Good morning, everyone. Welcome to the Dave and Buster's Entertainment Incorporated Second Quarter 2018 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 would like to turn the conference over to Arvind Bhatia, Director of Investor Relations, for opening remarks.
Please go ahead.
Thank you, April, and thank you all for joining us. On the call today are Brian Jenkins, Chief Executive Officer and Jody Prospero, Interim Chief Financial Officer. After comments from Mr. Jenkins on Mr. V.
Prospero, we will be happy to take your questions. This call is being recorded on behalf of Entertainment Incorporated and is copyrighted. Before we begin our discussion of the company's results, I would like to call your attention to the fact that in our remarks and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward looking statements and 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 morning, which is also available on our website. Now, I will turn the call over to Brian.
Well, thank you, Arvind. Good morning, everyone, and thank you for joining our call today. As many of you know, I joined Dave and Buster's over a decade ago, and I'm proud of what our team has accomplished over that time. As I assume the CEO role, I'm filled with a sense of optimism and commitment to continue our long track record of success. During my recent store visits, I had the opportunity to hear from many of our team members and found their passion for our brand and excitement for the future extremely energizing.
We have a strong foundation to build on as a leader in an attractive and growing entertainment space and are well positioned to propel our fair end to new heights. At the same time, we recognize the competitive landscape is changing and we need to evolve and innovate with a sense of urgency. I'm pleased with our 2nd quarter performance and the progress we've made on our strategic priorities. We grew revenue by nearly 14% and EBITDA by 17%. On a comparable basis, we grew revenue by over 11% and EBITDA by nearly 7%.
We drove meaningful sequential improvement in comp store sales during the quarter and new store performance remains strong, bolstering our confidence in the model. The 2017 class of stores is tracking well and we're encouraged by the early results of our 2018 class. As you may have seen, we are raising guidance on key performance metrics. At the same time, we are excited to announce new capital allocation initiatives, including the initiation of a quarterly dividend and expansion of our share repurchase authorization. As we look to the future, we remain laser focused on 4 strategic priorities.
First, we are evolving our offering to drive greater differentiation by introducing compelling new games and enhancing food and beverage. During the quarter, we launched our 1st VR title, Jurassic World VR Expedition on our industry leading proprietary platform. This was the biggest game launch in our history and I'm proud of how our team worked together to deliver a great new experience for our guests. Guest response has been strong and bodes well for future game releases on this platform, and we remain on track to launch our 2nd VR title towards the end of the year. And the plan is to build a library of VR content that will allow us to capitalize on this opportunity for years to come.
Near the end of the Q2, we introduced Halo: Fireteam Raven as a limited time exclusive arcade title for D and D, which has been very popular with our guests. This is a marquee game that combines a very well known intellectual property with strong gameplay and social elements via its 4 player feature. Players are also able to share their achievements by connecting to their Xbox account, which unlocks a special badge on Microsoft's Halo Waypoint website. As we look forward, we will continue to focus on introducing compelling content with a combination of proprietary, exclusive and non exclusive games emphasizing social and multiplayer elements when possible. Within F and B, the key themes of quality, simplification and accessibility remain in play.
In terms of quality, our team's focus is not just on the raw ingredients where we are making changes, but also on excellent execution with the goal of enhancing flavor and craveability. Just last week, we rolled out our new menu that included new offerings and upgrades in both food and beverage, new items such as Cantina Nachos, an Impossible Burger, Kobe meatballs, wintergreen marinara and our new handcrafted classic cocktails are just a few examples highlighting ongoing menu innovation. We are also improving our menu messaging by using quality call outs such as hand breaded chicken, slow cooked ribs and all natural chicken breasts. Simplification in F and B speaks to both the size of our menu, which we reduced by 20% earlier this year, as well as techniques we use to optimize the taste and presentation of our offering. We believe simplification will positively impact our speed of service over time.
In terms of accessibility, we're on track to test a quick casual offering in the Q4 this year and view this as a potential complementary delivery mechanism to casual dining inside our facilities. Our second priority is to improve service and reduce friction once guests are inside our stores. At a high level, solutions consist of a combination of technology and operating process, including how we deploy our people. In many of our stores, we have tested and implemented service model changes, primarily during peak times. A large number of stores have deployed guest ambassadors that meet our guests' entry and guide them on their experience.
Another initiative involves kiosk attendance to facilitate guest interaction with that technology. Also, in the majority of our stores, we have introduced hosted seating in the sports lounge area to improve flow during busy times. Early results indicate improved guest metrics at these stores, which is encouraging. Moving to the technology front. We have upgraded about a third of our kiosks at this point.
