Everyone. Welcome to the Dave & Buster's Entertainment, Inc. First Quarter 2019 Earnings Results Conference Call. Today's call is being hosted by Brian Jenkins, Chief Executive Officer. I'd like to remind everyone that this call is being recorded and will be available for replay beginning later today. Now I'd like to turn the conference over to Arvind Bhatia, Senior Director of Investor Relations, for opening remarks.
Thank you, James, and thank you all for joining us. On the call today are Brian Jenkins, Chief Executive Officer, and Scott Bowman, Chief Financial Officer. After comments from Mr. Jenkins and Mr. Bowman, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment, Inc. 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 as 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 www.daveandbusters.com, under the investor relations section. In addition, our remarks today will include references to EBITDA, adjusted EBITDA, and store operating income before depreciation and amortization, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of 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 Brian.
Well, thank you, Arvind. Good afternoon, everyone, and thank you for joining our call today. Before I begin, I'd like to welcome Scott Bowman, who recently joined us as our Chief Financial Officer. Scott has a long, proven track record of success working with brands like Home Depot and most recently, Hibbett Sports. His strategic vision and financial discipline make him a strong addition to our leadership team, and I am extremely excited to have him on board. I'd also like to take the opportunity to thank Joe DeProspero for serving as our interim CFO and congratulate him on his new role as our SVP of Supply Chain and Business Development. With respect to Q1, we grew overall revenue by more than 9%, EBITDA by over 3%, and EPS by nearly 9%, reaching new high-water marks for these metrics. That said, our results were mixed.
While new store performance remained strong, comparable store sales were below expectations as this year's Easter calendar shift proved challenging, F&B underperformed, and competitive headwinds remained stiff. As I mentioned on the last call, Q1 tends to be a volatile quarter for us due to the timing of Easter and spring break, and the impact of weather during those specific time periods, this year was no exception. You may recall that our comp sales were tracking up about 1% after the first seven weeks in the quarter and before the impact of the Easter shift. In the back half of the quarter, the net impact of the Easter rollover proved unfavorable, resulting in a slight decline in overall comps for the quarter.
On a positive note, the comp sales and amusements were up nearly 2%, and our Q1 guest pulse scores for key metrics improved compared to the prior year, an important indication our strategy is resonating with guests. As we look forward to the remainder of the year, we are working to drive awareness of our F&B improvements but expect this will take time. Additionally, we expect increased competition over the balance of the year as we continue to see aggressive entry into our market. Based on the year-to-date performance, recent trends, and our current read of the competitive landscape, we are lowering our full-year estimates on key metrics, and Scott will provide specific guidance in his prepared remarks.
While we are pleased to have reached new high levels for sales, EBITDA, and EPS, we are working with urgency to improve our comp sales performance and will continue to focus on our four strategic priorities to strengthen the brand and drive long-term shareholder value. Our first priority is to evolve our offering, including our amusements and F&B. In amusements, we continue to differentiate our brand by offering bigger, better, and marquee titles to delight our guests. Looking at Q1, our new release slate included two proprietary titles, Marvel Contest of Champions and Star Trek: Dark Remnant. Both titles are performing well for us. Combining fan-favorite titles with our proprietary gaming technology allows our customers to deepen their connection with our brand through these iconic properties.
Star Trek is proving to be a strong addition to our growing library of VR titles, and the continued strength of Jurassic World VR Expedition a year after its launch is a strong sign of its sustainability. Furthering our commitment to our best-in-class VR technology, in Q2, we launched Men in Black: Galactic Getaway, our fourth VR title, ahead of the release of the new Men in Black: International movie. With subtle differences in gameplay, dialogue that responds to the player's performance, and completely different endings, this game entices guests to play multiple times to get the full experience. Turning to F&B, our focus remains on simplification, quality, and accessibility. With a 35% smaller menu today compared to the beginning of last year, we have reduced complexity in kitchen processes and improved our ability to deliver items quicker on busier nights.
Our guest pulse scores for speed of service in both the dining room and bar were up in Q1 this year compared to the same period last year, indicating our simplification efforts are beginning to pay off. With the strides we've made in improving culinary efficiency, our commitment to quality remains unchanged. Our mantra is crafting craveability, and we live into the standard by enhancing techniques for creating craveable flavors and textures using premium choice steaks and chicken, elevating our plated presentations, and perfecting final execution to our guests. Overall, more than 75% of our menu has been recrafted or rebranded. Importantly, our guests appear to be noticing as we saw an uptick in our food quality scores over the course of 2018, a trend that held firm in Q1.
