Good day, ladies and gentlemen, and welcome to today's Dave and Buster's, Inc. 2nd Quarter 2017 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the floor over to Jay Toven, Senior Vice President and General Counsel. Please go ahead.
Thank you, Greg, 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 Mr. King and Mr. Jenkins, we will be happy to take your questions.
This call is being recorded on behalf of Dave and Buster's Entertainment Inc. And is copyrighted. Before we begin our discussion of the company's results, I'd like to call your attention to the fact that in our remarks and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward looking statements and relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated.
Information on the various risk factors and uncertainties has been published in our filings with the SEC, which are available on our website at daveandbusters.com under the Investor Relations section. In addition, our remarks today will include references to 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 Q2 call. First, on behalf of everyone at Dave and Buster's, I would like to express our deepest sympathy and concern for those affected by Hurricane Harvey. We want you to know that you are in our thoughts and prayers. We're fortunate to have reopened our 3 stores in Houston last Friday and most of our employees are back at work.
Today, I'll review our Q2 performance, highlight our strong new store pipeline and significant white space opportunity, and then provide an update on our ongoing initiatives. Brian will walk through the key financial highlights, our new $800,000,000 credit facility and our ongoing share repurchase program. And then I'll conclude by talking about our development and remodeling efforts before we open it up for your questions. We're pleased to report another strong quarter, including revenue growth of approximately 15% and EBITDA growth of 11.5%. Excluding a $2,600,000 litigation settlement expense in the quarter, we grew EBITDA by nearly 16%.
As we previously said, our long term target is for low double digit growth in annual revenue and EBITDA. Strong new store performance and an impressive growth in our high margin amusement segment were some of the key underlying drivers of these results. Our company's primary growth vehicle is building stores that have industry leading average unit volumes, great store level margins and outstanding cash on cash returns. The white space opportunity is large and our pipeline is stronger than ever before. We remain laser focused on our long term target of 211 locations in the United States and Canada and we'll continue to open new stores at a measured pace that ensures continued solid execution.
Let me take you a minute now to talk about our same store sales performance first. Our brand remains quite healthy as Q2 comps were 1.1%, which marked our 21st consecutive quarter of outperformance relative to Knapp Track. The amusement segment once again reported strong comps during the quarter. However, our overall comps came in below expectations as the environment for casual dining remains challenged. While D and B's differentiated experience across our 4 platforms, eat, drink, play and watch, has provided us with meaningful degree of separation from casual dining over the past several years, we are certainly not immune to the macro trends around us.
As I mentioned, our non comp store performance was impressive and we were pleased with our 2017 store openings today. Of the 100 stores we operated during the Q2, 24% or 24% of the total were non comp stores. Their strong performance and contribution to our overall revenue growth once again demonstrates the broad appeal of our brand. Next, I'll spend a couple of minutes highlighting our amusement business on the heels of a very successful 2016 this year continues to shape up as another exciting year for amusement segment of our business. With new and compelling content, including games based on some of the world's best known movie properties, 2017 underscores the further evolution of our amusement strategy as we continue to collaborate with our many game manufacturing partners to deliver our strategy.
Our summer games lineup this year was comprised of highly recognizable and marketable content, including Spider Man, Aliens, Despicable Me, Space Invaders and the world's largest Pac Man among others. Meanwhile, our proprietary title, Welcome to Welcome Robots remains very popular, typically ranking in the top 5 of our non redemption game. We continue to see good results from our efforts to enhance the game's durability. From a food standpoint, we introduced several new items including 2 shareable appetizers an upgraded Caesar salad, an additional sandwich and 2 new entrees, dynamite fried shrimp and Americana ribs. Within our beverage lineup, the 4 rum based Monster Aisle punch drinks introduced during the quarter are performing extremely well for us.
Food and beverage is a focus area for us and we're taking a thoughtful approach to reignite the momentum there. Fundamentally, our approach is to increase the crossover between amusements and F and B traffic in a manner that will incrementally drive sales. For example, in recent weeks, we began highlighting our Eat and Play combo promotion on national television. We're also conducting tests that will help inform our F and B strategy going forward, but we're still in the early stages of reading those results. Additionally, menu innovation remains a hallmark of our brand, especially in a more challenging casual dining environment.
