Good afternoon, everyone. Welcome to the Dave and Buster's Entertainment Incorporated 4th Quarter 20 17 Earnings Results Conference Call. Today's call is being hosted by Steve King, Chief Executive Officer. I'd like to remind everyone that this call is being Now I would like to turn the conference call over to Jay Talvin, Senior Vice President and General Counsel for opening remarks. Please go ahead.
Thank you, Ashley, and thank you all for joining us. On the call today are Steve King, Chief Executive Officer and Brian Jenkins, Chief Financial Officer. After comments from each of Mr. King and Mr. Jenkins, we will be happy to take your questions.
This call is being recorded on behalf of Dave and 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 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 atwww.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'll turn the call over to Steve.
Thank you, Jay, and good afternoon, everyone. We appreciate your participation in our quarterly and year end conference call. Today, I'll begin by providing an overview of the Q4 and full year performance and update you on our key strategic priorities. Brian will delve into the financials and provide updated 2018 guidance. And then finally, I'll conclude by sharing an update on our development efforts before we open it up to your questions.
Looking at the full year results, we grew revenue and EBITDA by low double digits while keeping EBITDA margins relatively flat year over year. But unfortunately, after several years of significant same store sales growth, we reported comps down about 1% for fiscal 2017. The 4th quarter proved to be a challenging sales environment for us with comps declining by 5.9%. We did not anticipate the abrupt drop in momentum in the latter part of the quarter as we finished the fiscal year. With this surprise in a bit of context, October, the last month of Q3, had modestly positive overall comparable store sales.
The most dramatic change in the trend was the slowdown in amusements. For the 1st 9 months of the year in 2017, the amusements business performed well for us with comps increasing about 4%. And on a 2 year stack, our comps were up just under 11%. However, in the early part of Q4, we saw a slight softening, which we pointed out on our call in early December. At that point, we still expect the trends to reverse during our seasonally strong weeks in December January.
Instead, the trends deteriorated further and those soft trends have continued into the Q1 of this fiscal year. In retrospect, our new amusement offerings in the quarter proved less compelling than in the comparable period last year. Weather was unfavorable and the impact of competitive intrusion was higher than we had forecast. In addition, our recent research shows that students who say they are coming less often tend to be a subset of younger guests who are more casual about gaming and more focused on other aspects of the experience. We have opportunities to improve our food and beverage offerings to better meet their needs during their visit.
So while we continue with our plans to satisfy our core demographic with superior game content, we're also taking this opportunity to advance several key student service initiatives that will serve to improve our guest satisfaction. Overall, we need to deliver new game content, food improvements, better and specifically faster service, as well as redemption prizes that are more accessible. Value comes through as an issue in the research, but it appears to be less centered on price and more on the overall quality of the experience. Now let me get into a few specifics and update you on our 4 strategic priorities for driving results over the intermediate to long term, which include amusements, food and beverage, reducing friction in the guest experience and driving 10% or more unit growth annually. First, amusements remains the primary reason for the visit.
As such, we'll continue to differentiate our amusement offering by adding titles on a proprietary, exclusive or non exclusive basis. We remain excited about our 2018 game lineup, including the planned launch of our proprietary virtual reality platform in the middle of the year. We have signed an agreement and development is underway for our first title, which is based on a very well known Hollywood film franchise. We plan to announce the details of this title as soon in conjunction with our studio partners. As we mentioned on the last call, our virtual reality platform will enable us to build a library of content and capitalize on the opportunity for many years.
In fact, we plan to launch a second proprietary Dior title on this platform towards the end of the year. In an increasingly competitive environment, offering differentiated will be more important than ever. 2nd, food and beverage. We know that the overall satisfaction of our guests is highly correlated with their dining experience with us. Our goal within food and beverage is to enhance the quality of our offering and improve the speed of service.
We're investing in higher quality than our guests can see and taste. We recently introduced a new burger product with an Angus blend and plan to launch a new chicken product and steak as we transition out of our existing contract. And finally, we hired a new Vice President of Food and Beverage Development to lead our efforts in this area. Speed is synonymous with service for many of our guests. We're improving speed of service through menu redesign and process simplification in the kitchen area.
In February this year, we streamlined our menu and reduced the number of food items by about 20% and our beverage offering by slightly more than that. In addition, we're on track to test a quick casual offering inside D and B during the back half of the year and view this as a potential complementary delivery mechanism to the casual dining inside our facility. Again, implementing the task and reading the results of all these initials will take some time. Our 3rd strategic priority is reducing friction in the guest experience. A combination of technology, operating processes and how we deploy our people will be key to this strategy.
We continue to test new technologies such as pay for table that can improve table turns and reduce wait times in the dining room. In addition, we're working on reducing friction in other areas as well, especially at the front desk, at our bars and while activating games in the arcade area. The 4th priority is driving 10% or more unit growth annually, which we believe to be the biggest driver of value over the long term. Our new stores continue to generate very strong cash on cash return, even after taking into account the sales impact on the existing system. As the category leader, we remain the tenant of choice and often get the 1st call or best site in a given trade area.
