recorded on behalf of Dave & Buster Entertainment Incorporated and is copyrighted. Before we begin our discussion on the conference results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed which are not entirely based on historical fact. Any of these items should be considered forward-looking statements relating to future events within the meeting 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 www.datainvestors.com under the Investor Relations section. In addition, our remarks today will include references to financial measures that are not defined under generally accepting accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website. Now I'll turn the call over to Brian. Well, thank you, Scott. Good afternoon, everyone, and thank you for joining our call today. Scott's first quarter results we announced earlier today provide solid evidence of the strength of the D&B brand and another great example of the outstanding commitment of the entire D&B team. I continue to be inspired by what we've accomplished together over the past year to strengthen the company on many fronts. Scott will provide a review of our first quarter financial performance in a few minutes, but I want to call out a few of the highlights. After closing out fiscal 2020 with accelerating momentum, our sales trend strengthened further during the first quarter. Despite continuing to operate with capacity and other operating restrictions, we saw a significant improvement in demand across our store base, including at our recently reopened New York and California stores. The reopening of our store base, coupled with stimulus payments, expanding vaccinations, and excellent operational execution drove significant revenue recovery. We generated $265 million in total sales, surpassing the top end of our expected range for the quarter, and established a new high watermark in our post-COVID sales recovery. Encouragingly, We exited the quarter with total comp sales down only 12% in April compared to 2019 with close to half of our comp stores exceeding their respective 2019 performance levels. This strong sales rebound combined with our lean operating model produced outstanding flow-through during the quarter, driving $72 million in EBITDA, only 19% below the first quarter of 2019, and reflecting 280 basis points of EBITDA margin improvement. Through the first five weeks of the second quarter, comp sales continued to accelerate, down just 4%, and total sales are running slightly ahead of 2019 levels. This trend, coupled with our summer initiatives, points to a promising second quarter. As of today, we have all stores back online except for our two Canadian stores that we anticipate will open late in the second quarter. Clearly, we've come a long way over the past year. We are optimistic about our future as we implement strategic initiatives to modernize and enhance our food and beverage menu, service model, entertainment offerings, and guest engagement. With these initiatives and the steps we took during 2020 to bolster our financial foundation, we are now a more competitive, more guest-centric company, and positioned to be a more profitable business as our sales fully recover. At this time, I'm going to ask Scott to cover the results of our first quarter and to share some insights on our expectations for the second quarter. After that, Margo will join me to provide an update on our 2021 strategic plan. Scott? Thanks, Ryan. The results of the first quarter marked a major inflection point for Dave and Buster's as we have begun to move beyond the significant impacts of the pandemic. We ended the quarter with 138 open stores, including one new store that opened during the quarter. With most of our stores open since mid-April, our business is showing strong momentum, generating revenues well above expectations for the quarter and extending into the first five weeks of the second quarter. We've also achieved a dramatic turnaround in profitability, driven by our lean operating model and the extraordinary efforts by our entire operations and support team. For the first quarter, total revenues of $265 million reflected a 35% decline in comparable store sales compared with the first quarter of 2019. In terms of category sales, the F&B business was down 49% comp, while amusements were down 25%. Amusements outperformed mainly due to a higher average spend for power court purchases. Throughout the quarter, comparable store sales showed steady improvement compared to 2019, and were negative 59% in February, negative 31% in March, and negative 12% in April. This sequential improvement was driven by the reopening of our stores and improving comp trends in our previously reopened stores. As a reminder, we will continue to report comparable store sales against 2019, as we believe this is a more meaningful comparison. Regarding sales next, Amusements were 67.5% of total sales for the quarter versus 58.5% in the first quarter of 2019, driven primarily by a purposeful reduction in discounting and a shift to higher denomination power cuts. Even up in the quarter was 72.1 million, or 27.2% of sales, and represented a 280 basis point improvement compared with the same period in 2019. The improved performance was driven by a higher amusements mix strong sales leverage on labor costs due to lower staffing levels, and reduced marketing and pre-opening costs. From a store perspective, 84% of our stores posted positive even up to the quarter, and 90% of stores did so in April. The company also returned to profitability for the first time since the onset of the pandemic, posting net income of $19.6 million, or 40 cents per deleted share. These improved operating results also produced $77 million of property and cash flow during the quarter, of which $60 million was used to completely pay down our revolving credit facility. We ended the quarter with $20 million in cash and $340 million of availability under our revolving credit facility, net of $150 million minimum liquidity covenant and $10 million in letters of credit. Total long-term debt stood at $550 million at the end of the quarter, consisting of our senior secured notes maturing in 2025. Additionally, at the end of the quarter, we had paid down all but $3 million of our deferred vendor payables balance and had approximately $45 million of negotiated rent deferrals on the balance sheet. We expect to pay back approximately $17 million of deferred rent throughout the remainder of fiscal 2021, $25 million in fiscal 2022, and the remainder thereafter. In addition, we received a tax refund of approximately $8 million in the first quarter, resulting from CARES Act legislation, and paid $22 million in semiannual interest on our senior secured notes. We expect to receive an additional tax refund of $3 million in fiscal 2021 resulting from CARES Act legislation and expect to receive a refund of over $50 million late in the fourth quarter or early in the first quarter of 2022 related to the carryback of fiscal 2020 losses. Turning to capital spending, we opened one new store in the first quarter and adjusted a total of $12 million and capital additions net of tenant allowances. We expect to open one additional new store in each of the remaining three quarters of the fiscal year. As we look forward to the remainder of the year, we are very encouraged with our progress and are very grateful for our outstanding operations team and supporting functions that have driven our success. Turning to our outlook, I'd like to offer some insights for the second quarter of fiscal 2021. For the first five weeks of the second quarter, we've continued to see strong demand for our brand, with comp sales down 4% compared to 2019. Two of our Canadian stores have yet to reopen. Based on current trends and barring any significant setbacks, we expect total second quarter revenues to be in the range of $335 million to $350 million, which is comparable to 2019. We expect EBITDA margins to decline compared to the first quarter due to higher commodity costs, higher labor and seasonal marketing costs, and a moderation of our amusement sales mix. Importantly, we expect EBITDA dollars to be in line with 2019 levels, a major milestone for our brand. From a CapEx perspective, we are reiterating our plan to invest $65 to $70 million in CapEx for fiscal 2021, with approximately 49% dedicated to new stores and other operating initiatives, 19% for gains, and 32% for maintenance needs. Finally, I'd like to reiterate our commitment to achieve 200 basis points of EBITDA market improvement as we reach 2019 AUV levels, which will be largely driven by structural changes in our hourly labor model, management labor, and G&A spending. With that, I'll turn it back over to Brian and Margo to discuss our strategic initiatives. Well, thanks, Scott. We're very encouraged by the first quarter results and the continuing early second quarter momentum that Scott just covered. Over the past several quarters, we've outlined our strategic initiatives to enhance the guest experience, and we've made great progress implementing them, which has set us up for what we think is going to be a really strong season for our brand. I'm going to turn the call over to Margaret to bring you up to date on the progress on several of those initiatives. and then I'll follow up with some additional commentary. Here's Margo.