We recognize that games are the primary driver of guest visitation, and we expect it will take some time to build awareness of our new food offerings and enhance our F&B attachment rate. We will look to feature food more prominently in our marketing campaigns in the future. We wouldn't be Dave & Buster's if we didn't extend our menu enhancements to flavorful, craveable cocktails. You already know we have added fresh juices and puree system-wide to take our handcrafted cocktails to the next level. We've also standardized our core cocktail recipes and preparation techniques, so our drinks not only taste better but are easier to execute on a consistent basis. In terms of enhancing accessibility, we continue to test a quick casual offering in our Dallas store.
As I mentioned on the last call, the initial response has been slower than expected, and we are evaluating ways to increase in-store awareness. Our second strategic priority is to enhance guest-to-guest experience. We are laser-focused on improving service by delivering a more friendly, available, and memorable experience. While results of overall service improvements are best evaluated over a long period, we did see a meaningful uptick in our service scores during Q1. Kronos, our new labor scheduling system, is important for improving our scheduling efficiency and guest service, and we continue to move up the learning curve with this new technology. The new RFID tap-and-play Power Card we rolled out in February is facilitating faster and more accurate game activation, and we have recently seen improvement in our guest scores for games working.
We're on track to unveil our new mobile app in the back half of 2019. Our business must remain digitally relevant to attract and retain our core consumer groups, and our new app is being designed to offer greater functionality, convenience, and reduce friction for our guests. We believe that over time, our new app will allow us to drive better guest connection and engagement with our brand, ultimately leading to greater frequency and spend. Our third strategic priority is to effectively communicate our offering and value. During Q1, we promoted our two new game titles, Marvel Contest of Champions and Star Trek, which launched during the quarter. We featured that on national cable TV. With respect to value, we ran our successful unlimited wings, unlimited video games promotion on Thursdays and also on select days during March Madness.
In addition, at the end of March, we introduced a new free $10 video game promotion with the purchase of a $20 Power Card. As I mentioned earlier, we must remain savvy to the evolving digital landscape. While national cable TV remains our primary channel, our digital media mix continues to increase compared to last year, including a focus on programmatic, social media, search engine marketing, and optimization. Finally, I'll highlight our fourth and biggest long-term driver of shareholder value, and that is to expand our brand geographically. We've opened eight stores so far this year, including five that are in new markets and three in existing markets. In terms of size, six of the stores we've opened are large, while the remaining two are small.
As I mentioned on the last call, for the full year, our new store openings will skew towards large format stores and new markets. Although we are going to some smaller DMAs this year. With eight stores under construction, our confidence in delivering on the full-year target of 15 to 16 new stores, representing 12% net unit growth remains very high. Including stores under construction, we currently have fully executed commitments for 23 new sites, providing us significant visibility on new store expansion really well into 2020. We continue to believe our long-term opportunity is 230 to 250 stores in the United States and Canada alone, nearly double our current store base, and plan to capture this large opportunity by growing units at a steady annual pace of 10% or more while generating excellent returns.
On the international front, we recently terminated our Middle East partnership due to continued delays and missed contractual deadlines from our partner. While we are disappointed with this turn of events, we continue to believe international represents a good long-term growth vehicle for us, and we will continue to pursue potential opportunities. With that, I will turn the call over to Scott to discuss our financial performance and 2019 guide.
Thank you, Brian. Good afternoon, everyone. First of all, I'd like to say that I feel privileged to be joining such a great company with a great history and long runway for growth. I'm very excited to be a part of the team and look forward to helping drive the company's future success. Turning to highlights from the first quarter, total revenues increased 9.5%, driven by strong contribution from our 28 non-comparable stores, partly offset by a 0.3% decrease in our comparable stores. As Brian mentioned, our comparable store sales were unfavorably impacted by this year's Easter calendar shift. Also, the combination of competitive intrusion and cannibalization continued to be a greater headwind compared to the same period last year, but sequentially, the impact was flattish. Looking at overall sales by category, amusements grew 11.9% and F&B grew 6.1%.