In a few of our stores, we're testing a pared down menu in our bar area to enable quicker service. We've also conducted additional focus group testing as well as some in-depth D research. From a longer term perspective, we're preparing to test technology initiatives such as pay at the table and handheld ordering technologies that should improve both the speed of service and overall guest satisfaction. With respect to advertising and promotions, amusements continues to be our focus given that it's our strongest sales channel and our highest margin segment. Our promotional strategy includes driving traffic by featuring games as well as great looking food and beverage on national cable television, typically coupled with an immediate call to action including an element of free gameplay.
As an additional note, the number of weeks for national cable advertising during the Q2 was the same on a year over year basis. Looking ahead to the Q3, we'll run our All You Can Eat Wings promotion for the 1st 6 Sunday, Monday Thursday of the NFL season for $19.99 with a $10 Power Card. As you recall, last year we ran a similar promotion on $29.99 price point for the $20 Power Card, so lower incidence during 2015 when we ran a promotion with the lower price point. In terms of our guidance for 2017, broadly speaking, we continue to expect low to mid teens growth in revenue and EBITDA. That said, we've lowered our same store sales guidance.
Additionally, the investments that we're making in pre opening for new stores coupled with the litigation settlement expense in the Q2 has prompted us to lower our EBITDA range as well. Brian will elaborate on these changes provide a more detailed financial update in his prepared remarks. Brian?
Thank you, Steve, and good afternoon, everyone. Before walking through
the numbers, let me just take a
minute and thank our many team members across the country for helping us produce another strong quarter, especially in a tougher environment. Speaking of a difficult environment, I would like to echo Steve's comments on Hurricane Harvey as our hearts go out to everyone impacted by this point. Now in terms of the second quarter, total revenues increased 14.9 percent to $280,800,000 That's up from $244,300,000 in the prior year due to strong contributions from newer stores as well as positive growth from our comp store base. Revenues from our 76 comparable stores increased 1.1 percent to $220,500,000 that's up from $218,000,000 while revenues from our 24 non comp stores, including 4 that opened during the quarter, increased to $61,100,000 that's up $27,000,000 from the prior year. Turning to category sales, the mix shift to our more profitable entertainment business continued as total amusement and other sales grew 18.6%, while food and beverage collectively increased 10.2%.
During the Q2, amusement and other represented 57.7 percent of total revenues, reflecting 180 basis point increase from the prior year as we continue to feature and to promote the entertainment aspect of the brand. Now, breaking down the 1.1% increase in comp sales, our walk in sales grew 1.1%, while our special events business was up 1.9%. In terms of category sales, amusements rose 4.7%, while our food and bar business was down 3.5% and 3.3%, respectively. As Steve mentioned, the environment for casual dining remains challenged. In addition, during the Q2, the impact of cannibalization and competition on our system was modestly above our expectations.
That said, our long term growth strategy and our plan to continue to gain market share anticipate some cannibalization and competitive intrusion in our existing stores. From a regional standpoint, stores in our Texas market, which is one of our most competitive markets, continued their rebound and delivered comps above the system average for the Q2 in a row. The impact of weather and calendar was a net neutral for us during the quarter. While weather was favorable in the early part of the quarter, the benefit was offset by somewhat unfavorable weather and a calendar shift in the latter part of the quarter. In terms of costs, total cost of sales was $48,500,000 in the 2nd quarter and as a percentage of sales improved 80 basis points, reflecting relatively stable F and B margins, improved amusement margins and higher amusement sales mix.
Food and beverage costs as a percentage of food and beverage sales increased 10 basis points compared to last year as about 2.3% in food pricing and 1.9% in bev pricing was more than offset by a growing mix of new stores. For full year 2017, we expect a relatively flat commodity environment. Cost of amusement as a percentage of amusement and other sales was 100 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 game. Total store operating expenses, which includes payroll and benefits and other store operating expenses were $147,000,000 and as a percentage of revenue, store operating expenses were 52.3% or 70 basis points higher year over year.
Our operating payroll and benefit cost was 40 basis points higher year over year. Leverage on higher amusement sales mix was more than offset by hourly wage inflation of about 5% and the typical inefficiency at our non comp stores. Our non comp stores, representing 24% of our store base, continue to perform well for us and generate excellent returns, but are not as efficient as our matured comp base from a labor perspective. Other store operating expenses were 30 basis points higher year over year as higher occupancy costs at our non comp stores more than offset leverage of marketing expenses. Store operating income before depreciation and amortization was $85,300,000 for the quarter, reflecting growth of 15.4 percent compared to $73,900,000 last year.