Thank you, Brian, and thanks, everyone, for joining us this afternoon. When we talked at the end of March, we were already making progress on our key initiatives. I'm excited about the positive momentum and appreciate the opportunity to give you an update today. The overarching objective of our food and service model initiative is to efficiently drive increased sales, improve the guest experience, and enhance our long-term profitability. On the food front, we have completed the transition to a new menu with the Food Identity Inspired American Kitchen. This new menu offers 28 items, representing 33% fewer items than were on our menu prior to COVID-19. While it is still early, dishes like the IPA Fish and Chips, Hawaiian Chicken Sandwich, and Mushroom Stout Burger are big sellers on the menu and clearly resonating with our guests. As we move into summer, we'll be evaluating the performance of the fully deployed menu to better understand its longer-term impact on sales and on the guest experience. This summer, our guests will be tempted with seasonal drinks in the form of LTOs, limited time offers. Our summer LTO lineup includes elderflower tonics and bomb pop margaritas. Starting in September, we'll be offering our guests a heartier selection of fruit and beverage LTOs that pair well for both fall football and Oktoberfest. We plan to use our LTO strategy to take advantage of the freshness of seasonal product to give our guests a constant stream of amazing new culinary options to drive food attachment and sales. Additionally, we have completed the brand-wide rollout of our high-speed ovens and kitchen management system upgrades. both aimed at simplifying our operations. These back-of-the-house initiatives make it easier for our teams to execute at a high level by reducing cook times by 40% on a third of the menu and also by facilitating a more seamless flow of food in the kitchen. Our research shows that the D&D Guest defines food quality by food that is served hot and fast. The combination of our new menu, high-speed ovens, and new kitchen management system set our teams up to deliver a great dining experience to our guests. We expect our new menu to drive an improved guest experience and increase food attachment rates, all aimed towards increasing food and beverage sales. Next, we'll move our attention to the beverage menu. The same disciplined approach and extensive guest research will be used to evolve our beverage offering, with the goal of launching a freshly curated beverage menu early in Q4 to improve relevance and attachment to dry beverage sales. We need great people in order to fully bring the fun to life at D&B, and the labor market that we are facing today is the most challenging one that I have seen in my career. To improve our staffing levels for the demand that we expect this summer, we have earmarked an estimated $5 million, largely in Q2, for hiring programs and retention incentives. This is a significant investment that's been thoughtfully placed to help us attract the talent that we need to capitalize on the upcoming summer season. Another key initiative is to deliver a more integrated experience by evolving our service model to give the guests more control over their in-store experience. This involves deploying a combination of a new service model, tablets, and a mobile web platform to enable a completely contactless order pay experience. The stores operating on this platform have been able to expand the size of server sections and reduce staffing levels to be more efficient. We have over half of our stores on this new model and will have brand-wide deployment next month. Our rolling four-week average for mobile ordering adoption is over 40%. Due to the strong adoption by our guests, we are also testing a completely self-serve, mobile web-enabled guest experience in two stores. We believe this technology will help us transform our business model, allow us to operate more efficiently, and grow our culture of social fun by freeing up our team members to focus on the guest touch points that matter most. As I wrap up, I want to thank our team, the very heart of DMV, Our strong first quarter performance is a result of every team member embracing change and looking for how they can bring the fun back to our guests. D&D has an exceptionally talented operating team, and I'm very grateful for the resilience and passion for our brand. With that, I'm going to turn the call back over to you, Brian.