We're in the midst of implementing our new workforce management platform and intend to roll out RFID enabled power cards during the Q4. Our third priority is to ensure we are reaching our audience and effectively communicating new news and data. This means understanding our target audience better, sharpening our message and choosing the right medium. To that effect, we are beginning to look into ways to leverage data to understand our target customer better. We also continue to evaluate the optimal media mix for us, including digital, to ensure we are reaching our target effectively.
While linear media is likely to remain a predominant part of our mix over the foreseeable future, we remain optimistic about the potential of digital. During the quarter, our primary media message featured VR and Halo, but we also promoted value with our eat and play all day, all week combo, and we offered that for several weeks. And late in the quarter introduced our new 3, 4, 5 Happy Hour Cocktails promotion. I believe that our relatively low frequency continues to represent an opportunity for our brand. While this will take time, our team is working to lean into those ideas that could ultimately drive higher frequency, higher store utilization as a result of better connectivity and loyalty with our guests.
The 4th strategic priority for us, which we believe will be the biggest driver of value of the long term is delivering 10% or more unit growth annually. We are expanding our footprint at a measured pace and have a strong dedicated team to execute on our new store up through plan. New stores continue to generate excellent cash on cash returns even after taking into account the sales impact on the existing system. We are very pleased with the response to our recent store openings. During the Q2, we opened 5 new stores, 1 in Salt Lake City, a new state for us in Utah there, Massapequa, New York, Torrance, California, Staten Island, New York and Northridge, California in the San Fernando Valley.
We are well on our way to opening 14 to 15 new stores this year, representing 13% to 14% unit growth. As we mentioned on the last call, these stores will skew towards new markets for our brand. In terms of square footage, at the higher end of the range, we expect to open 11 large stores this year, including 9 that are about 40,000 square feet and 2 that are between 30000 and 40000 square feet. The remaining 4 stores will comprise 2 small stores and 2 of our new 17 ks format stores. Looking forward, we currently have a total of 24 signed leases, providing us a lot of visibility on new store growth into 2019 early 2020.
Our long term target is to open 231 to 251 locations in the U. S. And Canada, including 20 to 40 of the 17
Pay format
stores. Our focus on and investment in these 4 strategic priorities are aimed at involving the brand and improving relevance among our guests and we are excited about the opportunity in front of us. Now I'll turn the call over to our Interim CFO, Jody Prospero, to discuss our financial performance and updated guidance.
Thank you, Brian, and good morning, everyone. Before I discuss our Q2 financial results and 2018 guidance, let me remind you that 2017 was a 53 week year and as a result, our fiscal year 2018 calendar shifted by 1 week and has 1 less week. Due to seasonality in our business, our quarterly results this year will not be directly comparable to our reported results last year. More specifically, in Q2 this year, we had one more higher volume summer week compared to last year and this shift had a favorable impact on revenue of $5,700,000 EBITDA of $3,700,000 and adjusted EBITDA of $3,600,000 In order to provide a more meaningful picture of our performance, I'll be quoting our comp sales on a same calendar week basis adjusting for the shift. Turning now to some of the highlights from the Q2.
Total revenues increased 13.7% to $319,200,000 versus $280,800,000 reported in Q2 of last year. On a comparable week basis, revenue was up 11.4% driven by strong contribution from our 31 non comparable stores, which represented 26% of our store base during the quarter. Including the 5 stores that opened during the quarter, non comp store sales increased to $78,800,000 up from $39,500,000 in the prior year on a comparable week basis. Revenues from our 86 comparable stores fell 2.4% to $241,900,000 down from $247,800,000 in the prior year on a comparable week basis. Looking at overall reported sales by category, amusement and other sales grew 16.6%, while food and beverage sales collectively grew 9.7%.
During the quarter, amusement and other represented 59.2% of total revenues, reflecting a 150 basis points increase from the prior year period, continuing a long term trend. Breaking down comp sales on a comparable week basis, our walk in sales fell 2.6%, while our special events business was slightly positive. In terms of category comp sales, amusements was down 1.2% and food and beverage was down 4.1%. Within food and beverage, food and bar business was down 3.3% and 5.9% respectively. During the quarter, the combination of competitive intrusion and cannibalization was a greater headwind both sequentially as well as compared to the same period last year.
In terms of content, as Brian mentioned, our new amusement offerings for Q2, Jurassic World VR Expedition and Halo are doing well based on sales and utilization rates. Total cost of sales was $55,600,000 in the quarter and as a percentage of sales was 10 basis points higher versus the same period last year, reflecting a decline in food and beverage and amusement margins, partially offset by a higher mix of amusement sales. Food and beverage cost as a percentage of food and beverage sales was 40 basis points higher compared to last year as the unfavorable impact of commodity inflation, including investment in our new Angus Burger and the impact of our newer stores was partially offset by the favorable impact of 1.9% in food pricing and 1.1% in beverage pricing. Cost of amusement and other as a percentage of amusement and other sales was 30 basis points higher than last year. This increase was driven by a change in redemption prices product mix, partially offset by the favorable impact of shift in gameplay towards simulation games, including virtual reality.