Amusements and other represented 59.2% of total revenues during the quarter, an increase of 130 basis points in mix from the prior year period. Breaking down comp sales, our walk-in sales were down 0.6%, while special events was up 3%. In terms of category comp sales, amusements was up 1.8%, while F&B was down 3.3%. Within F&B, food was down 2.8% and the bar business was down 4.4%. The gap between amusements and F&B widened in Q1 relative to Q4, partially due to amusement pricing initiatives taken during the quarter. At the same time, the positive impact of all-you-can-eat wings promo on F&B was less than in Q4, although it was somewhat offset by stronger performance in special events, which has a higher mix of F&B. Total cost of sales was $61.7 million in the quarter and was 20 basis points favorable as a percent of sales.
This was due to an improvement in amusement margins and a higher mix of amusement revenue, partially offset by a decline in F&B margins. Food and beverage cost as a percent of sales was 30 basis points unfavorable compared to last year, as the impact of 2% in food pricing and 1% in beverage pricing was more than offset by the unfavorable impact of slight commodity inflation, higher costs associated with the all-you-can-eat wings promotion, and timing of vendor rebates. Cost of amusement and other as a percent of sales was 30 basis points favorable compared to last year. Amusement margins benefited from our pricing initiatives and a continued shift towards simulation games, including our virtual reality games.
Our operating and payroll benefits cost as a percent of sales was 22.8%, or 90 basis points higher year-over-year due to the unfavorable impact of wage inflation, incremental investment in labor related to virtual reality, and de-leverage on comp stores. Other store operating expenses were up 100 basis points year-over-year, largely driven by higher occupancy costs, primarily at our non-comp stores, and increased investments in sports programming. G&A expenses were $16.8 million, up 7% from the prior year, reflecting increases to support a growing store base and higher technology and legal expenses, partially offset by lower stock-based compensation expense. As a percent of sales, G&A was down 10 basis points in the quarter. EBITDA increased 3.2% to $88.9 million and was 24.4% of sales, reflecting a reduction of 150 basis points versus the prior year. Adjusted EBITDA was $98.2 million and was up 2.4%.
EPS was $1.13 per share, up 8.8% over the prior year. Shifting to the balance sheet, we had approximately $443 million of outstanding debt quarter end, resulting in leverage of approximately 1.6 times EBITDA. The new lease accounting standard that went into effect at the beginning of the quarter resulted in the recognition of $880 million in operating lease right-of-use assets and $1.1 billion in operating lease liability. From a P&L standpoint, this change had an immaterial impact on our net income and cash flows in the quarter. During the quarter, we repurchased approximately 1.3 million shares of our common stock at an average price of approximately $49 and currently have over $200 million remaining under the existing authorization. Since its inception, we have repurchased 7.6 million shares for an average price of slightly under $52. We paid our third quarterly cash dividend of $0.15 per share during Q1.
Turning to guidance. Based on year-to-date trends, we are revising our fiscal year 2019 guidance as follows. Total revenues are expected to be in the range of $1.365 billion-$1.39 billion versus prior guidance of $1.37 billion-$1.4 billion, reflecting growth of 8%-10% versus the prior year. Comp store sales are expected to be in the range of negative 1.5% to positive 0.5%, compared to previous guidance of flat to up 1.5%. We are projecting net income to be in the range of $103 million-$113 million versus prior guidance of $105 million-$117 million. Guidance is based on an effective tax rate of 22%-22.5%, which is unchanged. Finally, EBITDA is expected to be in the range of $283 million-$295 million versus prior guidance of $285 million-$300 million. Thank you for your interest in Dave & Buster's.
Now I will turn the call back over to Brian.
Well, thank you, Scott. I just want to close by reiterating our firm commitment to the four strategic priorities our team is focused on. These priorities are fundamental to enhancing our brand positioning and for driving long-term shareholder value. Our proprietary and exclusive games ability to promote our offering through national advertising, attractiveness to landlords, and ability to attract the best talent are only a few advantages that set us apart from the competition. As always, I want to thank our entire D&B team for their continued hard work and to our shareholders for your continued support and interest in Dave & Buster's. James, at this time, please open the line for Q&A.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to the extent our snow tree chart equipment. We ask that you limit yourself to one question initially, then may re-prompt for additional questions if time permits. Again, press star one to ask a question. We'll take our first question today from Andrew Barish with Jefferies.