And as a percentage of sales, this was an increase of 10 basis points year over year to 30.4%.
G and A expenses were $16,800,000 that's up from
$13,600,000 in the prior year. And as a percentage of revenues, G and A expenses were 40 basis points higher year over year. In the Q2 of this year, we recorded a $2,600,000 litigation settlement expense related to alleged ERISA violations. Excluding this expense, G and A would have been $14,200,000 and as a percentage of sales would have improved 50 basis points year over year. Pre opening costs increased to $4,500,000 that's up from $2,900,000 in 2016, primarily due to the impact of 2 additional new store openings versus the prior year quarter.
And I would ask you to recall that large format stores, we typically expect to spend about $1,400,000 in pre opening and for small formats, we spend around $1,000,000 Our EBITDA grew 11.5 percent to $64,000,000 and our margins declined 70 basis points, while our adjusted EBITDA grew 13.2 percent to $70,600,000 Excluding the litigation settlement expense recorded in the quarter, EBITDA would have been $66,600,000 representing year over year growth of 15.9% and margin improvement of 20 basis points. Net interest expense for the quarter increased $2,100,000 that's up from $1,900,000 in the prior year, driven by higher cost of debt due to increases in the underlying LIBOR rate and that's partially offset by lower average debt level. Our effective tax rate for the quarter was 18.2% compared to 36.9% in the Q2 of last year. The decrease in the effective rate reflected a favorable 18.4 percentage point impact from the adoption of the new accounting standard related to share based payment transactions, which reduced our new contract provision by 6,800,000 and increased shares outstanding by 418,000 shares compared to the prior year quarter. As a reminder, the implementation of this new standard does not have any incremental effect on our cash taxes.
However, as we indicated on our last earnings call, it does increase our diluted share count and can significantly reduce our effective tax rate depending on the magnitude and timing of stock option exercises. We generated net income of $30,400,000 or $0.71 per share on a diluted share base of 42,800,000 shares compared to net income of $21,500,000 or $0.50 per share in the Q2 of last year on a diluted share base of 43,300,000 shares. I do want to point out that the new accounting standard for share based payments favorably impacted our net income and our EPS by $0.16 per share, while the litigation settlement expense had an unfavorable impact of $0.04 per share on our 2nd quarter results. Excluding these two items, EPS would have been $0.59 reflecting strong net income and EPS growth in the high teens. Now turning to the balance sheet for just a minute.
At the end of the quarter, we had 30 $2,000,000 of outstanding debt on our credit facility, resulting in low leverage of around 1x. Just a few weeks ago, we announced the new 5 year $800,000,000 credit facility that puts us on even a stronger footing. This new facility replaced our existing $500,000,000 facility, extended our maturity by 2 years to 2022 and lowered our borrowing costs by 25 basis points. Associated with this refinancing, we secured a charge, a pre tax charge actually of about $800,000 in the Q3 of 2017. As we have stated previously, investing in growth via high return new store development remains the top priority of our capital allocation strategy.
At the same time, our significant free cash flow, strong balance sheet and now expanded borrowing capacity provide us flexibility to return value to shareholders for years to come. During the Q2 this year, we repurchased approximately 1,000,000 shares of our common stock for $67,000,000 and at the end of the second quarter, this brought our year to date total repurchases to 1,500,000 shares for $98,000,000 and the exception to date total of 2,100,000 shares for 1 $127,000,000 At the end of the quarter, dollars 73,000,000 was still available under our $100,000,000 buyback program authorized in June of this year. Turning now to our outlook. As we have referenced on previous conference calls, we continue to view 2017 as a year of more normalized growth coming off a record 2016 year. Our long term financial targets are for low double digit annual growth in total revenue and EBITDA.
With this in mind, based on our 2nd quarter results, we are updating our annual guidance on several key metrics for 2017. Total revenues are expected to range from $1,160,000,000 to $1,170,000,000 which is unchanged from our prior guidance. Comp store sales growth on a comparable 52 week basis is projected between 1% 2% for the year, down from prior guidance of between 2% 3%. Note that we have 76 stores in our comp base for the fiscal year 2017. From a development perspective, we are now targeting 14 new store openings.