Our operating payroll and benefits cost as a percentage of sales was 23.1% or 10 basis points higher year over year due to deleverage in our comp stores, the unfavorable impact of about 4% wage inflation and incremental investment in labor related to our VR launch. This increase was partially offset by year over year improvements in our non comp store set. Please keep in mind that our newer stores tend to be less efficient from a labor perspective relative to our mature stores. Other store operating expenses were 40 basis points higher year over year, primarily driven by higher occupancy costs at our non comp stores, deleveraging in our comp store base and slightly higher marketing expenses resulting from inflation in media costs and continued tests in the digital media space. This increase was partially offset by small variances in other areas.
Store operating income before depreciation and amortization was $95,100,000 for the quarter compared to $85,300,000 last year, reflecting growth of 11.4%. As a percentage of sales, margin declined 60 basis points year over year to 29.8%. G and A expenses were $14,800,000 down from $16,800,000 in the prior year. Recall in the Q2 last year, we recorded a $2,600,000 litigation settlement expense. Excluding this expense, G and A was up approximately 4% year over year as increased headcount was partially offset by lower stock based compensation expense.
As a percentage of revenues, G and A expenses improved 140 basis points year over year or 40 basis points excluding the 2017 litigation settlement expense. Preopening costs were $5,300,000 versus $4,500,000 in the second quarter of 2017. This increase was primarily due to more store openings versus the prior year as well as pre spending associated with our remaining lineup of 2018 openings. As a percentage of revenue, pre opening costs were 1.7%, 10 basis points higher compared to the prior year. EBITDA was $75,000,000 up 17.1 percent and EBITDA margins were 23.5%, up 70 basis points versus the same period last year.
On a comparable week basis and excluding the unfavorable litigation settlement expense last year, EBITDA was up 6.7% year over year. Adjusted EBITDA of $82,400,000 grew 16.7% versus the prior year, marking our 32nd consecutive quarter of growth. On a comparable week basis and excluding the 2017 litigation settlement expense, adjusted EBITDA grew by 7.4%. Net interest expense for the quarter increased to $3,200,000 up from $2,100,000 in the prior year, driven by higher average debt levels resulting from our share buyback program and also due to increases in the underlying LIBOR rate. Our effective tax rate for the quarter was 20.9 percent compared to 18.2% in the year ago period, driven by lower tax benefits from reduced stock option exercises, partially offset by lower federal statutory rate under tax reform.
We generated net income of $33,800,000 or $0.84 per share on a diluted share base of 40,300,000 shares compared to net income of 30,400,000 or $0.71 per share in the Q2 of last year on a diluted share base of 42,800,000 shares. Shifting to the balance sheet, at the end of the quarter, we had approximately $363,000,000 of outstanding debt, resulting in low leverage of approximately 1.3x EBITDA. Earlier this week, we adopted new capital initiatives reflecting our strong financial position and confidence in the future. We initiated a quarterly cash dividend of $0.15 per share and expanded our share repurchase authorization by $100,000,000 through the end of fiscal year 2020. During the quarter, we repurchased approximately 729,000 shares of our common stock for 33,700,000 The inception to date total as of September 11, 2018 is 4,800,000 shares for $253,000,000 with approximately 147,000,000 still available including the new authorization.
Turning now to our outlook for fiscal year 2018, we are raising our guidance on several key metrics. Total revenues are now expected to range from $1,230,000,000 to $1,255,000,000 up 10% to 12% on a comparable 52 week basis. Revised guidance is $30,000,000 higher at the lower end and $15,000,000 higher at the upper end compared to prior guidance. This increase reflects the sequential improvement in our comp sales and outperformance at our new and non comp stores during the Q2. We now project comp store sales on a comparable 52 week basis to be down low single digits versus previous guidance of lowtomidsingledigits decline.
We continue to expect second half comp sales to be better than first half as our initiatives, including virtual reality, gain traction and we roll over easier comparisons. From a development perspective, our target remains to open 14 to 15 new stores, including 2 of our new 17 ks format stores. With 11 stores opened so far this year and eight stores under construction, we are confident in this guidance. We are projecting net income of $101,000,000 to $111,000,000 The lower end of the range is a $6,000,000 increase while at the upper end guidance is up $1,000,000 Net income is based on an effective tax rate of approximately 24%, which is unchanged from prior guidance. We estimate a diluted share count of approximately 40 point 3,000,000 down from prior guidance of 40,500,000.