Hey, guys. Just wondering on the comp guidance, and maybe it's a bigger picture question around virtual reality also as you lap the launch coming up. Is it getting you kind of the movement in traffic and interest that you wanted? Are we seeing the second half of the 1Q trends kind of continue here into the 2Q? Is that part of the reason why we're seeing the lower guidance overall on same-store sales for the year?
Well, I guess a couple of questions in there. Just in terms of what VR is doing for our business. Clearly, we've featured proprietary titles here in Q1. Our comp in amusements were positive just under 2%. Part of that is due to price, part of that is due to VR itself, and obviously, that's an incremental per guest spend for us. We are seeing some uptick in the percent that VR represents of our overall amusement when we introduced the title here recently. I think VR still is one of the primary avenues that we have on that platform to introduce proprietary content that we can feature on TV. That said, I don't think that amusements alone can drive the whole bus here. We've clearly focused on food and bev and trying to drive that attachment rate. We need to pull that gap in.
Working very hard to do that, drive the awareness, and build that business back and close the gap. The choppiness of kind of how we actually ended the quarter, April was a strong month because Spring Break and Eastern Spring Breaks fell into April. Start of the quarter, May has been choppy for us, particularly up the Eastern Seaboard in particular. That gives rise to the guidance changes kind of down one point. We missed fundamentally what we were setting out to achieve in Q1.
Just can you quantify the Easter Spring Break shift and just kind of how you looked at that in the last quarter?
Yeah. As we said, we were up 1% in the first seven weeks, heading into the really big weeks. Week nine was Easter the prior year, a lot of Spring Breaks, and then pushed back three full weeks into week 11, 12. You kind of have to look at the Spring Break Easter time and the associated weather during that time. Obviously, we like a rainy Spring Break. The combination of the two, we track at about 150 basis points of headwind that we had between the two in the quarter.
Okay. Thank you.
Thank you, Andy.
Next, we'll hear from Joshua Long with Piper Sandler.
Great. Thank you for taking my question. Was curious on the mobile app and what you believe you could accomplish there as you roll that out in the back half of the year. I think high level, you mentioned increased opportunity for connection with your guests. I think in prior calls and over just history, we talked about your guests coming a few times a year. Just curious on how you think you might be able to bridge that gap and develop more touchpoints or maybe even increase frequency with that guest going forward.
Yeah. Joshua, clearly, we'll provide some more details on the functionalities as we get closer to the app launch, which will be in the back half of the year. In general, our focus areas with the app are to reduce friction with the guest, improve the experience with the guest, improve our ability to communicate and connect with them, and really be the platform that will accommodate new futures over the course of years. We will be focusing on, and I think I said this last call, creating a true guest account, a first-party data relationship with our guests. Streamline the mobile payment, connect it with our loyalty program, and also have some easy recharge features.
There's a number of features, and there's some others, but we think the app over time will be a good vehicle for us because as you said, and we have said previously, our visit frequency is very low as a brand. It is a big opportunity, and we do not know enough about our guests on a first-party data basis. That's something that we want to leverage over time and are working. The IT and the marketing team are highly focused on that initiative right now.
Great. Thank you for that. One quick one if I could on the competition piece. Seems like that's still weighing on the overall environment. Is the messaging that it's more or less flat sequentially, but still on a year-over-year basis, you're still having that year-over-year impact. Can you remind us when you expect to see that year-over-year impact level off and provide any sort of qualitative details on other venues or areas you're particularly seeing that impact in your system?
The competitive environment is something that we're tracking regularly, trying to read when the over 2 dozen brands out there building some form of combined dining and entertainment space, and we're doing our best to track their indications about stores that they're opening. Right now, we think that headwind's going to increase over the balance of the year. Just in this past quarter, we have about 40% of our comp stores where either a competitor or one of our own stores is open on them. It's a meaningful headwind for us and our most recent intelligence on at least indicated openings by the competitive set is the number of units is going to be increasing year-over-year. That's something we don't see abating for some time. I think what we have to do is focus on what we do best.
We have a large nucleus of our stores that are very healthy. Our guest metrics are improving. As we think about the competitive set for the long haul, long-term, I'm not convinced that all the brands that are building stores will have sustainability. Many of them are small, independent players, and candidly, we have significant advantages over them. We have a strong, proven business model, which is why I think you see a lot of investment in this space. We have some of the best AUVs, margins, and returns in this space. We have scale, we have access to real estate, human capital, and we have a great balance sheet as well. A lot of flexibility to invest and are, in my view, very well-positioned for the long-term and confident that we're working on the right things as a brand to sustain a leadership position here.