Thanks, Margo. I'll take the next few minutes to update you on our new entertainment and guest engagement initiatives. Designed to fuel a strong summer season and balance a year, we continue to work diligently to ensure that Dave & Buster's remains the premier destination where guests can discover the latest entertainment to enjoy together. This summer, we'll feature seven new games across our entire system, all of which launched exclusively at Dave & Buster's. Games like a life-size version of the classic board game Hungry Hungry Hippos and the arcade version of Minecraft Dungeons, which has already established themselves as two of our best performing titles in their categories. With the postponement of the new Top Gun movie to November, we made the decision to push back the release of this proprietary VR game to capitalize on the brand awareness that will accompany the film's launch later this year. However, this has given us an opportunity to draw more awareness to our enhanced version of Terminator, Guardian of Fate Special Edition, which we released earlier this year and that has already become one of our most popular VR titles. Finally, we are broadening our entertainment offering through the production of high-energy interactive events. We recently brought on a new leader for our dedicated entertainment programming function, and began executing our plan, starting with a very successful live music test in our Tampa store, produced in partnership with the well-known dueling piano brand, Howl at the Moon. In the coming weeks, we will begin testing national-themed trivia nights in conjunction with market leaders, geeks who drink, and will continue developing a wide range of recurring events. By expanding our entertainment lens, we look to broaden our appeal and increase visit frequency. For the upcoming football season, we have a number of initiatives planned to establish Dave & Buster's as the ultimate tailgate destination. These include proprietary video content, live entertainment in select markets, contests designed to draw our guests into the game, and, of course, compelling food and beverage promotions. We also continue to make progress in our discussions with potential sports betting partners and look forward to concluding negotiations later this year. Now Q2 is an important quarter as we look to drive deeper guest engagement. And we see three forces converging this quarter to accelerate our sales recovery. First, we're seeing pent-up demand in the marketplace from people seeking social entertainment after the lockdowns of the past 14 months. coupled with higher levels of household savings and punctuated by the reopening of our stores. The second force is our new brand positioning, which highlights how Dave & Buster's turns ordinary situations into extraordinary social moments. This transformation is signaled by the iconic arcade sound, ding, ding, ding, and is prominently featured this summer in in the first campaign of our new seasonal window strategy, which will be followed by a holiday campaign that will mark the next significant investment in marketing to reach guests and drive conversion during our fourth quarter. The summer campaign leverages a new media mix, which shifts the brand to a significantly higher digital social mix while increasing our video reach to audiences through connected TV within our key trade zones. The new modern approach to media will be accompanied by unique activations ranging from bank card partnerships to TikTok influencers. The third and final force behind our accelerating recovery is the introduction of exciting new products. We know that new product news is a powerful motivator for visitation. and it will be an important message to drive conversion this summer. Communication of this key message both outside and inside our stores will highlight new games, new food, and new beverages. As we look to drive deeper guest engagement, we're also developing a new loyalty program to encourage guests to level up by eating, drinking, and playing games. Launching in late Q3, The program will have a robust targeting and personalization capabilities. It will also bring additional relevance to our mobile app, as guests must use the app to complete challenges and earn rewards. Our research suggests that this program is significantly more attractive to guests than our current offering and will drive higher engagement. It is truly an exciting time at Dave & Buster's as the strategy, the planning process, and the preparation that occurred during the pandemic are now coming together to accelerate our recovery. I'll close today by emphasizing how much I appreciate the team's commitment, how encouraged I am by the proven resilience of our brand, and how confident I am in our plan to drive Dave & Buster's to new heights. Our brand is back. We have a solid financial foundation, and we are ready to move full speed ahead into summer. Now we'd like to take the call to your questions, operator.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. And if you're on speakerphone, make sure that your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause a moment to allow everyone an opportunity to signal for questions. And we will go to our first question from Chris Ockel of Stiefel.

Hey, good afternoon, guys. Thanks for taking the question.

Sure.

I'm doing well. Scott, the company's second quarter total revenue guidance is similar to 2019 actuals, and based on our math, the implied AUV for the second quarter is about 10% lower than the second quarter of 2019. First, is that correct? And then I had a follow-up.

That's... That sounds about right.

Okay. I don't have to mention the summary, but that sounds pretty close.

Okay. And then the company has stated the EBITDA margin would be 200 basis points higher than 2019 at similar AUV levels to 2019. But if you exclude the $5 million labor investment that you guys are making in the second quarter, it would seem the company is able to achieve that. the 2019 EBITDA margin at a much lower AUV level. Am I thinking about that correctly?

Yes. Yeah, let me give you a couple things, you know, to think about because, you know, as we think about the 200 basis points and savings, first off, you are correct. You know, as we approach the 2019 AUVs, you know, that's the point where we thought we could achieve that level of savings. You know, with kind of how dynamic things are right now, just kind of give you a couple items to think about as we get into second quarter. So, you know, first off, you know, food costs are a little bit higher, you know, on the commodity front, which is, I think, very common out there. So I expect we'll see a little bit more in, you know, higher commodity costs in the second quarter and kind of the past half of the year as well. And, you know, you mentioned this one on the labor cost front. You know, we are, you know, having some incentives out there to kind of bolster our staffing, you know, position. And so, you know, we'll spend some money there, about $5 million, you know, to try to attract, you know, more talent, you know, for staffing. From a marketing standpoint, we're kind of taking a little bit of a different position. And, you know, we kind of touched on it a little bit where, you know, the second quarter and the fourth quarter are going to be heavier. And so we're taking this Windows-based approach where, especially in the second quarter, we're going to really have heavy media during the summertime frame, kind of coinciding with our new menu and new games. We want to have a pretty strong push with marketing and really get the reach that we need to make an impact. And so that's a little bit of a shift from how we've done it in the past. with a little bit more of an even spread. So that will give us, you know, a little bit of a headwind in Q2. And then in Q4, you'll see the same thing. You know, we'll lighten up a little bit in Q3, and then we'll be, you know, heavier in Q4 from a marketing standpoint.

And then from a sales mix standpoint, you can kind of see the numbers that, you know, we were, you know, over eight points higher in mix and amusement than we were in the prior year, and so obviously that carries with it some nice,

you know, upside, you know, in our rural margins. We expect that, you know, that will, you know, moderate somewhat. You know, time will tell exactly how much, you know, kind of what that new normal is. But, you know, we saw some pretty heavy increases in, you know, our per cap, you know, just people buying, you know, higher value power cards and really contributed, you know, to the sales and the next shift there in amusement. So we did, you know, assume some moderation in amusement in the second quarter. So those are some nuggets there that kind of help you, you know, take a look at the modeling for EBITDA. But I think the important takeaway here is, you know, that, you know, number one, we feel very comfortable with, you know, the savings areas that we have lined out. And, you know, as a reminder, about three-quarters of that is, you know, hourly labor, management labor, and GMA costs. And so from a structural standpoint, we still feel comfortable with that. But, you know, the only caveat is you may see some fluctuation quarter to quarter until we get there.