Above our prior guidance of 12 stores, we expect our 2017 class will skew towards large format stores and new markets for the brand. We have already opened 8 stores so far this year and currently have 9 under construction, so very confident in this guidance. While we have not historically provided specific guidance on preopening expenses, we now expect preopening expenses to be approximately $21,000,000 this year compared to slightly above $15,000,000 last year. This is higher than we had previously expected due to our increased 2017 new unit guidance and a higher pre spend on our strong pipeline of new stores for 2018. EBITDA is now expected to range between $270,000,000 $276,000,000 that's down from the prior range of $276,000,000 to $282,000,000 However, this guidance now includes the previously mentioned litigation settlement expense of $2,600,000 and higher preopening expenses.
We are projecting net income of $109,000,000 to $113,000,000 That's based on an effective tax rate of 30.5% to 31%. This guidance now includes the year to date impact of the new accounting standard related to share based
payment.
However, we have excluded any potential future tax benefits in the balance of 2017 since the timing and magnitude is largely out of our control and will likely exhibit significant volatility. We also estimate a diluted share count of 42.6000000 to 42.8000000 shares, that's down from our prior guidance of 43.2000000 to 43.4000000 shares due to increased share repurchases during the Q2. And finally, we project net capital additions after tenant allowances and other landlord payments of $182,000,000 to $192,000,000 This reflects a $16,000,000 increase from our prior guidance driven by our increased new store guidance for 2017. With that, I'll turn the call back over to Steve to make some final remarks.
Thanks, Brian. I want to review our recent and upcoming store development activities as well as our remodel program. We're very pleased with the response to our recent store openings, as I mentioned. During the Q2, we opened 4 stores, the first in New Orleans, Louisiana, which is a new state for us Alpharetta, Georgia near Atlanta Myrtle Beach, South Carolina and McAllen, Texas, which is our 100th store. And as Brian mentioned, we currently have 9 stores under instruction, but also have 27 signed leases, providing us with excellent visibility on new store growth well into 2018 and some of 2019.
As Brian mentioned, we now expect to open 14 stores for this fiscal year, which plays to unit growth right at 15%, up from our previous expectation of 12 stores. Of these stores, 8 will be in new markets for Dave and Buster's, with the remaining 6 located in markets where we already have a brand presence. In terms of square footage, we expect 10 large stores this year, including 8 that are right at that 40,000 square foot size, 2 that are between 30000 and 40000 square feet and the remaining 4 stores will be our small format of 30,000 square feet or less. By the end of fiscal 2017, we'll have 106 stores operating across 36 states, Puerto Rico and Canada, and that's right at half of our addressable market. As a reminder, our long term target is for 10% or more annual new store growth, including a combination of large and small store formats.
We're confident that we have a strong and dedicated team needed to execute on this vision. That said, we're constantly refining our process to ensure greater efficiency in the pre opening process and during the 1st 90 days of operations. We remain focused on having new stores and the teams ready to handle the typically strong opening weeks and an operational team focused on driving and getting those new stores to their performance targets as soon as possible. As you know, developers continue to pivot towards more entertainment options and our position as a premier sought after entertainment and dining concept continues to strengthen. The combination of these two dynamics is enabling us to capitalize on additional development opportunities as evidenced by our upping to 14 stores.
But we remain selective in picking the sites or best sites for our brand. With respect to this year's 4 comprehensive remodels, we completed these projects on time and well ahead of the start of the football season. So in conclusion, we had another strong quarter of revenue and EBITDA growth. Our white space opportunity is significant. We have one of the best experiential brands in the country and remain focused on returning value to shareholders, including share repurchases.
As always, we appreciate your continued support and interest in Dave and Buster's. And with that, operator, would you please open the lines for Q and
A? Absolutely.
And first from SunTrust, we have Jake Bartlett.
Great. Thanks for taking the questions. My first was on the sales. And looking at your mix to family, it's gone up, I think, 44% of sales as of the Q1 and versus 40% last year. If I could do the math on that, it looks like your family business is up pretty solidly on a kind of a same store sales basis, but that your adults business is down, I estimated it came down low single digits.
Can you maybe just on both sides, explain why the family business has been growing so much quicker? And then also why you think there's been this weakness in the adult business?
I don't know. I mean, I think that to equate that percentage of parties that is self reporting with having somebody under 18 as being the equivalent of sales might be a mistake. We know they have a lower incidence of food and beverage and we do believe that is kind of one of the issues, not the majority of the issue, but one of the issues that we're seeing on the food and beverage side. There is more of a chance that that audience just comes in and plays games and doesn't really order food or beverage. So we haven't cut it that way and I'm not sure we have the data to exactly cut it that way, but I don't think that I would jump to that conclusion.