Great. Thank you.
Thank you.
Andrew Strelzik with BMO Capital Markets has our next question.
Hey, guys, this is actually Dan on for Andrew today. Thanks for taking the question. Firstly, I guess just understanding that there's been a lot of evolution in the food and beverage business over the last year or two. What's a reasonable timeline to expect the food business to improve? Do you think you can improve it independently of the game business, maybe through shifting advertising spend or through some other initiative?
A really good question. We do believe we're pursuing the right F&B strategy, really for the long term of this brand. We have new leadership and a team that's extremely passionate about food, and we're proud of the changes we've made. We've simplified our menus significantly, made substantial quality improvements, and our execution is improving. We're seeing results from that on a qualitative basis. In other words, food quality scores, speed of service, and value scores are all improved. Obviously we want that to translate into better quantitative performance. As I said on the call, increasing guest awareness of the changes that we have made in food and bev and really improving that attachment rate to amusements, I think it's going to take some time since guests are primarily coming in for amusements and our visit frequency is low.
We're going to work hard to drive that awareness. We have just launched a new Craveable Combos promo, which is going to be a combined offer of some of our new craveable items along with game play. We're also encouraged by what we've seen as a strong guest response in a dining room repositioning that we've made in our Dallas store. We've done a couple of tests in that store. In this particular store, we've created what we call fondly a Wow Wall, basically a 15 by 50 foot multi-projector laser projector screen. We've seen a fairly significant uptick in food comps in that store. That's an area that we are going to explore further as a brand over the balance of this year.
Great. That's helpful. Thanks. Then just one follow-up on the amusement side. I guess I'm just curious, how did customers react to the increase in the VR pricing? I guess, was there any noticeable or measurable impact on traffic or anything you guys noticed, maybe qualitatively, after the price increase?
Yeah. As we mentioned, we took an amusement price increase, basically a $1 increase in a little over half of our store base, after doing some testing. Any time you take a price, you're going to see a little bit of a traffic decline, which we did, but incrementally, it has been additive to our comps, the price increase. Our view is, we will begin to think about how we package multiple VR experiences in one package, we have not done that yet. There are some opportunities for us to think about how we package price multiple experiences. We think that was the right move after looking at what many others are doing in the VR space. I think it was the right strategic move.
Great. That's helpful. Thanks so much.
You're welcome.
Next, we'll hear from Jeff Farmer with Gordon Haskett.
Thank you. You guys have been more aggressive with your value-oriented offers, I'm just curious what has worked, what hasn't worked, and where do you see the opportunity moving forward?
Good question, Jeff. The value hard work in driving the promotional engine is a continued effort on the part of the marketing team. We have been focused, I would say, primarily on some of the off-peak offers around our Wednesday offer and most recently, our unlimited wing video play on Thursdays, which was our strongest day of the week in terms of the first quarter. We're going to continue to look for ways to drive traffic, particularly off-peak. We have a lot of capacity. We're going to clearly be more thoughtful and careful about how we lean into discounting and value-related things on our peak times. We did introduce a national promo, a free $10 video with a $20 Power Card in the first quarter. Didn't really see the traction we were hoping for on that. That was a broad offer across the chain.
This is an effort that we're continuing to try to unlock. We clearly believe value starts first with the numerator in the equation, the offering, the experience, and the service level that we provide, and that we're moving the needle on in our view. We know we're going to need to surgically, and maybe in some cases, more broadly put in value to drive traffic, particularly around off-peak day parts.
Okay. Just one more sort of a follow-up question. The same-store sales guidance reduction, a lot of moving pieces there. In terms of what proved to be the greatest surprise to you relative to the expectations that you set in April, was this a traffic shortfall? You alluded to this. Was this more about the food and beverage gap being greater than you expected? What did prove to be the greatest surprise relative to what you had expected back in April?