We are projecting EBITDA of 263,000,000 dollars to $277,000,000 for the fiscal year. The lower end of the range represents an increase of $8,000,000 versus prior guidance, while at the upper end guidance is up $2,000,000 Revised EBITDA guidance reflects incremental investments in our ongoing initiatives Brian discussed in his remarks. Net capital additions after tenant allowances and other landlord payments is projected to be $179,000,000 to $189,000,000 unchanged from prior guidance. Finally, I want to remind you that the impact of 1 less week in fiscal year 2018 versus 2017 has an unfavorable impact on revenue and EBITDA of approximately $20,000,000 $4,000,000 respectively on a full year basis. During the first half of this year, the calendar shift had a favorable impact of approximately $4,300,000 on revenue, $2,700,000 on EBITDA and 30 basis points on EBITDA margins.
In the back half this year, the shift will have an unfavorable impact of approximately $24,000,000 on revenue, dollars 6,700,000 on EBITDA and 30 basis points on EBITDA margins, including the impact of 1 less week. The unfavorable impact on Q3 revenue, EBITDA and EBITDA margins will be $5,500,000 $4,100,000 and 130 basis points respectively. This year Q3 will have one less higher volume summer week and will include the week of Halloween, which tends to be a slower period for us. Please keep this in mind for modeling purposes. With that, I will turn the call back over to Brian.
Thank you, Joe. Let me close this morning by reiterating how excited and honored I am to lead this great company and outstanding team. We are confident that by focusing on evolving our offering, improving our service and more effectively communicating our new news and value, we will positively impact comps sales performance over time. We expect improving comp sales combined with our ability to capitalize on the opportunity to more than double our store count, will drive growth and shareholder value for years to come. As always, we appreciate your continued support and interest in Dave and Buster's.
April, please open the lines for Q and A.
Thank And we'll take our
Congratulations on your recent results. When you talked a little bit about VR in your prepared commentary, Brian, in generating a library of content, How important is it to have something that is proprietary versus exclusive and maybe branded versus generic?
Well, first of all, we were extremely excited on our first Doctor title, Jurassic World. Clearly, we featured some IP that we felt very strongly about and Kevin Buck is our Head of Games, really worked hard to deliver that. And we like the idea having proprietary IT that we put on our proprietary platform. So that is our desire and that's what Kevin has set about to do and that's what we're looking to do here at the end of this year with another release of the title. So that's our strong preference.
We've tested a lot of more generic type titles over time. And while they actually get a lot of gameplay, we just feel like the better strategies have something that no one else can have. And that's what we're going to lean into. And that's what, as I said, Kevin's really diligently working to deliver. And our view is that we will try to build the library over time.
Again, one more title this year and a couple of titles a year is what we would look to do. And our view is that over time, if guests come back and repeat a visit that they will play not only Jurassic World again, but they'll play some of the new library and will drive repeat play and will drive playing more than one of those library titles at one time on one visit, so that we drive per capita spend when our guest comes to visit Dave and Buster. So, we think adding content options over time will help our per capita, will drive consumption and that's key to the strategy.
And thank you. And just a final question. Can you talk a little bit the consideration now or I'm sorry, I guess the initiation of a dividend in terms of capital deployment? And it doesn't seem like obviously from the development pipeline that this signals excess capital because growth is slowing and certainly you've been extremely opportunistic with share repurchase. So is this simply really an outlook of a lot of cash flow, big units opening well and obviously improving comps that allows you to initiate the dividend?
And then how do you plan to balance development versus capital deployment back to shareholders? Thank you.
Yes. Thanks, Nicole. I appreciate the question. Clearly, new store development remains the number one priority for us as far as capital allocation is concerned. We have leaned into our share repurchase program in recent history.
And we thought another idea to be able to return value to our shareholders would be to implement a dividend of $0.15 per share. In terms of absolute dollars, it's not nearly as impactful as some of the historical rates that we have done on our repurchase activity. But at the same time, as you referenced, we do feel good about our financial position. We have relatively low leverage of just over one time and we think that dividend would be a great opportunity to once again be able to deliver value to our shareholders in a new way.
Yes. And we Nicole, we don't feel like this dividend restricts our ability to grow in any way. We're very strong financially. So not going to curb any kind of store development or growth initiatives that we might set about to do here.
Great. Thanks again.
Thank you, Nicole.
We'll take our next question from Andy Barish from Jefferies. Please go ahead.
Hey, good morning guys. I'm just wondering if you can give us maybe another layer on your comments on competition and cannibalization. I mean, particularly considering your new store activity is mostly new markets this year and new store returns continue to perform well. So how does that all kind of jibe with the greater headwind you referenced both sequentially and year over year?