Okay. All right. So, moving to your pipeline and your development. So you increased your development by 2 this year. Is there any is that pulling in from 2018 at all?
Is there any kind of should we be concerned that maybe 'eighteen won't be as strong as that level? This is more of a timing issue versus the momentum in your pipeline?
I think it's actually the opposite. I mean, we have so much momentum that we have the ability and the choice to move from stores that were originally intended or at least on our schedule to be open in 2018 in 2017, but clearly have plenty of backlog for 2018 to open our target.
If you think about the basically, I mean, we guided pre opening that $21,000,000 so that's up pretty significantly from what we expected previously, roughly $4,000,000 I think against consensus as well. Two stores are not $4,000,000 So we actually have more pre spin in that preopening number for our 2018 class. So there's strength in the 2017 class and I think strength in the 2018 class is what we're saying here.
Great. And then lastly on your new credit facility, you increased it by a fair amount by $300,000,000 How should we read that in terms of why you did it? You're free cash flow positive. Is it would you think about that as I know funding your accelerating unit growth, but also returning cash to shareholders? And as we look at the Q2, how much you bought back in shares, is that the kind of level we could expect going forward?
Or is that an anomaly in any way? Maybe just help us out on what your goals are for your capital structure?
Well, I don't think we really necessarily want to telegraph what we are going to spend next quarter or whether you should expect the same level of spend. I think for us, given the strength of the brand and how we performed over the last couple of years, we had the opportunity to put in place a new credit facility that had lower interest rate, allowed us to have longer term to take us out farther in our long range plan, again at a lower cost of debt at a very low cost to get the deal done. So for us, it made a lot of sense to go ahead and seize that opportunity because it does allow us to continue our plan of investing in stores as a top priority and we increased our guidance by 2 stores. We increased our capital guidance by $16,000,000 We've increased the outlay on the expense on the pre opening line by 4,000,000 So we did accelerate our store growth. And as you pointed out, we did accelerate our repurchase activity in the second quarter spending about $67,000,000 and that is the second kind of use of cash for us.
And this facility allows us to do all those things while maintaining what we would view a prudent level of leverage, which for us, we don't think going below 1 is a good idea and you can see we came in at 1 for the quarter. We were actually lower than 1 at the end of Q1. So we've put in a facility that takes us gives us flexibility for many years to come. Great. Thank you very much.
Moving on, we'll next hear from Nicole Miller with Piper Jaffray.
Thank you. Good afternoon. Just a couple of quick questions. The first one, if I look at the first half of the year and look at the 2 year trend and imply that to the back half and take comparisons into consideration, I think you'd be down mid single digits in 3Q and then down low single digits in 4Q, but that would be below what you've guided for the year. So can you talk to us a little bit about what is or what might improve in the back half of the year?
Well, I mean, as we thought about our guidance, we did bring our guide down by a full percentage point. We came in at 1.1. As we indicated, that was a bit below our expectations. So we partially brought down the guide for that reason. As we think about the back half of this year, we see 3 things that we're looking at.
1, a casual dining environment that seems to have been progressively worse over the course of the summer if you look at how the headwinds, the casual dining environment space over the course of the summer, it got progressively worse. For us, the competitive opening, I mentioned in my comments that was modestly higher than we expected. We had Main Event opened 5 stores in our quarter and 2 topped off. So was a little bit it's an interesting science for us to know exactly when these guys are going to open. And that was a little more than we were expected.
So what would be nice is, if Main Event slowed down their pace of growth, that would be a pleasant surprise. There is some indication that they may do that because of some shareholder activism in terms of how they are performing as a company. So that would be a potential good news thing if they slowed their growth because we did see a little more pressure on the competitive front in the quarter than we expected. And then I think the unknown here is right as we were thinking about this guidance is the impact related to Hurricane Harvey, which I am sorry, what was that? That we were shut down for a full week and we're back open, but not at full strength.
So we'll see how that goes. So we provided some room to accommodate some underperformance in the Houston area where we have 3 stores. So, to the extent
And that's helpful color. I actually fear I didn't ask the question clearly at all. So to get to your even the low end of your downward revised guidance, the back half of the year has to get better at some point than the first half of the year and everything you just talked about are reasons why it might not. So, I mean, I want to be very delicate, but I think I'm kind of wondering how are you even going to get to that number?