Just to wrap a bow on this, you talked about roughly 150 basis points or more of incremental costs in the second quarter with margin flat relative to 2019 and volumes 10% lower than 2019. Am I thinking about that right?

Yeah, that's correct. Okay. I think another – Yeah, one of the other things to think about as well is just from an occupancy expense standpoint, that's going to be a big drag for us because that is more fixed in nature. And so really throughout this year with the lower volumes, we still will see a pretty hefty drag from occupancy.

Great. I'll pass it on. Thank you, guys. Thank you.

And we'll go next to Jake Bartlett of Truist Securities.

Hey, thanks for taking the question. My first one was on the quarter date sales. I think you mentioned that you were running roughly in line with the second quarter of 19, or actually, no, above, but the second quarter guidance was more in line. So I'm just wondering what the drivers to that may be, you know, more modest increases for the rest of the quarter are.

Well, Jake, I appreciate the question. You know, our guide for the quarter is actually the top end is above our 2019 level by a bit. So we are currently five weeks in, you know, just surpassing 2019 in the top end of our guide, basically saying the same thing here. So I don't know that it's any materially different than what we've seen. so far in this quarter, you know, at the top end of the guide here. And I think, like Scott said, you know, we definitely have, first of all, we're extremely optimistic about where this business is right now. We're seeing, you know, a lot of strength really broadly across our store base here. And so we're extremely optimistic about the quarter. You know, there are some elements and drivers here that, you know, we're watching around some of the per capita that Scott mentioned on our amusement business that, you know, we've not seen in our history before here. I've been here, you know, 14 years. The buy-ins on our car parts are really high and elevated. A lot of that is... driven by things we've done, purposeful things around pulling discounting. We're virtually not discounting right now, so effective price increase, if you will. And that's, you know, that is helping the per cap quite a bit on amusements. But there is elevated demand here right now. And, you know, a lot of folks are talking about pent-up demand. And, you know, as COVID, you know, restrictions come off, people getting out, being locked up, there's a lot of stimulus money. You know, I think we're a benefactor of that a bit. And so we'll see how that all settles out. But, you know, we're super excited about kind of the recovery and the patterns we're seeing in the recovery in California and certainly New York. So we're positioned to have a really good, you know, summer. We're going to get back out with a voice for, in some ways, the first time since COVID. You know, we had a little bit of media back in, I think it was the third quarter of last year, that we couldn't cancel, but we've been, you know, relatively quiet, and we were saving our powder, if you will, to get out big and strong this summer, and I think the timing is perfect. You know, COVID is – fears are weighing in a bit, obviously, with the vaccines. You know, we've got some great product that we're going to be able to, you know, put in front of our guests, and the team is really energized. So we're really excited about, you know, what summer is going to bring. feels a lot different this year than a year ago, let's put it that way.

Well, I appreciate that, and that sounds great. You know, the other question I had was on last quarter you provided quartiles, you know, of performance. I'm just wondering, you know, how much that has tightened. If you could maybe provide that again in terms of, you know, it sounds like I'd imagine that a good portion of your stores are doing better than 19. Do you have any of that data that you can share just in terms of the range of how stores are doing right now?

Sure, sure. As I said, Jake, we're seeing broad recovery, strong broad recovery right now, so we're really encouraged by that. That said, as you might expect, we have certainly some regional variability of the company, and there's a couple, I think, key factors in our minds that are driving that. I think you've seen some of the sort of, we call this the maturity curve graphs that we put out early on in COVID-19. You know, our stores that are in markets that have been open longer and really go along in that maturity curve, and I'm really talking about some of the southern markets, are performing better. We've got, I would say the other factor here is there are certain markets where COVID fears and discomfort is different. And we think that's impacting some of the regions, and then clearly we have a number of locations are still subject to some form of operating restrictions. And we've got about 40% of our store base where we still operate with either a capacity restriction or something else. So those are kind of the three big things that sort of separate, you know, the quartiles and the regions for us. You know, the good news, you know, in our view is that we think all these factors are going to self-correct over time, you know, Stores are ramping up, and here I'm going to speak specifically about California. They got it out of the gate very strong, much stronger than other stores and regions, but they're still, you know, pretty green in their maturity curve. You know, I think COVID fears are declining, you know, with the expanding vaccinations. And, you know, we expect to see operating restrictions get lifted. So we're pretty optimistic here, but there are separations being created. You know, specifically on your quartile question here, You know, that separation has created differences. Our top quartile in the last five weeks is just shy of 120%. So, you know, they're above 2019 by about 20%. The lowest quartile we have is, you know, about 75%. So we definitely have separation. We view that as an opportunity to get the, you know, bottom quartile moving higher over time. And, you know, I point to California as being sort of a big part of that because, as I said earlier, in their maturity, there's still quite a bit of restrictions in that market. So in our second and third quartiles are, I'm going to say, just right at 19 levels, you know, average between the two of them. So, you know, we feel really good about the store base. We see, you know, the boats are rising. And, you know, as I said, we're really optimistic as we head into summer.