If the location is a good fit in one of our previously identified targets, we often choose to move forward, particularly if we believe that the alternative use is a brand that will create some sales pressure on our existing units. The first three of these strategic priorities are specifically aimed at improving relevance among our core target of young adult. We're investing more in research than ever before and have increased our capabilities with leveraging big data to gain insights. This will be reflected in what we offer, new promotions that combine food and games that deliver greater value perception. It will also be reflected in how we reach these young adults.
We plan to increase our investment in digital media significantly in 2018. Our broadcast media has not been consistent in delivery, and we've recently hired a new media agency with a strong track record with digital media, innovation and measurement. Overall, we recognize the need to continuously evolve the brand and increase relevance with our guests, especially in the context of growing competition. Our focus will be on identifying opportunities for improvement at a deeper level and testing of potential solutions with the goal of turning returning to positive comparable store sales. The good news is that the management team has a strong track record of evolving and reenergizing the brand.
That said, we do not expect the turnaround to be quick or easy. In fact, we consider 2018 as the year of recalibration and will lay the groundwork for much of this evolution. In terms of our guidance for 2018, we now expect year over year revenue growth on a comparable 52 week basis in the 7% to 11% range, which is lower than our prior guidance of low double digit revenue growth. And at the midpoint of our guidance, we expect EBITDA to be flat on a year over year basis. And Brian will elaborate on these changes in his prepared remarks.
With that, Brian?
Thank you, Steve, and good afternoon, everyone. First, I want to thank our team members across the country for their continued hard work that enabled us to deliver our 4th consecutive year of record revenue, net income and EBITDA. Over the past 4 years, we have significantly grown our EBITDA and expanded our margins on the shoulders of this team. We recently hosted our Annual General Managers Conference, and it was encouraging to see our team's passion for the DNB brand and more importantly, the commitment and resolve we have to reverse the recent challenging comp sales trend. Turning now to some of the highlights from the Q4, which I will remind you included 14 weeks this year versus 13 weeks in the year ago period.
The extra week in fiscal 2017 generated approximately $19,700,000 in revenue, dollars 900,000 in net income, dollars 3,400,000 in EBITDA and $4,300,000 in adjusted EBITDA. For the quarter, total revenues increased 12.9 percent to $304,900,000 due to strong contributions from our newer stores and the benefit of the extra week. Excluding the extra week, revenues were up 5.6%. On a 13 week basis, revenues from our 76 comparable stores fell 5.9% to $214,900,000 down from $228,300,000 while revenues from our 30 non comparable stores, including 5 that opened during the quarter, increased to $73,600,000 that's up from $43,900,000 in the prior year. Turning to category sales.
Amusement and other sales grew 15.3%, while food and beverage sales collectively grew 10%. During the quarter, amusement and others represented 54.5 percent of total revenues, reflecting 110 basis point increase from the prior year period, continuing a long term trend. Breaking down the 5.9% decrease in comp sales, our walk in sales fell 6.4%, while our special events business was down 2.9%. In terms of category sales, amusements was down 4.2%, while our food and bar business was down 7.4% percent and 8.5%, respectively. As Steve previously mentioned, less compelling game content, bitter cold weather, particularly during the busy holiday season and higher than expected impacts from competitive intrusion for all contributing factors.
In terms of cost, total cost of sales was $54,600,000 in the quarter and as a percentage of sales was 20 basis points higher versus the same period last year. This reflected a decline in F and D margins, partially offset by improved amusement margins and a higher mix of amusement sales. Food and beverage costs as a percentage of food and beverage sales increased 130 basis points compared to last year as approximately 1.9% in food pricing and 1.2% in bev pricing was more than offset by commodity inflation, an unfavorable mix shift and a product write off related to the launch of our new and improved burger product in early 2018. Cost of amusement as a percentage of amusement and other sales was 40 basis points lower than last year. This was driven by a moderate price increase in our Wynn merchandise and a shift in gameplay towards simulation games.
Our operating payroll and benefit cost was 30 basis points lower year over year despite comp sales pressures, lower incentive comp, a strong focus on managing hourly labor and favorable benefit costs were the key drivers underlying this improvement. This was partially offset by higher store management expenses, hourly wage inflation of about 4% and the typical inefficiencies of our non comp stores. Our non comp stores represent 28% of our store base now and they're performing well. In fact, our 2018 class of stores generated 1st year cash on cash returns of more than 50%, well above our new store economic model. However, as you know from our prior calls, from a labor perspective, they tend to be less efficient compared to our mature stores.
Other store operating expenses were 150 basis points higher year over year, primarily driven by higher occupancy costs at our non comp stores and deleveraging in our comp store base. Marketing expenses were also higher as a result of incremental media related to the 53rd week, further tests in the digital media space and inflation in media costs. In addition, we invested significantly more in research to better understand our guests and to develop more compelling advertising and promotions. Store operating income before depreciation and amortization was $94,300,000 for the quarter compared to $87,200,000 last year, reflecting growth of 8.1%. As a percentage of sales, this was a decrease of 140 basis points year over year to 30.9%.
G and A expenses were $14,400,000 essentially flat versus the prior year as reduced incentive compensation, lower legal expenses and better cost control offset increased headcount to support our growing store base. As a percentage of revenues, G and A expenses decreased 60 basis points year over year due to leverage on our sales growth. Preopening costs increased to $9,100,000 that's up $4,100,000 from the Q4 of 2016. This was primarily due to the impact of significant pre spending associated with our strong lineup of 2018 openings. As a percentage of revenue, preopening costs increased 3%, up 110 basis points compared to the prior year.