Well, competition and excuse me, competitive intrusion and cannibalization continues to remain a greater headwind for us. We are opening more of our stores are slightly skewed towards new markets, but at the same time we are opening locations in existing markets. Some of them in relatively densely populated including California and New York. So with that, some of the competition that we tend to review has grown over time. A few years ago, we looked at a handful of competitors given some of our recent success that we've touted.
We've bought some new entrants into the space and they are growing at a pretty significant rate based on kind of what we look at and what we see coming into the space. And looking at our future pipeline, as I mentioned before, it is a more significant headwind than it has been versus both last quarter and prior year. And we anticipate going forward, it will continue to that headwind will continue to increase slightly as well.
And then just a quick VR follow-up on sort of the labor deployment and cost there? Has that sort of been in line with what you expected and your utilization, meaning days of the week and hours that VR is up and running? Is that sort of been in line with what you originally thought on the attraction?
Well, that's a very good question, Andy. We opened the launched the attraction during the middle of summer. So, I think we mentioned that the operational model would depend on the time of year, the size of store and the day of week that may vary. We actually operated the attraction more than we expected, and I think that bodes to the success of the game. We had a lot of demand for the attraction.
We actually, in some cases, in some stores, manned it with 2 people at really busy times to get the throughput that we wanted and make sure the experience and the execution loading, unloading happened the way we wanted it to happen. And I think our teams in the field just did a superb job. The uptime on the game was excellent, and the feedback from our guests was also very strong. So, we did spend more labor than we expected in the quarter. And it is an attraction that we're going to make available even if it's not attendant, so you can seek out someone to go spark the game up.
But we operated it quite a bit more than just at night and on weekends. Obviously, it was summer, kids out of school and we had launched it, it was featured on TV. We wanted guests to be able to experience it. And that will change, that operating model will change over the course of the year.
Thank you.
You bet. Thank you, Andy.
And we'll take our next question from Sharon Zackfia from William Blair. Please go ahead. Hi, good morning. Just a follow-up on Andy's question. Do you have any metrics you can give us on the VR game on how it added to tickets in the quarter?
And then secondarily, I think last year you said about $19,000,000 in CapEx on games. How do we think about that going forward? Will there be a greater kind of commitments, I guess, on the CapEx line to gain this going forward?
Yes, just in terms of Doctor metrics that we don't want to get too specific on exactly what the per cap was and how many units utilization on this call. We don't want to reveal that. But in general, this was a launch of a paid attraction for us, really the first one we've had. Maybe somewhere in the history we've done this before, but not in really my time here. So there is a per cap play with this.
This is where we're trying to, for every power car sold, penetrate an attraction ship play, and we saw a really favorable response. So our per cap in the amusement side lifted. Again, it was launched halfway through the quarter. And what that would tend to do is actually create some separation from amusement and F and B, because it is really a per cap play. That said, we feel like it's also a traffic driver.
We featured it on TV. A little difficult to tell what we would have done without it because we actually advertised it. But we felt like the response and the way our guests viewed that was very favorable, helped our traffic and we know it helped our per cap, which will create some separation from F and D.
And then on the CapEx for the gain?
I'm sorry, on capital, I don't know that we're going to guide next year's capital right now. Typically, we work through our plans on what we're going to do next year. We'll be doing that here as we wrap up the calendar year. So, but clearly, we spent one of the largest outlays we ever had on the platform to launch this first title Jurassic World and we plan to launch other titles. So that platform was a significant investment and significant portion of our outlay this year.
Depending on how many titles we put out and whether we tweak the number of VR platforms that we have in each store, We may lean in a little harder on the number of units we have out in some of our stores. We have, I think, 15 or 20, I'm trying to remember right now, stores that actually have 2 units. So, we may tweak that a little bit going into next year, but we won't have the big platform investment at the same level next year.
Yes. And I guess, Brian, I probably just didn't frame my question very well. I was just thinking on the comments on competition and what you've been seeing there, if you think you've been under investing in games on the CapEx line and whether that will be more of an initiative going forward to ensure more proprietary, more new game flow?
That's a great question. What's the right level of game investment? We ask it often here. I feel like our strategy this year of really going after large marquee titles like Halo, like virtual reality that you definitely can't have at home. It's the right strategy.
They tend to be more expensive games. They tend to be more telegenic on our media campaign. So, I don't feel like we're under investing on gains and we have a good pipeline of attractions and games that we're trying to cycle through over the course of the year. And we've talked about it before, the pipeline of stores is critically important. It's the primary growth driver.
But the pipeline of new games is equally important. It is the region primary region for the visit. And that is a pipeline we're working on for 2019 right now.
Okay. Thank you.
Thank you.
And we'll take our next question from Andrew Strelzik from BMO Capital. Please go ahead.