Great, great. That's helpful. And then my last question is just on the staffing challenges. And I know I believe you're giving bonuses for summer hires and things like that. And you guys are, you know, because you're having to ramp up so quickly, I think you have a great insight as to how difficult it is. So can you provide any insight as to whether there's been any change in the last weeks or months in terms of that getting better? And then how do you feel your second quarter is going to be in terms of staffing? Do you think there's going to be light? I know there's this extra cost from the bonuses and other efforts, but, you know, maybe stripping that out, do you think you're going to be running fairly lean because of the staffing issues?

So I'll jump in and then Brian or Scott can join on. Just to the first part of your question, which is, is it getting better? You know, we are seeing in markets where they are pulling back on some of the stimulus. We're seeing the applicant flow increase in some markets actually pretty significantly. So in terms of is staffing getting a little bit easier, we are seeing that in specific markets. And not only is the applicant flow increasing, but you're actually having people, you know, accept the offers and show up at work. Sometimes we were having applicant flow, and then that wouldn't translate into an interview or it would interview. It almost was like activities that didn't result in a hire, and that we're seeing change. So we're encouraged by that as we go into Q2. Okay. We're also seeing some of the recruiting and retention programs that we had mentioned start to take hold, specifically in our referral programs. And so we're encouraged by that as it relates to staffing in Q2. So I don't think that you're going to see Q2 be as difficult from a staffing standpoint as what we've operated in, you know, the past quarter. Additionally, the new technology that we're rolling out and the new service model has been really powerful for us. It's allowing us to operate more efficiently. We're able to have servers cover off on a bigger station. The teams like it. The technology is pretty easy for the guests to acclimate to. So we're really encouraged about the combination of all of those things coming together to help make just the staffing situation better for us in the upcoming months. Anything you want to add? Okay. That's great. Yeah.

Great. I appreciate it. Thank you very much.

Sure. And we'll go to our next question from Jeff Farmer of Gordon Haskett.

Thank you. I actually just wanted to follow up on some of those lean staffing comments that you guys just made. So in terms of thinking about the big picture of the initiatives you guys have put in place over the last several months, where do you stand? Did the first quarter sort of see the full benefit of those initiatives? Or theoretically, are there more to come in terms of cost controls as you get deeper into the second quarter?

Well, I mean, the sort of efficiency initiatives that we've put in place, we're really rolling out over the course of the first quarter. We're not, as Margaret said in her prepared remarks, we're a little over halfway through the system in terms of We're rolling out our mobile web and POS handhelds that really help facilitate the new server and service model. And we'll be done tail end of July. So we still have room to go on that. So we'll see some dividends over that as we get through the rest of the store base over the course of this summer. Okay.

Okay, and then separate question, you mentioned it in an answer to an earlier question, but with all the two of the stores open today, I just wanted to better understand what effective capacity, whatever term you want to use is, what that effective capacity number looks like currently, meaning in terms of your ability to use all of the bar areas, the amusement floor, whatever it might be, where that stands today versus where you think it might be moving deeper into the summer?

I think it's a little bit of a hard call. As I said, you know, we've got roughly 40% of our stores that have some form of, you know, still have a form of capacity limitation. It could be particularly California, you know, not being able to use the bar or, you know, table limitations on games, which I think is less of an impact for us than You know, I think we feel like that, you know, over the course of the coming months, we're going to see these things get listed. And, you know, I know we read a lot of stuff in terms of, you know, casual dining and, you know, pointing to this as the primary factor of kind of limiting business. As I said before, this is not as, you know, big of an issue for us just because of our sheer size and scale, the number of square feet we have. Certainly... As these stores recover and get to bigger numbers, it can put pressure at peak hours and stuff. But, you know, when you look at our top quartile producing 120%, you know, we've had stores that have been well over 100 with restrictions, capacity restrictions. So it's impactful, but it's not the same kind of magnitude that you would see in casual dining.

And I apologize, just one more quick one. So a lot of conversation about staffing levels and where you guys are and what the labor market looks like, but any early thoughts on potential wage rate inflation, not only for your business, but just sort of looking more broadly out across the sector and your thoughts on wage rate inflation as we get into the back half of 21 moving into 2022? Sure. I can start on that one. So far,

the kind of incremental wage inflation that we've seen, most of that is actually due to additional overtime. You know, with lower staffing levels, we are augmenting more, you know, with overtime, you know, than we had in the past.

And just from, you know, store opening standpoint, of course, you know, when you add, you know, California to the mix, that's going to, you know, kind of raise our average, you know, by itself just internally.

But, you know, as we kind of get into the second half, I mean, we expect, you know, the wage pressure to moderate, you know, somewhat as, you know, some of these labor charges ease, which, you know, we think we'll see that. And, you know, I say that just, you know, for a couple reasons, really. You know, as unemployment benefits start to go away in early September and, you know, even earlier in some states that have already pulled back, You know, we think that, you know, COVID fear should start to subside, you know, with more folks, you know, willing to return to work. And then, you know, as schools reopen as well, we think there's a few factors out there that, you know, over the course of the next few months, you know, should, you know, help the labor shortage situation. You know, in the meantime, you know, we'll continue to augment with some overtime. But also, you know, with the technology that we've kind of talked about with the tablets and, service model, that's definitely helping us as well as fewer operating hours for the time being.

Appreciate it. Thank you.

Thanks, Jeff.

And we'll go next to Andrew Selvick of BML Capital Markets.

Hey, good afternoon. Thanks for taking the question. My first one, I think over the last couple quarters you've talked about the demographics of, you know, driving the sales recovery really being more millennial heavy, and I'm curious if you're seeing that start to broaden out to include more families, or is this sales recovery still really being driven by one of those two buckets of the customer base?