Our EBITDA grew 4.3 percent to $70,800,000 and EBITDA margins were 23.2%, down 190 basis points versus the same period last year. Adjusted EBITDA grew 10.7 percent to $82,500,000 and excluding the impact of the extra week increased 5%, marking our 30th consecutive quarter of growth. Net interest expense for the quarter increased to $2,600,000 that's up from $1,400,000 in the prior year, driven by higher cost of debt due to increases in the underlying LIBOR rate as well as higher average debt levels. Turning to taxes. During the Q4, the federal government enacted the Tax Cuts and Jobs Act, which required the revaluation of our deferred tax position using the new federal statutory rate of 21%.
This resulted in a nonrecurring one time favorable adjustment to our 4th quarter tax provision totaling $8,000,000 or $0.19 per diluted share. In addition, the impact of the lower statutory rate for approximately 1 month of our fiscal year increased net income and EPS by $2,000,000 or $0.05 respectively. As a result, our effective tax rate for the quarter was 10.6% compared to 36.7% in the Q4 of last year. We generated net income of 35,600,000 dollars or $0.85 per share on a diluted share base of 41,700,000 shares compared to net income of 27,400,000 dollars or $0.63 per share in the Q4 of last year on a diluted share base of 43,400,000 shares. Net income and EPS, excluding the net benefit of the tax reform, would have been $25,600,000 or $0.61 per diluted share.
Shifting to the balance sheet for just a minute. At the end of the quarter, we had 367,300,000 dollars of outstanding debt on our credit facility, resulting in low leverage of approximately 1.4x EBITDA. During fiscal 2017, we repurchased approximately 2,600,000 shares of our common stock for just under $152,000,000 The inception to date total as of March 28, 2018, stands at 3,700,000 shares or 202,800,000 with just over 97 $1,000,000 still available under our current $300,000,000 authorization. Turning now to our outlook for 2018. Total revenues are expected to range from $1,200,000,000 to 1,240,000,000 dollars up approximately 5% to 9% compared to fiscal 2017
or
up 7% to 11% on a comparable 52 week basis. This is lower than our prior guidance of low double digit growth in revenue. Comp store sales on a comparable 52 week basis is projected to be down low to mid single digits, reflecting softer than expected recent trends, a more competitive environment and higher cannibalization year over year. On a relative basis, we expect second half comps to be better than the first half as we roll over easier compares. From a development perspective, we're targeting 14 to 15 new store openings, including 2 of our new 17 ks format stores.
These openings will skew towards the first half of the fiscal year, large format stores and existing markets for our brand. We've already opened 4 of those stores and plan to open 2 more in the Q1 of this year, and we have currently have 8 stores under construction. We are projecting net income of $95,000,000 to 110,000,000 dollars based on an effective tax rate of 23% to 24%, which includes the impact of the new tax legislation. We also estimate a diluted share count of about 41,000,000 shares. We project EBITDA of 255 $1,000,000 to $275,000,000 Net capital additions after tenant allowances and other land order payments are projected to be 170 $1,000,000 to $180,000,000 And I do want to remind you that we will have one less week in 2018 compared to 2017, unfavorably impacting revenue and EBITDA by about $20,000,000 $4,000,000 respectively.
Additionally, due to the 1 week calendar shift, our year over year quarterly results will not be directly comparable to last year due to seasonality in our business. We anticipate the elimination of the 53rd week and the calendar shift will have an unfavorable impact on revenue of $1,400,000 in Q1, dollars 5,500,000 in Q3 $18,300,000 in Q4 and a favorable impact of $5,700,000 in Q2. Lastly, please keep in mind that our mix of 2018 stores includes 217000 ks format stores that are expected to generate AUVs of $4,500,000 to $5,500,000 in their 1st full year of operation, which is about 40% to 50% lower than our original small format stores. With that, I'll turn the call back over to Steve to make some final remarks.
Thank you, Brian. I'd like to review our recent upcoming store development activities as well as a little bit about the long term opportunity. We continue to be very pleased, as Brian mentioned, with the response to our recent store openings. During the Q4, we opened 5 new stores in Brandon, Florida, which is just east of Tampa Woodbridge in Northern New Jersey Auburn, Washington Baltimore, Maryland and Biomont, Puerto Rico, which you may recall was delayed by about a quarter. New Jersey, Washington and Puerto Rico are all new states or territories for the brand.
As Brian mentioned, in the first quarter so far, we've already opened 4 stores, including Rogers, Arkansas, our first 17 ks format store and stores in Memphis, Tennessee Wayne, which is also in Northern New Jersey and Anchorage, Alaska, which is a new state for us. The 14 to 15 new stores we plan to open this year represent about 13% to 14% unit growth, are comprised of 8 stores in new markets for DNB, the remaining stores located in markets where we already have a brand presence. As Brian mentioned, we currently have 8 stores under construction and a total of 27 signed leases, providing us with significant visibility on new store growth well into 2019 early 2020. We're confident that we have a strong and dedicated team that needed to execute on our vision of opening these stores. In terms of square footage, at the higher end of this range, we expect 11 large stores, including 9 that are approximately 40,000 square feet, 2 that are between 30000 and 40000 square feet and the remaining stores will be comprised of 2 small stores, again, those are 25000 to 30000 square feet and 2 of our 17 ks format stores.