Well, I mean, we look at a 3 year stat too. You can go back and I think you'll get a little bit different answer if you look at our numbers, if you look at a 3 year stack, kind of how we performed Q1, Q2 and you look at our kind of estimate on a 3 year basis, I think it will look a little bit different to you.
And then just maybe talking about the Eat and Play combo on TV, the national advertisement of that and pushing to get the food and beverage comp up where you want it. I mean, that's very interesting, the research that you said. I think maybe Steve commented that you're doing. Is that done? And if you have it, what does it say?
If it's not completed yet, when are you getting it? And what do you expect maybe to learn and to do with that? Thanks.
Yes. So, we have done the research. Literally, we got the top line back, I think, on Friday or Saturday, something like that. So it's a pretty early read. But it confirms some of what we saw in the focus groups that we conducted as well earlier in the quarter and that is particularly millennials want kind of shareable, snackable fast and they equate fast with service.
And so anything that we can do to increase speed will probably help us in 2 ways and that will be to help both quality and the service scores. We mentioned that we were going to that we had been testing a pared down menu in the bar and sports lounges in several stores. It's a little early to read exactly what that means, but as you might expect, it's going to take some repetition before you get a clear in other words, some amount of time for people to repeat their visit before you get a real clear line to what that does for or does to you from that standpoint. But also based on this focus group and quant that we said, we're going to roll a store wide I say roll, we're going to do a test of a store wide smaller menu in October as well, with the idea that if we see positive results from that, we'd be able to roll it system wide towards the end of the year and the beginning of next year. So that's really what we've been focused on in terms of the research and trying to read the research.
It's really been more about menu items and kind of what are the other elements that folks are focused on. And then finally, in the longer term, our intent is to look at service from a technology standpoint. We've committed to a test of pay at the table with Quikr by MasterPath later this year. And we think that could be very helpful in terms of eliminating a pinch point in terms of being able to pay when you want to pay and leave when you want to leave from a debt perspective.
Thank you.
Thanks, Nicole.
Our next question will come from Jeff Farmer with Wells Fargo.
Thanks. You might
have touched on it, but what headwind to 3Q same store sales do you expect to see from those Houston units? And what headwind did you guys factor into the full year same store sales guidance for Houston?
I don't know that we are going to get specific on that. I mean, we just dumped these stores back up on Friday. So, they were shut down for a week. 2 of them in our comp set and one of them is not. So it's a little early to call and I don't want to comment specifically on the exact basis points, but we've tried to factor in some negative impact for what we see right now for the Houston market.
But we'll see how that all develops over time. But we're back on track.
A follow-up to that, do you have
any case study, it's a tough question, but just extreme weather resulting in a sustained period of closure for any given unit. Is there anything comparable that you could point to? And what type of same store sales recovery did you see in the weeks that followed that reopening of those units?
I don't think we have a case study that either we can point to or that we've made public in the past. So for example, like we've not had stores closed in the Florida market when we've had hurricanes there for a whole week. I mean, the only other significant period of time that we've had a store closed for a flood, it was closed for 2.5 years, I think. So it wasn't it was closed for so long that it became irrelevant in terms of the bounce back of how but we haven't closed anything as long as a week. I think the bigger issue quite honestly is that it will be more about how those communities are able to recover and whether people are going out and dining and going to entertainment brands and that sort of thing more so than it is kind of whether or not we're prepared to handle the traffic.
And I think just about everybody has said that each one of these storms is unique. Houston is going to be, I believe, unique in terms of how its recovery occurs. I would also say one last thing. Over my career, hurricanes in the intermediate term have typically been a tailwind, but not in the short term.
Okay. And just one more follow-up moving away from the hurricane and just focusing on cannibalization. You guys did mention it, but ballparking, what do you think the rough cannibalization headwind is right now on your comparable Sandstorm sales number? And then theoretically, as you move forward, I think more than half of your future development is expected to be an existing market. So I guess more importantly, do you think that your cannibalization headwind will sort of grow in coming years or sort of whole study?