Hi, Andrea. It's Margo. So I'll add a little color, and then Scott and Brian can join in. So we're seeing both families and adults return to Dave Investors, and while it's been great to welcome our guests back to the fund, we are also looking to learn more about the guests through a new tool that we've launched in May, Medallia. And it's basically a... It's a comprehensive guest experience platform, and it's going to offer deeper insights. It kind of captures everything for you in one spot. It's in-store experience. It's guest relations feedback. It's all mobile and all social. So think about all the review sites, you know, your Yelp, your TripAdvisors, all of that. And it's going to help us better understand what the guests want, and it's going to put us in a position from an operations standpoint to have actionable feedback about improving the execution. So we're excited to not only welcome the guests back, but also to wow them. But, yeah, we're seeing more of a pre-COVID reflection in the guest space, where, to your point earlier, it was planted more adults. It's a little bit more balanced now.

Yeah, and Andrew, I just had one thing. So, you know, I think I mentioned this on one of the prior calls. You know, we really just launched this program here in May, and, you know, during the course of COVID, we actually pulled back on a lot of the investments we had made and kind of our guest satisfaction, those tools, just due to cost management. So, We ended up, you know, kind of reengineering the whole platform here that we feel a lot better about. It's kind of smart. It's comprehensive. You know, the dashboard that we get today compared to before is significantly different. So, you know, a lot of what we are talking about in terms of returning guests is a little more anecdotal today than it was when we, you know, had a system and platform that was in place and was in place for a long time. So, yeah. You know, not to be evasive on the specifics, but that's the reality here.

Good comment coming in the future, though.

Thank you. It sounds like an exciting opportunity. My second question is just, you know, you were talking about how you pull back on the promotions, and I'm just curious how you're thinking about kind of more broadly promotional levels and layering that back in over time. How much do you think of this as sticky versus how you're thinking about layering that back in?

I mean, that's a really great question, and we're talking about it frequently now. I mean, right now I don't feel a strong need to go back into the discount territory here. We're seeing strong demand without it, and it's having a significant impact on sort of our per capita, as Scott mentioned in his prepared remarks. You know, it's not something going back to an always on discounting strategy. It's not something that we're planning to do near term because we're going to opt much more towards, you know, pulsing things versus just a constant discount trend. Yeah.

Okay. If I could just squeeze one more quick one in here. It sounds like above and beyond kind of the service model changes that you're implementing. You mentioned testing in two stores, this fully automated kind of F&B situation. Can you just give a little more detail about what that looks like?

Yeah, so we have two stores where we have basically – offer to the guest the ability for them to order via their phone food and beverage so that they can control the complete experience themselves. That being said, you know, if a guest is uncomfortable and is looking for the server experience, we can adapt. But what's been interesting is in both of these situations, we've had high guest adoptions, and it's been really pretty well received, so we're encouraged by that. Additionally, as we're rolling out the mobile web platform in the different regions, the other thing that we've seen is is that we've gotten better at the rollout and better at best practices. So every week when we're bringing on a new region, they come on with stronger guest adoption in the beginning. So it's been an encouraging situation in our overall brand rollout, additionally in the two stores that are basically a contactless, mobile-enabled experience for the guests throughout the building.

Yeah, I mean, just to add something here, you know, this is a pretty transformative change in terms of how we're thinking about using technology to really transform the service model. So here, the two stores, one is in Dallas and one is actually in Times Square, we're talking about really moving the transaction piece of the experience over to the technology piece. And the roles are being rewritten. So in this environment, there's technically not really a server role. So we've defined roles, scripted roles to drive engagement and, you know, enhance the guest experience. So move transactions over, reimagine the roles of our team members. So it's been, you know, a lot of work and it's evolving and, you know, our technology team, along with our operations team that have really done some great work here. And, you know, we'll see where it goes. I'm excited. I think it could be very transformative for our brand.

Great. I really appreciate the call. Thanks a lot. Sure.

And we'll hear next from Nicole Miller of Piper Sandler.

Thank you. Good afternoon. Just two questions. The first, around, I think you said half of the CapEx would be for new store development. I wanted to understand how the bench strength is. How do you kind of get the pipeline restarted and just in making sure that that's sitting on G&A as we pencil out both the top line and EBITDA here? Thanks.

Well, I guess, you know, there's no doubt that, you know, with G&A, the events of COVID, we, you know, put ourselves back a notch or two in terms of our ability to build out stores. And that's, at this point, less about, you know, capital because, you know, our cash flow is now returning. You know, we're seeing a lot of strength in the business and, you know, our financial foundation is getting stronger by the day. So I think we have flexibility to begin to re-accelerate development and Our development team really is, you know, in place. You know, they were heavily focused on, you know, lease negotiation. It was a complete pivot, you know, during COVID in terms of what the role was. But, you know, we have an incredible development team, and they still are in place, and we are pivoting their focus, obviously, now. Where we have, you know, the pain points and more difficulty is the bench strength in the field just because we are operating at, you know, lower par levels post-COVID. And we've had some people, you know, move on to other industries and move on to other companies. So that's something that's going to take, you know, some time to rebuild. And that's, you know, the work that we have now is to think about the rebuilding of the leadership team that's really going to fuel the stores. You know, every day that goes by and as our recovery gets better, our numbers get better, we're adding, you know, back more PARs. But, you know, that's going to take a little time. So I don't foresee, you know, we're not going to be in a position where we're going to move back to 15 stores and kind of the numbers that we were running pre-COVID in the near term.

That all makes sense. There's nothing that would changed dramatically. I mean, the team was basically in place. I think the pivot point comment is super important. They're just going to, again, shift direction. So thank you for that. The second question, I know it's a little bit more difficult because, you know, everybody's coming back in real time and you're doing some research around the guests. But, you know, how are they spending their time? You know, we understand, like, the percentage mix, as you've reported. But are you kind of able to track the behavior, meaning, you know, how long are they sitting to eat and how long are they playing or watching sports? You know, what days of the week are they coming? What times of the day? Kind of just on an absolute basis, but also very curious to understand how that on average might compare to those stores running above, right? I think you said 125% was the top quartile. How does the behavior look the same or different in those stores? Thank you.