So in conclusion, we believe our white space opportunity remains large. We're targeting 230 to 250 locations in the United States and Canada alone, including the 17 ks format. Our plan focuses on taking market share by driving unit growth at a consistent measured pace. At the same time, we need to evolve the brand and continuously develop new reasons to visit by enhancing our offering, improving the perceived value of our offering, executing well inside the box and ensuring that we're reaching our audiences effectively. As always, we appreciate your interest in Dave and Buster's.
And at this time, Ashley, would you please open the lines for Q and A?
Thank We'll take our first question from Jake Bartlett with SunTrust. Please go ahead.
Hey, thanks for taking the question. I wonder if you can look back and just touch on kind of what the narrative was in the Q4 when you gave the quarter to date update around weather around the new games over the holidays not being as successful? And then kind of moving forward into early Q1 here, it seems like weather has improved. You had some games that came out that you thought were going to be as successful or maybe even better more recently. What has changed?
Do you have any sort of different view of what has been happening and what's been driving the deceleration? And how do you explain kind of staying in this kind of maybe if you could kind of quantify and help us where you are right now, but I'm assuming it's in this kind of mid to negative mid single digit comp trend right now?
So let me see if I can clarify. I think what we said when we were when we talked to folks in January, I think you're referring to after we preannounced results was that we thought the major influences were really content first, followed by competitive intrusion and weather as those two things that were different from what we anticipated. I would say, 1st quarter competitive intrusion and weather are not different from what they really were in the Q4. The weather has not been our friend so far in this quarter. I think that during ICR specifically, one of the things that we were saying was that on a year over year basis, the early part of the Q1 was unlikely to show any kind of significant shift as we were rolling over what we thought was good content from last year with good content from this year.
And that really is the best prospect to see a significant change in trajectory. We're not going to come until the Q2 when we rolled
ER. Okay. I thought you were talking about having a game that turned out to be Tomb Raider that was going to be about equally as successful to Walking Dead last year and then you're going to come out with a game that you thought was going to do better than Pirates of the Caribbean, which had not been successful. So but it sounds like the games that you've put out or you have so far have been less successful than they were a year ago. Is that the right way to think about it?
Well, they haven't driven any more traffic than what we rolled a year ago. In fact, our traffic trend based on what we're guiding, traffic and what we said during this call is traffic trends remain weak. So we haven't seen a turn as it relates as a result of the 2 pieces of content that we've rolled so far. And one of them has been out about 2 weeks just for the last quarter. It.
Okay. Do you blame that on the content or do you blame that on just your consumer being needing a little bit more to be inspired to come in?
I think the content is not such that it is driving the traffic that we anticipate that we'll get when we have something that's significantly different than what we've rolled in the past, which is, again, out to kind of VR in the Q2. So I mean, do I lay it at the Pita? I think in part, what we're trying to say in terms of the research and what guests are visiting us last and that sort of thing. There are issues here that are related to content and there's issues that are go broader than specifically content. And a lot of those surround, I would call them less attached to games guests that we've had in the past or less committed to games guests that we've had that have been attractive to Dave and Buster's and that we've been able to attract to Dave and Buster's, but are more critical of some of the other elements of the offering like F and B.
Okay. And just quickly following up on the virtual reality. You mentioned a title that you're going to you start launching it with the title or testing it with the title. What's the timeframe in terms of when we can expect to know more about what your offering is? And then you sounded like the Q2, but is that the tail the back end of the Q2?
Or how should we think about the rollout of VR and how that could impact results?
I mean, we've continued to say mid year and we'll announce the exact timing when we have the exact timing. I've mentioned it's under development. It's early to be in Britain. We have an agreement for the IP. So we're confident that we're going to deliver it in mid year, but exact timing behind that is something that we will wait until we have 100% line of sight
2. We will take our next question from Sharon Zackfia with William Blair. Your line is open.
Hi, good afternoon. I guess following up on virtual reality. Hi. Can you give us any idea on how you're thinking about pricing virtual reality? And I think previously you had said it would not be utilized with the Power Card, it would be separate.
I'm just wondering if that's still the case. And then in the guidance, I think you said you expected comps to get better just because comparisons are getting easier. Are you anticipating any specific benefit from VR?
So we have priced VR in cash as a separate item for cash and credit without the ability to utilize it on the on your Power Card. Our intent in terms of how we intend to roll it is similar, although we are planning to offer the ability to purchase what we'll call an attraction chip, for lack of a better description, or a VR chip that you can put on your power card for a separate price. So it doesn't delete the other chips that you use, the regular chips that you use as a way for people to be able to activate VR or participate in VR. And we think that will just make it a little bit easier for us to manage from a throughput standpoint. And then in terms of have we or do we anticipate kind of incremental revenue from this?
Our measurement when we tested it, and again, this was tested with generic content, was that there was overall and we didn't put on television, by the way, just so that there was some incremental sales associated with it.
And then price points, are you comfortable discussing that?