Hey, good morning. Two questions on VR for me. The first one, after the launch with the TV advertising, I'm assuming you saw a lot of VR trial. But as the movie was maybe fading from theaters and things like that, were you pleased with the trial kind of post launch and how that hung around, number 1? And number 2, as you look back at the game and kind of assess some of the components of the game, do you see areas where maybe are there opportunities to evolve what the games look like going forward to either get better retrial or anything like that that could maybe even improve the performance of the VR going forward?
Yes. The replay or the momentum with this game has continued post the movie. We the utilization rate, the penetration of attraction ships in relation to power cards sold is pretty steady here. So, we feel like it's got long staying power. It is an experience that much like when you go to a theme park and you ride the roller coaster again on another visit, we think people will continue to enjoy Jurassic World on additional visits when they come to a Dave and Buster's.
We do believe that as we build, as I mentioned before, build out the library and offer more titles, the thinking here is that and we know this from our testing when we had just generic content, if we have multiple titles, there will be, as I say sometimes, at least one guest that is going to consume 2 of those experiences in one visit. So, our thinking is that as we build the library out, we will get repeat play on the platform itself as well as possibly the game. And then you made some comments a little bit about Jurassic World in particular. It was our first title. We really liked the IP.
We definitely that game fundamentally was built more as an experiential title. Think some of the learnings here would be and actually we have the ability to do 2 additional releases on this particular game. It's experiential. So I think having a little bit more competitive flare, the ability to understand where you sit relative to the person sitting next to the seat next to you is something that we will lean into on the things that are in production. In fact, all the games we currently have in production on the VR front are designed to be have a highly visible guest facing element where there's variability in the content.
So you're really trying to encourage multiple plays per visit by an individual player, so they can see everything and experience it in different ways. So I think you will see us evolve that in some of the upcoming games we have in the works.
That's very helpful. And if I can squeeze one more in here just on the outlook for labor in the back half, we're going to be lapping some of the cost savings that you had in the back half last year. And I think you mentioned 4% wage growth as well as some of the initiatives on friction and things like that. So are we really just thinking about the hourly wage growth? Or is there any incremental investment or anything like that, that
we should think about on the labor line for the back half?
Yes. I think to your point, we are experiencing about 4% wage inflation. We anticipate going forward, it will be a similar number. I mean, clearly virtual reality, as Brian referenced, it's been incremental labor for us in Q2 and we launched that on June 14, which was only obviously partially Q2 that will continue to happen in the balance of the year. Something else to consider as far as labor is concerned, in Q2, we deleveraged on declining comp sales.
And one thing I do want to mention is, we were able to partially offset some of the those labor headwinds with some outperformance on our new stores. It's been an initiative for us to get new stores up to, I'll call it, comp level performance quicker. And as an aside, we are implementing a new labor management system and our new stores are opening on that new labor management system and we've seen some benefit from that. So those are things to think about in the balance of the year regarding labor.
Andrew, just one additional comment and probably just something you guys need to think about and understand in terms of how virtual reality kind of impacts the P and L for us. It's a simulation game, so it has no cost direct cost of sales that are functions like any other non redemption game. But it does have a labor profile that actually exceeds the kind of redemption cost profile of a redemption game. So while it provides very good penny profit for us and we view it as meaningfully incremental and we think it's a very big win for us. From a margin perspective, it does pull put a little pressure certainly it will in the back half.
Very helpful. Thank you very much.
You bet.
And we'll take our next question from Brian Vaccaro with Raymond James. Please go ahead.
Good morning. Just a couple of clarifications, if I could. First, starting with the comps, I know historically you haven't provided sort of monthly cadence, but given the importance of the build and the improvement compared to the last couple of quarters, could you provide some more context around the cadence you saw maybe pre and post the VR launch? And perhaps any comments on quarter to date?
Brian. We have typically not commented on cadence within the quarter or related to floor trends. But what we have said is that and what our guidance suggests is that we are expecting improvement in comps in the back half relative to the first half. We're obviously rolling over a tougher back half of twenty seventeen, as Joe mentioned. And we said VR was let me tell you now, VR was meaningfully incremental to us and launched midway through the Q2.
So I would just take those facts as they sit and that's where we all want to comment on that.
All right, fair enough. Switching to the margins, if I could. On the labor line in the Q2, you called out the pressure on the virtual reality launch. Could you maybe put some quantify how much that impacted the line or just isolate the pressure that you expect? How we should think about from a modeling perspective sort of the second half dynamic there from that component?
Again, I don't know that we're not going to build the RP and L for you exactly, Brian. But again, what I would say is, if you think about a redemption gain that has that drives the cost of goods on our on the amusement line in our P and L for a redemption gain. Think about a cost structure on labor that exceeds that. In other words, there is more cost in labor associated with VR than there are cost of sales associated with the redemption gain. So, there is again less contribution margin than a typical redemption game on Doctor.