That's a lot of questions in there. You know, obviously we have a pretty big separation and kind of amusement performance relative to F&B in the first quarter, and, you know, we're still seeing that, you know, here early into the second quarter. You know, if you kind of drill into F&B, sort of traffic, which is sort of indicative of how people are spending their time. The traffic metrics for us right now in our food and beverage business versus amusements are pretty similar. They're down about the same number. And as Scott mentioned, we've seen pretty massive increase in per capita spend on the amusement side, entertainment side. So in terms of how they're spending their time, they're consuming and attaching to our offering in similar ways. The higher per cap spend and amusement would indicate they're spending, you know, more time to put more chips on their power cards. But I don't know. I can't give you their stand going from an hour and a half to two. We don't really have that stat. But I would point to that a bit. That said, you know, in our release you may notice that, We had a pretty large deferred revenue adjustment in the quarter. And I think some of that is, you know, we've got some of these guests that are buying the cards and they're, you know, deferring some of those shifts because we had a pretty big pressure on that metric, the biggest number since I've been here in terms of reduction to sales and sort of a direct hit to our quarterly performance. So... But in terms of consuming food, consuming beverage, it's sort of that mix is about the same. I think they're spending probably a little more time in the arcade.

And just to confirm on a lower store, let's say sales in someone above 100% in 2019, it sounds like the behavior of the consumer isn't shifting at all. It's just how they can use the store in their geography in terms of mobilization. But I want to make sure I don't miss. you know, the finer point of any consumer behavior shifts that you see?

I think the separation when you look at, you know, top cartel, low cartel stores is much more driven about traffic, you know, return of people in the box, less about certain geographies or consuming a lot more food relative to or less or more food relative to amusement. It's less about that. It's more about, you know, people coming back into our box. And, you know, that's where our opportunity is. You know, California is on the train. We've got those stores open. They still trail, you know, the rest of the system right now. I think that's going to change. You know, California likes our brand. They'll be back.

Thank you very much. I appreciate it.

Thank you, Nicole.

And we'll go to our next question from Andy Barish of Jefferies.

Hey, guys. A lot of the stuff's already been asked. Wondering if you've done any recent work or even anecdotally can sort of comment on the competitive set out there and closures, you know, that you're seeing in some of the folks that you track?

Yeah, you know, that's evolving. Good question, Andy. You know, clearly when COVID hit, we saw temporary closures in virtually every competitor. You know, as we said earlier today, I would say virtually every competitor is largely reopened at this point, and that's kind of where it sits right now. There's a few that have some units that have closed permanently. But the competitive set's largely open at this point. You know, I think during COVID, we all wrestled with, you know, the challenges of that. We saw, you know, a pronounced deceleration in openings, obviously, in 2020, you know, relative to what was, you know, pretty strong roads in 2019 and those earlier years. And, you know, just as we look at it and kind of look at the competitive step, we do expect, you know, competitors to accelerate into 2021 versus 2020, which is probably obvious, right, because 2020 was somewhat shut down. And it appears to us that the collective set is going to grow faster than 20, but not collectively as high as what they were doing back in 2019 and earlier. So that kind of temporary role that we talked about, you know, did happen. It's still probably there in 2021, but I think You know, we're not, as I said before, we're in an attractive space. We understand that, you know, there will be competitive investment. It's likely to accelerate. I think we're going to see competitors begin to gear back up in 2022 and beyond. You know, as will we. You know, as I said before, I think, you know, for us, you know, I would say, in my view, we have the best team. We have a very strong business model. We have a balance sheet that is much stronger. We have flexibility to invest, and, you know, we have a great plan. So I'm, you know, confident that we're going to emerge as an even stronger competitor as we all gear back up.

Thanks very much. Helpful.

And we'll go to our next question from Sharon Sackfield. William Blair.

Hi. Good afternoon. I guess I just wanted to clarify something. Brian, I think you talked about pent-up demand. Are you seeing any kind of ebbing of sales volumes for the stores or the locations that have been in areas that have had less restrictions now for quite a while?

Are we seeing stronger performance where people have less restrictions for laws?

No, no, no. So I think there's a hypothesis on pent-up demand, meaning that when you first reopen the doors, all these folks come in, and then it's a big honeymoon and it tapers off. So I was just wondering, obviously you have stores all over the country. Some of those areas have been open quite a bit longer. Are you seeing any kind of slowdown in sales trends as the market's been open longer, or is it maintaining?

No, I, you know, we haven't published it because we've had so many stops and starts with COVID. You know, we had a pretty good start out there on our maturity curve, you know, kind of how stores, you know, had gradual and continued improvement over time. I, you know, I think, you know, our most recent, you know, states are New York and California. They're doing better today than they were doing in the first week of reopening. So I think we're seeing sort of that same trend. maturity curve kind of reality in our performance and a gradual recovery. That said, you know, we have stores in states that have been open a long time that are over-indexing significantly, Ford in particular. So I would say that they have, you know, dialed back. We've got a lot of strength in that top quartile in particular, and as I said before, You know, the second quartile is surpassing 2019, and the third quartile is just shy of 100%. So, you know, we feel really good about it, kind of where we sit.

Okay. And then on the revenue guidance for the second quarter, and I'm sorry if I missed this, but I know you talked about normal seasonality. It was kind of the thought process as you looked to giving that second quarter guidance. But as you all mentioned, you've been really quiet on the marketing front, and that's changing. So I'm just wondering, did you include in any kind of sales lift from the marketing that's starting now?