We tested it at $5 per person and I think that we will roll with $5 per person. We may offer some promotional ways for you to get it at a lower price, but our thought is that we put it out at $5 per person and kind of see what kind of demand it generates.
And one last question on it. Is the launch going to be kind of around June? I know you said the summer. Don't know if we're technically thinking June or July or when?
Specifically, we haven't been specific. So, I mean, we said midyear over several times. So, I think we will deliver by mid year.
All right. Perfect. Thank you.
Thanks, Sharon. Thanks, Sharon.
And we'll take our next question from Andrew Strelzik with BMO Capital Markets.
Hey, good afternoon, everyone. Hi, Andrew. So my first question, there's been a lot of conversation obviously about virtual reality mid year and compares getting easier in the back half as one reason that the comp trajectory might improve. But there's a number of things that
you're working on. So I
guess can you help me understand what exactly the timing is of each of these initiatives that you've kind of laid out for 2018 understanding that this is kind of laying the foundation. But as we just think about the drivers and think about the different things that you're working on, can you lay out the timing of them?
Sure. I mean, as it relates to content, I think that kind of VR is the hero there. But we do have some other things in the pipeline that we think are marquee titles that truly will have the potential to be traffic drivers. Bigger names than Tomb Raider or Rampage that we've rolled out so far this year. So we're encouraged about the titles that we have for the balance of the year.
We have already changed our menu in February. I view that as a longer term initiative. I mean, we're really we shrunk the number of items and that's really an attempt for us over time to deliver better quality and faster speed. I don't think that that's the kind of thing that you get an immediate reaction to, but rather again a longer term play in terms of when we would expect to see results from that. And then we have also called out that we intend to do a quick casual test.
That will be sometime in the second half of the year. That will be tested in a couple of stores to start. So I wouldn't expect that, that would have any kind of significant impact on 2018 other than perhaps to directionally give us an idea of where we could invest in 2019 in order to have an impact there. So that's a little bit about the F and B side. I'd say on quality of accounts, we've already done the burgers.
We intend to do the chicken as quickly as we can as we roll out a contract, same with steak. So calling out or changing products where we think we can get credit both from an absolute taste standpoint from the guests, but also we can call it out in a way we'll get some credit from the guest. And then as it relates to the friction that we've talked about, there's a number of different elements to friction. We are deploying, I think, it's 280 additional kiosks, new kiosks that are upgrading new technology on that. We are deploying resources against the front desk in order to try to either prevent the line from occurring or bust the line in the event that it's there.
And really that's an attempt to say, there's a lot of people that are being attracted to our front desk and being frustrated by being in line. We don't need to be in line at all. So trying to figure out how to make sure that we clearly communicate to folks that if you're looking for a different part of the experience, then there's other ways for you to access it without waiting in a line. And then the RFID for the games, I think that's really a question of time and the pricing on the cards. We're out to bid with that.
If it comes in close enough, I think we could be deploying RFID cards as our primary card in the second half of this year. And we're testing pay at the table. Pay at the table has gone much more slowly than we'd like. It's been bumpier than we'd like. I think that we like a lot of the elements of what that brings to us in terms of speed of service, table terms, convenience for the guests, having it their way, so to speak, in terms of being able to pay when they want to pay.
But if we are successful with that with that task and being able to roll it into other stores successfully, it would be an end of the year kind of a timeframe in order to be able to deploy that.
Okay. That's very helpful color. I appreciate that. My second question, as you've ramped up on an absolute basis the number of openings per year, presumably you're taking away some of your better managers at the store level to open those new stores. Is there any sign that the ops have suffered in your existing locations that may and I don't know how to ask this delicately, but that maybe the management talent and the number of has suffered at the existing stores in favor of the new stores, I guess, is
the best way to say it?
So I think there's 2 parts to that question. Intuitively, I don't think there's any doubt that we have depleted some of the resources from our existing stores to open new stores. I mean, it's part of the model of how we want to open new stores with ideally a sitting GM going to the new store. I'll caveat that by saying the objective measures that we're seeing on execution don't appear to have been compromised by that. So and I mean by that, the 400,000 or so guest satisfaction surveys that we're getting don't seem to indicate that the overall level of execution is deteriorating.
And in fact it's increasing a little bit on a year over year basis. So even assuming there is some sampling error, it just doesn't seem to explain what we're seeing from a comp standpoint.
And we'll take our next question from Jeff Farmer with Wells Fargo. Please go ahead.
Thanks. You touched on several of the Amusement same store sales headwinds, but can you help us understand why Amusement same store sales fell so abruptly? I think you said really it's around the November timeframe. So again, trying to understand why it fell seemingly off a cliff. And then what caught you by surprise in terms of looking back at what happened over the fall into the early winter with amusement same store sales?
I mean, I think I said in my opening comments, we didn't anticipate the drop in momentum in the latter part of Q4 as it related particularly to the slowdown in amusements, which has been running positive comps of roughly 4 percent for the 1st 3 quarters of the year. We did not perceive that going into the Q4 that we were doing something dramatically different on amusements. Again, in retrospect, I guess, Rock 'em Sock 'em was a big, very compelling visual advertising message that we had in the Q4 of last year. But honestly, the amusement slowdown started before Roth and Stockholm. So you would point towards something that's more cumulative in nature as opposed to discrete event in nature.