Just how to think about it like that. I don't think we're going to get into that.
Okay. All right. And then just last one on capital allocation. I want to ask about the balance sheet leverage and how you're thinking around. So is there a new comfort range on leverage that you're thinking about?
I know it's basically about a year ago maybe that you've increased the capacity, I believe, the credit facility. And we haven't seen much change there on the debt side. So just maybe an update on how you're thinking about the right level of balance sheet leverage. Thank you.
Hi, thank you very much. Yes, as far as we haven't really disclosed, I'll call it, target leverage ratio. But at the same time, we have said in the past that 1 or sub one leverage is not ideal for us. We currently sit in the low ones and we our repurchase activity has been pretty significant in 2017 as well as the first half of this year. We did recently announced an increase in our share repurchase authorization through 2020.
So once again, not to give a target leverage ratio, but that's something that's some of the things we've announced.
All right. I'll pass along. Thank you.
Thank you, Brian. Thanks, Brian.
And we'll take our next question from Jake Bartlett with SunTrust. Please go ahead.
Great. Thanks for taking the question. In the context of bigger games or more impactful games that may be less frequent, Can you talk about the pace of games or of new content for the remainder of the year and what you're kind of without kind of disclosing what they are, but just what the pace would be in the rest of the year? Maybe how you expect it to be next year compared to historical kind of cadence of new games?
Well, just starting with what the next year, we're not going to comment today on kind of the specific pipeline for 2019 right now other than to say, we know we're going to work to build the VR library a bit and we're going to do that each and every year, have a with a focus on proprietary IP. I mean, that is what we're trying to do with that platform. We've got, as I mentioned, for the balance of this year, an additional VR title that we're excited about that we'll launch we expect to launch late in the quarter, Q4. And there are 2 other marquee titles that we have planned. So, there and again, back when we began this path of marketable capital, making our games and treating it as marketable capital, We were buying packages of games.
Our focus right now are bigger, better marquee titles and that's really what we've done this year. And that is our intent for next year as well.
Great. So just to clarify, you mean one more VR game late in Q4 and then 2 other marquee titles in this year that are not VR?
Correct.
Okay. And just without kind of people we've been trying to get what the impact of VR has been on traffic in check, but I don't think you're disclosing that. But can you talk about whether there's any evidence that the spending on VR crowded out any other spending, whether it was people kind of loading less on their cards so they can kind of accommodate the $5 amusement charge or any just commentary around that?
Yes. I mean, we
don't we are doing analytics. Again, I don't want to be specific on the P and L on VR, but we are measuring what we believe to be the what is incremental related to the spend. We're charging essentially $5 for each play. And we're not given our analytics, we don't believe it's all incremental. We think it's meaningfully incremental.
So, we do believe it's helping drive per capita spend. The average spend in amusements per power card sold has moved related to this. So, but it's not all incremental. And so, I don't we don't believe it's crowding out in any material way, but it's not you can't take if you're building your model, trying to get the P and L on what VR is, you should not assume that it's all incremental, because it is crowding a little bit out on the amusement side.
Got it. And then lastly, on the food and beverage side and the changes you've made on the menu with service and you're slimming it down simplifying it.
Are there any is there anything you
can share about the impact of that? Maybe service times, table turns, if you're seeing any improved metrics in your surveys with customer satisfaction, just trying to gauge how much that's helping. And I think with the eye on whether guests are getting perceiving a better experience and they're more likely to kind of come back after maybe they came in for VR, but now they had
a good experience elsewhere, just
trying to gauge your progress on that front?
Well, I think we're getting a lot of traction on the food and beverage front. I think we mentioned on the last call, we hired retained a new VP of food and beverage who really is has huge energy and is aggressively pursuing innovation in the F and B front, and he's been here roughly 4 months or so, I think, at this point. And we're working hard to and have simplified the menu. We've cut, as I mentioned, about 20% off early in the year, and he's continuing to look at how we might tweak or maybe reengineer that even further. We are investing in quality that counts.
We did the burger early in the year before he came on board, but we've since rolled out a new all natural chicken and we'll be upgrading our steaks here later this year. Speed of service is definitely a focus for us. We have some fairly complex dishes that we have. So, he has a keen eye towards how we might simplify the preparation. Very operationally focused kind of food, which I think has been very helpful, well received by our deal team.
He's out visiting with the stores in our kitchens. And so I still think it's early and I think we have opportunity in front of us to get better here than what we are today. We've seen some traction and we think we've seen some positive reaction. We just launched a new menu. So, I think it's still a little early to tell how this will evolve, but we feel really good about the leadership here and the direction.