Yeah, we definitely did. There's many inputs, and that was one of them that we did assume left from.

Okay, great. Thank you.

Thank you, Sharon. And we will go next to Brian Vaccaro of Raymond James.

Hey, thanks, and good evening. I just want to quickly circle back on the quarter-to-date sales that you mentioned and Scott, I think the down 4% puts you somewhere in the low to mid-190s range on average weekly sales across the system. I just wanted to hopefully level set that and make sure that's right. And then any additional quantification on the pace of recovery you could provide on California or New York since both have reopened in recent months? I'll take the first one.

Yeah, sure. Yeah, you're correct on the first one and then blanking. give you some color on New York and California. Yeah, Brian, you know, we talked a little bit about New York last time around. I think it's just opened up, if I remember right. But, you know, both of those markets got out of the gate stronger than really any state in terms of kind of those initial weeks. And in our view, that actually makes a lot of sense, right? They've been closed for so long in a lot of the kind of earlier states You know, there's still a lot of COVID fear. So they got out of the gate stronger in terms of that index that we've been quoting. New York a bit better than California. At this point, I think we had it in our – I think we said this, but our New York stores are centrally back to kind of our overall system average at this point. So, you know, that's good news, right? They're sort of – if you look at our minus four, they're kind of right in the hunt. California is trailing. It's lagging. It started off out of the gate a little slower, and it's recovering. It's better than the first weeks of reopening. That is a state that's still subject to restrictions. You know, New York has opened up. You know, we're not restricted there. California still has a lot of restrictions. And I would argue, I think, you know, when I talk about what are the factors that You know, the COVID fear, I think there's a fair amount, that would be one of the states that I would probably point to. I think there's still some consumer and fear in California around COVID. It's been locked down a long time. They've been pretty aggressive as a state. So, you know, but I think that's the opportunity. I think we're going to, you know, I think people are people. They want to get back to their life and socialize. You know, I think, you know, California will be back. It's just recovered a bit slower, but we're going to get there.

It makes sense. And I guess thinking about historical seasonality during the summer, how important is the end of the school season? I know it differs around the country, but how important of a driver is that for your business moving into July and August relative to the month of May? And I suppose June as well, though it's a little bit more mixed on that front. Would you expect that to be an incremental driver of sales, I guess, moving from here as the school year ends around the country?

Yes, sure. So, Brian, you were talking about, you know, so in May, you know, we do typically, you know, under index, you know, the average, you know, about 89% of our average weekly sales increase. And then, you know, as we get into, you know, the August, you know, timeframe, we're about even. You know, we're about, you know, at our overall average weekly sales. So, you know, in July is – June and July are heavier for us. You know, June we see a ramp up, and then July, you know, is one of our highest months. You know, it's in the kind of the top three as we look at, you know, just normal cadence at least – the average weekly sales and seasonality.

All right, that's very helpful. On the labor front, if I could just squeeze one more in, on the labor front, can you help us level set where current staffing levels are compared to pre-COVID-19 levels or maybe how many employees you see yourself as needing to hire to be able to catch up to the stronger demand you've seen?

It really will vary pretty dramatically by market.

Yeah, I don't know if I have that stat here, Brian, right now. I think pre-COVID we had a team from around 14,000 hourlies, and I want to say we're in the 10,000-something range right now. Yeah, we've actually done a little better over the last couple weeks. We're just short of 12,000. Is that where we're at? Yes, just short of 12,000 people. So we are catching up. We still have a little bit more to go. You know, we're not, you know, operating at full volume yet. And so, you know, we're getting there, but there's still some ways to go there.

Yeah, okay, that's great. And commodity inflation, a topic on everybody's radar, it seems, these days. I know it's not a big driver of your cost structure normally, and obviously today as well. But what level of inflation do you expect moving through the rest of 2021? And I'll leave it there. Thank you.

Yeah, first off, you are correct. It's not as big of an issue for us, you know, thankfully. But, you know, if we kind of look at, you know, some of the key proteins and down the list, you know, chicken, beef, and dairy, probably seeing the biggest, you know, inflation, you know, chicken at the top, not a surprise. We feel like as we, you know, get towards the end of the year and from the balance of the year, actually, we're estimated about a 6% to 8%, you know, increase in food costs is what we're seeing right now, at least.

And we do have a follow-up question from Brian O'Callough at Stiefel.

Hi, guys. I just wanted to make sure to clarify a question or a response to a question earlier. Scott, did you say that the advertising that's planned, is the list of the potential sales from that is reflected in the guidance? It is, yes. So I'm curious, with the quarter-to-date comp down roughly 4% and the midpoint of the guidance below that quarter-to-date trend, what am I missing? Why are you expecting some sort of underlying softening?

That's a good question. And, you know, as we kind of look where we are, you know, we've talked about You know, the really big increase that we're seeing in per cap, especially on the amusement side, I mean, we see that moderating.

You know, it may be a question of when that moderates, but, you know, we have built some of that in there.

And, you know, with also, you know, dependent demand that we're seeing, you know, we're assuming that there will be some moderation of that as well. But, you know, there's no perfect science to understand when exactly that will happen. But that is built into our assumptions as we look at the second quarter.

Very helpful. Thank you. Thank you.

Do we have time to take additional questions?

No, I think we've overshot this by a little bit. I appreciate everybody's attention. I'm sorry if we're running over here about ten minutes, but I think we probably ought to call it.

I'll turn the call back to the presenters for any final comments.

Well, folks, we really appreciate you guys joining the call today. I wish you and your families a a great and active summer. Get out there. Get to one of our stores very soon because we're open virtually everywhere in Canada. Come out and see us and have a great night. Thank you very much.

And so this concludes today's call. Thank you for your participation. You may now disconnect.