And by that, I mean that if people were dissatisfied with content over the years over the year that you had advertised and maybe they're reacting to it in the Q4 when they were disappointed in previous quarters. And again, back to our frequency, it's relatively infrequent, a couple of 3 times a year on average. So you could see a situation where it may take time for people to react to a disappointment on the content side. So again, I don't know that there is a clear cut. It was because of X that amusement sales dropped.
But amusement sales between October December were radically different on a year over year
basis. Okay. Then a lot of questions on VR moving forward, I guess, as we get to the middle part of the year. But what gives you confidence in just another way to ask question, but what gives you confidence that your proprietary gaming lineup will be more impactful in fiscal 2018 than it was in fiscal 2017,
really beyond VR? Yes. Well, moving beyond VR, we do not have any proprietary games planned for 2018. We did not have any proprietary games in 2017. We had proprietary games in 2016.
We had exclusive games in 2017, but no proprietary games other than, I guess, Spider Man technically was proprietary to us. That was the only one that we had last year that was proprietary. So I think, 1st of all, I think VR can be visually much more impactful than what any one of the games that we rolled in 2017 was. And I think that as mentioned, we have multiple ways that
we can utilize that platform
with multiple elements of intellectual property. Platform with multiple elements of intellectual property. I think the intellectual property that we'll be rolling first will be one that will be extremely well known. And actually the one we're doing in December is extremely well known as well. And so a part of it in terms
of the timing of this has
been that we wanted to roll it with some significant IPs that would have be very compelling and be well known from a consumer standpoint. So we were rolling it with a more generic platform that I guess some others are utilizing for VR.
I don't know if I'll add. I think some of the I mean, we tested the platform, the notion of this with, as Steve said earlier, generic content and saw, without even advertising, pretty good uptake and penetration when we were operating that, I'll call it a ride because it's a motion based platform. So our feeling is that if we have compelling IP, we put it on TV. It's a great looking platform. It's going to present very well in the TV spot that it could be perform a lot better than our test environment when we were kind of testing the platform with just generic content.
Jeff, the one other thing I'll add to this is, I don't think anybody else is going to do this. And I think that we have a number of games that we have in our midways today that you can find in other competitors' environment. And so I think that our move towards proprietary is really an effort to differentiate our offering compared to theirs.
And we'll take our next question from Stephen Anderson with Maxim Group. Please go ahead.
Yes. I have a question about your service initiative. And given that you've been spending the last couple of quarters reducing some of trying to keep tight control
on labor costs. Do you
foresee yourselves having to add additional labor particularly during peak periods where service times have potential to increase? And then I have a follow-up.
Well, I mean labor has been a focus for us for a long time, not just this year, but since we came to this company over a decade ago. Obviously, as the numbers shifted down and our comps came under pressure in Q4, our teams, our operating teams did what I would call a fabulous job reacting to that and sizing down the staff when our sales were softer. As Steve mentioned, our guest SaaS scores did not suffer. In fact, we improved. So the evidence isn't that we shortcutted the guest experience at least in the data we have.
We are and we've worked hard on we've talked about this a lot on recent calls as we've grown the store base and have this big base of sort of immature new non comp stores. The gap between the non comps in our comp base narrowed significantly in Q4. And again, that's been a significant focus for the operating teams and some of our folks in finance and our regional folks to really try to dial them in quicker. And it was the smallest gap we've had in a long time between those 2 in Q4. So I think those are good things.
We do have a workforce management system that we put in place. I believe it was back in 2010 that we used and have used for a long time. It was one of the most impactful pieces of technology at its time, and it helped us a lot. The fact is that we're upgrading we're in the midst of actually upgrading that tool right now to a new platform that we like a lot better, and we're in the midst of that. We'll be done with that sometime around midyear.
But this will be a more real time labor management system that will allow us to react more in the heat of the battle in terms of dealing with staff and really optimizing the staff so that we aren't hurting putting the right people in the right place at the right time so that we aren't negatively impacting the experience. So it's something we're always focused on and we're investing in putting money and people around putting this new tool in as we speak.
Okay. The other question I would ask also is on the value side of the food and beverage business and maybe well where you certainly have the casual dining look at quick service and a huge emphasis on discounting whether it's a 2 for 5 burgers or $7.99 or $9.99 dinners and casual dining in. I just wanted to see if there's anything that you see like as Mary of
platform?
So you mentioned EPC. Historically, EPC or in play combo, half price Wednesdays, really our happy hour offering and playing new games for free. And actually, the 20 for 20 have been a cornerstone of our value offering. Some of these are honestly not resonating as well as they once were. And you mentioned EPC.
It's not getting the uptake that it was in the past. So we're working to recast that. For example, we're going to test a new version. We're currently testing a new version of EPC where you choose your entree and then we discount the car. And I would say broadly over time, that's more what we've done is we have discounted on the amusement side than we have discounted on the food and beverage side.
I'd say that, but we've always had a very attractive happy hour, 50% of cocktails and special prices on beer. Again, that's one that in some of our research and focus groups isn't resonating quite as well because people don't really understand what that 50% off cocktails mean. So again, we're in the process of conducting a 3, 4, 5 happy hour, meaning every item is either $3 $4 or $5 And the good news about that is you can actually promote it digitally. You can't promote alcohol on linear advertising. But we're doing those tests because we do see a need to work on value.