Clearly our guidance was expecting a stronger first quarter than flat. We were up one. We were counting on a good spring break, Easter calendar, that didn't prove to be the case. The miss to our internal estimates for Q1 is not an insignificant part of the one point decline in the top end of our new guide rate on comps. A bit more choppy start to the first quarter, I'm sorry, the second quarter. We have a lot of the year in front of us. We have a lot of things that we're working on to drive to positive comps, we have a huge sense of urgency on this team to do so. We have a lot of this quarter left to go.
Big weeks, summer weeks when kids are out of school and we are doing everything as a management team we can to drive the comps to a positive place.
All right. Thank you.
We'll now hear from Jake Bartlett with SunTrust.
Great. Thanks for taking the question. Brian, I wanted to better understand the comments around Easter. You've talked about the impact of the calendar shift. I'm just trying to understand whether it was a calendar shift that impacted or whether it was just worse results during the spring break period or the Easter period, maybe due to competition or other factors. Just trying to understand how the shift aspect impacted the results.
There's a bit of an inexact science to some of that stuff, Jake, but what we did look at, again, coming into the Easter calendar shift, through week seven, we were up one. We had some confidence in how the quarter was going to end up. When we take week nine, week 11, 12, and we look at some of those weeks where spring breaks were shifting, we lost in our estimation, about 150 basis points was some of that competition. Really hard to tease that out. Clearly, the competitive headwind is stiff for us, but a lot of this has to do, because a later Easter calendar, spring break calendar can work to our favor, it can work against us. A lot of it has to do with the combination of the timing of Easter and spring break and the associated weather at that time.
As it turned out for us, you had an earlier, colder spring break time period in 2018, followed by a later, and unfortunately, better weather, warmer weather. Sometimes it can go the other way. If it's a rainy spring break and April shower, so to speak, we can have big weeks. It didn't fall our way. I'm not saying that's the whole thing for the quarter, but it was a headwind for us.
Got it. You mentioned the big summer weeks that are coming up and a lot of room to gain ground. How confident are you or can you provide us any insight as to the games that you have coming up? You're, right about now, starting to lap Jurassic Park, but last year you had Halo, which was, I think, a pretty successful game in late July. Anything you can talk about in terms of your content that you have that should give us some confidence that those big summer weeks will really come through?
Well, clearly, we just launched Men in Black, which is an impressive title, very telegenic, and we'll continue to try to drive business with our VR platform over the course of the summer. We're going to be looking at our promotional offers. We've launched our Craveable Combo offer here just yesterday. Really trying to drive consumption of both parts of our offering. This particular offer will also include a potential to upgrade to unlimited video for just $8. We are trying to drive traffic with both the combination of content, but as I said, my view is we'll need to do it with two messages here.
Got it. Lastly, I'm wondering just the differential between amusements and the food and beverage. How much of that might have been attributed to just a shift in your consumers? Maybe more families, less adults as a mix of your business and whether that's more of a longer-term problem than kind of shorter term.
Well, I'm not going to mince words on the food and bev challenge we have. We've had a fairly significant gap for some time. It was significant early part of last year, and we closed it some with our wing offering, particularly in Q4. It widened back out somewhat in Q1. That is why we're looking at trying to do things in combination, where we are trying to drive attachment rate of both offerings. Wings has been very successful in doing that. That's why you saw it narrow a lot. We didn't have as many days. We did that around football, and we want to be careful not to have that offer grow stale. You're going to see us continue to look at ways to drive the combination of both offerings over the course of the summer to try to narrow that gap.
Obviously, the best thing we can do about comps is to drive amusements up first. The gap we need to narrow as well.
Got it. Thank you very much.
Yep.
Next, we'll hear from Brian Vaccaro with Raymond James. Mr. Vaccaro, your line is open.
Sorry, still learning that mute button. Thank you, and good evening. Just wanted to circle back to the first quarter comp performance. I'm curious if you're seeing a noticeable difference in your mall versus non-mall locations. Brian, back to your quarter to date, you said I think the Eastern Seaboard was maybe a soft patch or particularly soft. Curious what you think is driving that. Is competitive intrusion concentrated there or something else you'd call out?
I guess first on mall stores, two questions in there. Over the long haul, our mall stores have outperformed. In Q1, they did underperform and have kind of for the last 2 years. They did trail our in-line stores and freestanding stores in Q1. In terms of Eastern Seaboard, weather was, in fact, I think I saw a piece you put out yesterday, Brian Vaccaro, on May. The Eastern Seaboard for us, and unfortunately on some of Memorial Day weekend and the week following, was extremely dry relative to what we saw in the prior year or so. I think that even showed on your analysis. We struggled on the East Coast also up and down, particularly around Memorial Day weekend.