And one thing I don't think I did mention, we are on track to test our 1st fast casual offering where we know that at least there is at least some portion of our guests that don't want the casual dining experience. They don't want to take the time. They don't they want to play their games and they don't want that time commitment. So, we are set to launch our first fast casual test here in the Dallas market. It will be proximate to the arcade.
We're actually going to take one of the special events function rooms and it will be a essentially, I think of a food truck. Our research shows that what resonates with particularly millennials would be street tacos. So we're going to test a twisted and traditional kind of food truck, street taco fast casual concept. It's going to be called TNT Tacos and that will be that's on the horizon here in the Q4. And again, it's a test.
We obviously want to read that. But to the extent that we're successful, the hope would be that we get increased penetration. That's something we've been talking about a lot, what's our penetration in food relative to power cards sold, our hope would be that we would see, because of accessibility, increased penetration due to this offering and then we'll read that for a little while and see whether that makes sense to roll out to other locations over time.
Great. Thank you very much.
Thank you, sir. Thank you,
Joe. And we'll take our next question from Stephen Anderson with Maxim Group. Please go ahead.
Yes, good morning. And I wanted to follow-up. I know most of my questions on VR have been answered. I wanted to more or less address the food and beverage side of business. First of all, wanted to ask if the Eat and Play all week promotion had contributed incrementally to an improvement in the comp from food and beverage.
And wanted to ask if you have nothing anything new in terms of what kind of value you're going to add on food and beverage?
Well, the offering we had for a number of weeks in the Q2 was what it was an eat and play combo all day every day. And that's not something we've historically done. And I think we did see I think it was impactful in that our weekends were pretty solid for us relative to the weekdays. So I think it was a good offer. That said, I think the promotional engine at Dave and Buster's is an area that we're really focused on right now.
How do we drive traffic, increase frequency and utilize our space more. We're for a fairly low frequent visit. We don't have we're not treated as a meal replacement. So we don't have the frequency of the casual dining tab. And we have big boxes that are underutilized.
So, we are going to lean into, as I said, some ideas of how we might try to unlock and use our spaces more. And that may involve some value LTO kind of offerings, but that's yet to be determined what we're going to come up with here. But I think that's actually a pretty big opportunity. A lot of folks in entertainment, theme parks have really unlocked some meaningful ideas on that front. And so we're going to continue to explore that.
That said, we view ourselves as the quality and then there's price. So we are we believe if we change the quality, which we're doing, we are making changes to our menu. Our VP of food is improving the quality numerator, so to speak here. So we don't think it's all about price. We're looking at it from both fronts.
Anything else, Steve?
Well, thanks.
Thanks,
Steve.
And we'll take our next question from Jon Tower with Wells Fargo. Please go ahead.
Hey, thanks for taking the question. Just on the VR platform again, what's the governor to greater content launch? Is it having the right people in place at your company or is it signing license agreements with some of these the actual movie titles, what is slowing down that process?
Well, I mean, we have quite a few balls in the air on this front. I mean, getting the IP is 1st and foremost before we lean heavily into the development of the game. So, and that can depending on the where the IP who has the IP that can be that can take some time. There are a number of folks that are out there building the actual once you have the IP, they have the capability to build the games. But it's I'm not sure if I know which one, the bigger governor.
They both take time. But we are as I said, we really want proprietary content, something that we have alone, not that everything we're going to do is going to be that way on Doctor, but that's our preference and that takes more time than just standard generic content. So, in the development cycle, some talented folks out there, We're working with a couple of studios. And but I would if I had to pick it, I would say more getting the IP, getting that pipeline secured. And then once you have that, you can move relatively quickly.
Okay. Thank you. And then just in terms of thinking about the overall process of getting something from idea to test to launches, it seems like you've had some pretty good success with VR to date. And Brian, your comments early on in the transcript about having a greater sense of urgency as a company. Can you discuss maybe how that process has evolved even over the past several years?
And do you see yourselves as a faster company now versus years past in getting things from idea on paper to actual testing and launch in stores?
Well, that's a great question. We I've been here a decade. We have a strategic pyramid that we look at all facets of this business very deeply constantly. We are working to try to simplify not only what happens out in the field, but what happens here at our corporate office, so we can do that very thing. Bring to market big ideas or opportunities faster by focusing on those and not getting distracted by the many, many projects you might have as a company.
So, one of my objectives here is to simplify, to focus on things that matter and bring them to bear quicker, I mean, just philosophically.
And this concludes today's question and answer session. At this time, I would like to turn the conference back to today's speakers for any additional or closing remarks.
Well, thank you for your time this morning. We look forward to reviewing our 3rd quarter results with you in December and you guys have a great day.
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