I mean, the research confirms that value is an issue that consumers bring up. But it seems more centered on overall quality and not so much on specific price. Although I just mentioned 2 things where we're going to really try to go after specific pricing in order to better communicate what those values are.
And we'll take our next question from Andy Barish with Jefferies. Please go ahead.
Hey, guys. I think you may have just answered the question, but I was interested in digging into a little bit more on the sort of non game attached consumer that you mentioned. I think that's probably about a third of your customers and where the research is showing a larger disconnect taking place? And maybe it is primarily on value, but any other factors that you're seeing would be helpful.
I think it's both value and speed. We have a significant number saying they'd like a different delivery mechanism. I think we mentioned that in the past that we've got a significant number saying they'd rather see a quick casual offering or some of them even a counter service offering. But I think that it can be a complement to our full service opportunity because we still have a majority that want a significant majority that want a full service experience. But we are seeing those folks say, I don't want to take as much time out to eat.
I would prefer a way to eat in a quick casual environment and I'd like it even better if I could order it on my phone and walk up and pick it up when it's ready. So we sort of envision well, that's part of what we have envisioned for a quick casual offering inside our store, a complement to the full service experience where people who don't want to take the time to sit down, perhaps go on a list for a table and some of that sort of stuff at peak, we would be able to increase our attach rate by offering them something and having them either not eat before or not eat after they come to enjoy D and B.
B. And just a quick follow-up on that. Did you mention that you're seeing that as a younger customer that is sort of demanding those?
I think that offering would be broad in terms of its appeal. But in terms of those who are, I'll call it, more disaffected, would be they skew younger. Okay. Thank you.
And we'll take our next question from Brian Vaccaro with Raymond James.
I'm sorry, still learning that mute button. Good evening, guys.
That was the best question yet, Brian. Yes. All
right. Thanks. That's all I had.
So I want to circle back
on the recent sales trends, if I could. And I think you said the quarter to date remains soft. But with 2 months under your belt now, would you be willing to put a finer point on what that means? Is that worse than the down 5.9% we just reported for
the 4th quarter or any additional color you'd
be willing to provide?
The answer is no. And I'll provide some color as to why no. This is the most volatile quarter on a week to week basis that we have. And I would say that the shifting of the holiday of Easter this year versus last year and all the rest of that creates a tremendous amount of noise. Not to mention which, we did have a bunch of as I mentioned earlier, I don't think the weather was any better to us in Q1 here than it been in it was in Q4.
But having said that, I just think it would not be meaningful or accurate, it just was the number in the middle of the quarter here. And we're giving you guidance based on everything that we can see and know today, right? And we're giving you our best guess of what we think is going to happen. We'll know at the end of the quarter until we'll you, slightly after the end of the quarter, where it all shook out.
Okay. And just so I remember correctly, the shift in Easter earlier and shift in spring breaks, that's a benefit to the month of March. Is that correct?
Yes. I saw some notes on casual dining doing really well in March. I was like, yes, they should have. That's a benefit.
Okay. All right. A couple of
cleanup questions on VR, if I could. So you said $5 a play per person. I just wanted to confirm, is that initially still going to be offered during sort of the Thursday through Sunday period? Is that still the plan?
Our plan is to offer it at peak times. So we haven't said exactly. I think during the initial rollout, it's most likely to be advertised as kind of nights and weekends, but we may I mean, clearly
it's based on we're
going to debt based on where there's demand for it because the labor associated with it is relatively low. I mean, you only need a couple of people to kind of pay for the labor per hour. So we may expand those hours depending on what the demand is. But early on, I think certainly nights and weekends. But then holiday weeks, I think, will be a no brainer in terms of and perhaps over the summer will be a no brainer as well during the week.
So we will monitor it and open as appropriate.
Yes. We'd like to have a reason to have it operate large parts a week. And so, again, we'll see how it goes. And all stores probably will not be created equal here. We have some stores that do huge volume and the capacity of this is a 4 player platform.
Some stores actually will get 2 of them. So we will it won't be the same necessarily in every store.
Okay. All right. That's helpful. And on the labor line in the Q4, it looks like the cost per week was down around 10%. And I know we saw some savings kick in starting in the Q3, obviously.
But have there been new initiatives put in place sort of in recent months on top of what you were doing in the Q3?
Well, Brian, you're asking about overall labeling total labor here, total operating labor, and that's what you're speaking to when you talk about the labor. Yes.
Just thinking
about underlying labor cost trends in the 4th quarter versus the 3rd quarter and sort of I think in the Q3, you said about specific and you're seeing outsized gains in new unit productivity sort of on that margin ramp? And have there been new initiatives in place maybe to fortify the existing asset base? Just any color 4Q versus Q3?
I don't know if I'd call it new initiative. We're always focused on labor in the company. But obviously, when comps came under pressure in Q3, we stepped up that focus. It's a significant topic discussion in terms of trying to dial in non comp stores faster without damaging the experience, but dial them in to make bring them more in line with Thermocure stores. So that's been a huge focus in the back half of twenty seventeen.