On the malls, could you remind us what % of your comp base is mall-based, and would you be willing to quantify the differential that you saw year to this quarter or just kind of gauge the range that you've seen in the last several quarters between the two cohorts?
I'm not going to probably answer the latter. Our mall stores are about 33% of our overall comp stores and about 39%-40% of our overall store base.
Okay, great. That's helpful. Shifting gears just to the COGS outlook. I wanted to ask about amusement COGS specifically. Could you walk through the impact of China tariffs and remind us what % of your amusement COGS are imported from China? Of that, what % might be impacted by tariffs? Have you or are you planning to make any changes in how you source certain items as a result? Yeah, I'll start off on that. As we look at tariffs, what we've seen so far, we've made some adjustments internally and also working with our vendors, we've been able to mostly offset the impact of what we've seen so far.
It's mainly in our redemption area category that that applies to. So far, what we've seen, we've been mostly able to mitigate or offset. Now, for future tariffs, who knows? There's still that lingering tariff out there that could or could not be put into place, a 25% tariff on the remaining 350 billion or so of goods. Obviously, that would be a larger impact. We would be able to mitigate some of that. Much tougher, as you can imagine, with that amount of goods coming in. Right now, we're in pretty good shape. We'll continue to monitor the possibility and the magnitude of the future tariffs down the road, and give those updates when the possibility and timing is more clear. We'll continue to monitor it and put plans in place and mitigate best we can.
All right. Thank you.
Just last one, if I could. Your updated EBITDA guidance. In the past, when comps have been soft, there's been declines in store level and corporate bonuses and G&A. Curious if you've embedded any assumptions on either of those explicitly in the rest of your guidance on either labor or G&A.
We lowered the top end of the EBITDA guide by about $5 million. Sure, there's some adjustment and correction implicit in that $5 million reduction as in the lower end of the range. There are some, but it's inclusive of that guide. All right. Thank you. Thank you, Brian.
Next, we'll hear from Jon Tower with Wells Fargo.
Great. Thanks. Just on the marketing side of the equation, I know you're pivoting a little bit more towards digital mix relative to years past, one could argue that perhaps your brand awareness isn't where it needs to be today, and that could also argue that you need to take up the actual marketing spend. Could you talk about that and your thoughts around where the marketing spend optimally could be for the business over time?
That's a very good question and something we discuss and debate regularly, the appropriate marketing spend. It clearly has been an area that we've leveraged as we've grown our store base over the years. From a national cable standpoint, we're advertising the majority of the weeks already. What we're doing, and we did spend more money in marketing in Q1, primarily on digital, and that it's moved from essentially no spend, no allocation a few years ago to a meaningful allocation. In our view, this is sort of a test and measure kind of activity. We are looking for real results when we go out digitally. It does allow us to be more targeted, in our view, with both message as well as where we go. We'd like to get traction in that area and have great reasons to continue to invest.
You make a valid point. The marketing team is continuing to evaluate both the mix and the spend. Right now we're pivoting into digital. Jon, this is Scott. I'll just tag onto that with one other comment. As we talk about the mobile app, that's all tied into our strategy around digital marketing. One of the things that we've put a lot of work into when we thought about the mobile app is how do we connect with customers? How do we acquire customers through that vehicle? From the way that we look at it, that mobile app will be a great intake mechanism for customers.
It will help them as they use that app inside the store with descriptions, so forth, but it will also provide us a wealth of customer data to be able to use that in the future to do more segmented and targeted marketing to our customers to what's most relevant to them. That's not just promos, it's also just informational type things of what's new and so forth. I've seen that in my past work be very effective. I think we're on the right track with that, and that will just accelerate digital marketing even more as we build that customer database.
Can you just remind us what percentage of sales marketing is today?
It's just slightly over 3% of sales.
Okay. Just pivoting a little bit here, but in terms of thinking about the balance of unit growth versus, say, shareholder payouts, given where the stock has traded over time at discount to a lot of the peer group, it looks like public investors aren't necessarily willing to pay you for the unit growth that you're putting up, the double-digit level that you've been at. Why continue to grow units at this pace if these public market investors aren't willing to pay for it, versus, say, slowing the unit growth and more aggressively attacking same-store sales growth and in the interim, perhaps enhancing shareholder payouts?
Well, I think we are attacking comp sales growth. That is a major focus for the team here, and that's why we're focused on three of our strategic priorities of the four are focused clearly on that. To say we're not focused on it wouldn't be so. We definitely are. Our view is, right now, that this business generates a significant amount of free cash flow that our returns on new stores are extremely high, if you look at our historical track record. In our view, it doesn't make sense to slow down that growth. If we can accommodate it with the team, we certainly have the cash flow to accommodate it. More than enough left over to continue to return value to shareholders, we can do all things.
I think that to the extent that we allow a competitor or someone else looking to take what we view as a market that is on our radar and get there in front of us, it does inform our go-forward plan in a market. We're not really looking to hand over the keys to some of these markets, to the many names that are out there trying to build pipes right now.
Okay. Thank you.
As a reminder, press star one if you have a question. We'll now hear from Stephen Anderson with Maxim Group.
Yes. Good afternoon. Two quick questions, mostly regarding your test location. First of all, you say the Taco Truck test really hasn't had a great deal of awareness at this point. Have you given any thought at all to maybe broadening the menu to maybe appeal to more of the guests, so there can be maybe somewhat higher guest attraction? I have a follow-up.
We have. We have considered that. We may, in fact, do that. We did two tests in Dallas. One was our Wow Wall TV, one was Taco Truck. Our guest research focus group work said fast casual. There were a meaningful number of people that were looking for that, and we expected it to perform better than it has. We're exploring what to do with the Taco Truck and what to do with the particular offering. I hear you. The flip side is the other test looks to be more impactful so far, and that is the Wow Wall. We made an investment, and we do need to increase the energy, in my view, in our dining rooms that are really the lowest utilization space in our stores. That test has performed very well. And it's something-
Has that resulted in an increase in F&B?
Yes, it has. Dallas is essentially one of our top-performing stores in the system right now. Texas, in general, is performing well, but it's outpacing. This is an area that we're going to look to expand in a few more stores over time.
I actually went to go visit that location. I saw that there are two VR machines in operation there, which I haven't seen roll out to any other store at this point. Is it another test that you're doing, or is that something that you're considering on a case-by-case basis?
Yeah. We have two VR machines in, I believe it's roughly 10 stores. Yeah, maybe it's 15. Yeah. You might know. Yeah. We did that at launch. Stores with some higher volumes, we elected to put two machines in to be able to handle peak capacity. Dallas happened to be one of them, and there are a few others as well.
Okay. In terms of the labor considerations, are they running roughly in line with some of the other locations that have one VR machine in operation?
No, I would say they're going to tend to be a little higher because each machine requires two dedicated people. I'm sorry, requires a dedicated person, and at peak, sometimes we run more than that. I don't have those numbers in front of me, but I would say they run a little less efficiently. From a profitability overall bottom-line profit, we've elected to do that because we think it's incremental to overall profit.
All right. Thank you.
Any problem.
We have a follow-up from Jake Bartlett with SunTrust.
Great. Thanks. I just wanted to ask about your philosophy on the balance sheet and taking leverage up a little bit here. Is there a level of leverage that you're comfortable with, maybe taking that up through buybacks, a little more aggressive buybacks going forward?
We haven't really given a targeted range on our leverage. With where it is right now at 1.6, we're fairly comfortable with where that is. We don't think, at least near term, on the base business, it's really going to fluctuate a lot from where we are today. As we say that we'll continue to look for opportunities and buyback and things like that could fluctuate somewhat, just based on how things trend in the near future. We're fairly comfortable with where it is with the base business.
Okay. Thanks a lot.
Jake, clearly, we were pretty active in Q1. We repurchased 1.3 million shares on over $63 million. I think that's our most active of any quarter so far, honestly, with the multiple on the stock the way it is. We've been pretty active with our share repurchase program, which is, as you know, our board authorized an expansion of that. We have a little of whatever, $200 million available to us right now.
Great. I appreciate it.
That will conclude today's question and answer session. At this time, I'd like to turn the comments over to Brian Jenkins for closing remarks.
Well, thank you for your time this afternoon. We look forward to reviewing our second quarter results with you in September. You guys have a great evening.
That will conclude today's conference call. Thank you for your participation.