Just to be clear, in my comments, when we talked about being 30 bps favorable in our operating labor and benefits, There is a significant driver around incentive compensation in that number. Again, it's the self correcting nature of our bonus program. So if we miss budget in the company, in the field, there's a correction there. So that's the most significant driver, followed just close behind by better hourly labor as a percentage of sales, which is really impressive when you think about, again, comps being down as they were and this big growing base of non comp store. So I feel like we did a the team did a great job, as I said in my remarks.
And then we actually deleveraged on management labor. So we had some big structure in these stores, management teams that given the lower sales that we saw in Q4 actually was a deleveraging piece in that whole pie. So a couple of factors, but there's heavy focus on this. And that's why we are investing a significant amount of internal resources and dollars on putting in what we believe is state of the art workforce management platform.
We'll take our next question from Nicole Miller with Piper Jaffray. Please go ahead.
Thanks. Good afternoon. Sorry to go back to the Q4, but I had previously been under the impression that weather was the biggest factor, albeit the quarter was not closed out at the time you talked to us in January. And it sounds in the commentary today like that is not the case. So it would be very helpful if you could quantify the weather impact.
Is that along the lines of 100 basis points, 200 basis points? How can we think about that?
So directionally on the first of all, I think what we said at ICR multiple times was, number 1 was content, number 2 was weather and number 3 was the increase in competitive intrusion compared to what we were expecting. So weather was about 100 bps of that.
Okay. And then in terms of current trends, can very much respect the volatility. For us to get margins modeled appropriately, are you implying that the segment, the food and bed bev comp is similar to 4Q and amusement is similar to 4Q? Or are you meaning to imply those have changed for some reason, but the total system comp is similar Q1 to date?
I'm not sure we were trying to give that level of specificity, but the directional trends are the same in terms of comp in terms of our best is amusements
and kind of food and beverage trail that. Clearly, the amusement to the food and the gas narrowed. They still outperformed in Q4, but not near the level we've seen obviously in the 1st part of the year. And that's what we talked about at ICR that we saw a significant narrowing between our food and bed and amusement performance in Q4.
And then, all else equal, and I know there's certainly not, what kind of food and bev and what kind of amusement comp you need to hold margin steady?
Well, I mean, our we've always talked about we need 2% to 2.5% comp growth in our comp set to on a year over year basis to maintain margin in our comp set. And then over the long haul, as we grow stores, that we could leverage G and A and marketing. As we continue and we that's evolved over time as we've seen the impact of our non comp stores increasingly become a bit of a drag on our overall margins because occupancy costs are higher and they are not as labor efficient. So that's sort of been offsetting some of the G and A and marketing leverage we've had over the years as this big growing non comp base with higher structural costs. If you look at our guide, we're guiding a depending on what number you're picking, if you pick the high or the low, we're guiding kind of 140 bps to 230 bps year over year decline on what would be a negative comp.
So and a point comp is directionally around 40 bps. So every point is about a 40 bps kind of impact on our business.
That's helpful. And just a final question. The guests, where are they going? And I'm trying to understand how you define your competition and rank it. Are they going home and playing these survivorship type games?
Are they going golfing? Are they going to the movie? Retail actually had the strongest Q4 holiday period on record and since the Great Recession. Are they going shopping? Can you frame that up for us?
Well, the competitive environment is something that's rapidly changing for us. You've heard us talk about kind of the combined dining entertainment landscape for early to start talking about in the 1st part of 2016, if I remember right, because prior to that, we really didn't see a whole lot of activity. Today, we are tracking a couple dozen names that are some form of dining and entertainment. And when we look at the past 3 years, as we look at those names and how many stores they have opened, they've doubled their unit. They're bigger collectively than us, that group of names.
In our view, we're still the leader in the space. It's an attractive space. We're generating awesome returns, 50% plus year 1. Our view is that's attractive capital. There's a lot of folks looking to put money somewhere.
There's been significant investment in the space and we think it's not going to necessarily go away that it's going to be a headwind for us over the foreseeable future. So that's why Steve and we are talking about what we need to do to continue to evolve the brand, continue to launch compelling content, look at our execution levels, look at how the friction in our system and quite frankly, be the 1st mover in market if it's on our list of a potential good solid market in our total addressable market pipeline to seize the day that we're not really looking to slow down our accounts. We want to be controlled in the growth, but we're really not looking to let a competitor come in and take the spot. So it's something that is evolving and we're tracking a lot of names. There's a lot of folks out there with a couple of units in some form of dining and entertainment.
You mentioned some of the categories golf, dining and entertainment. So we've always talked about 2 big names, but it's broader than that.
Thank you.
And we have a follow-up question from Jeff Farmer with Wells Fargo. Please go ahead.
Thanks. When you guys do move ahead with the VR launch at some point mid year, will you be able to
roll that out to the entire system at
the same time? Or will that be a staggered rollout over the balance of 2H 'eighteen?
It will be Big Bang. Okay. Thank you. Over 100 stores will be in. Anyway, we're going to have to wrap it now.
We're over time.
And that does conclude our question and answer session for today. I'd like to turn the conference call back over to Steve King for any additional comments.
I'll be brief. Thank you for joining us today. We look forward to reviewing our Q1 results when we speak with you in early June. Thank you.
And that concludes today's conference call. We thank you all for your participation and you may now disconnect.