Well, as we've kind of said before, the whole competitive cannibalization front is a little bit of an enterprise science in some ways. We are watching the competitors closely in terms of when we think they are going to open and trying to measure the magnitude of that opening, but it's not always totally clear. I think I said this, we were probably a little bit surprised on the high side on how many units main event opened in the quarter. They opened 5 units, 4 of which were in our market and 2 Topgolfs, both of which were in our market. So, that headwind was a little more than I think we were expecting.
It does look to us as though main event may be slowing down in the back half, but we don't run those companies and it's a little difficult to say. I do think from a cannibalization standpoint, we are trying our best think through kind of a good balance of new markets versus existing markets so that we are not oversaturated with opening stores in existing markets. But look, we've said this before, our long term strategy is to grow our sales and grow our earnings and that will have some negative headwind related to cannibalization. That's just going to be a part of it. The stores return great returns and it's just something that we're going to live with.
And we're going to try to manage it as best we can that we don't have any huge shocks here. But we have not gotten specific to note to talk about when we look at our oneone, how much was cannibalization, how much was competitive intrusion, we haven't got into quantifying that publicly at this point. So I'm probably not going to start on that today. We've just said it's those 20 or 30 basis points on each of those, we wouldn't be talking about it. So it's something more significant than that and it is a real headwind.
Okay. Thank you.
Next from Jefferies, we'll hear from Andy Barish.
Yes. Hey, guys. I just wanted to follow-up on the back half implied guide. I mean, it seems like it's flat to maybe 2% at the high end if some things go right. Is that the way we should be thinking about it?
And should there be more of an issue in the 3Q as we sit here today?
Well, I don't think we want to get into the quarterly guide. But I think the way you have backed in, I mean, we did get an update, I think, in our earnings release, it was in our Qs now that you can pretty easily kind of back in what this would imply. You're kind of on the money slightly positive to size 2% balance a year to hit that 1% to 2% guide. So I think you are in the right zone here.
And then thanks. And then just on you mentioned the 2Q advertising weeks were the same, Steve. Anything as you kick off football season that we should be aware of other than the pricing shift on wings? Do you have an extra marketing week? Is there anything on the calendar with the start of season or anything like that we should be aware of?
I think that we said on some of our prior calls, we are going to be a little less transparent about exactly how many weeks and how many points and all the rest of that. But we did change the promotion. We are going to come out with a strong advertising campaign around that promotion. We believe the $19.99 price point should be more effective for us just based on our prior experience. And we are excited to kick off football in a big way.
Okay. Thanks guys.
Our next question comes from Brian Vaccaro with Raymond James.
Thanks and good evening. I wanted to just circle back on the Q2 comp. You mentioned the calendar shift that impacted the quarter. Was that through the July 4 shift or something else? And are there any calendar shifts in the second half of fiscal 'seventeen that we should be aware of?
Yeah. The calendar shift was the July 4 holiday and ended up being a little worse than what we expected going into it. And then balance the year, the only other significant one is really around the Christmas holidays and how that falls this year, which should be a net benefit.
Okay. And on the F and B side, with another quarter under your belt, can you provide a little more color on where you're seeing the softness? Is it concentrated in a particular area within the restaurant, whether it be the dining room, a bar area or the midway or is it more broadly based than that?
It's broadly based. I mean, when yes, the gap that you're seeing is broadly based. I mean, we're as we've sort of said before, we're seeing the strongest growth when you look at our comp performance. Actually, it started last year and it's continuing this year, our strongest growth period of time is the early dayparts, lunch afternoon daypart where amusement mix is higher and we are seeing more lift during that daypart. That's where our growth is coming from.
And we think part of it is the family. I think a question came up earlier. Part of that is driven by increase in family mix, which obviously has less penetration around alcoholic beverages and we think also food. That said, they are coming in and playing the games. Games are driving amusements, but it's still driving positive comps for us.
But there is less propensity to buy food and bev. And food and bev is down across all day parks. So it's not just lunch and afternoon. Okay. All right.
That's helpful. And
on the EBITDA guidance, if I could shift to that, Brian, did you say I just want to make sure I heard correctly. Did you say that your pre opening cost estimate went up about $4,000,000 versus your prior expectation?
Yes, about that. And I think if I remember right consensus, not that I'm tracking that, you guys, but around that too. And we bumped the 2 stores, increased the 17 count by 2 stores, but it is also higher free spend on this 2018 class. So I view that as a positive. You guys may view that as a negative.
We think about it as positive as we do the capital increase as well.
So ex the pre opening bump and the litigation, sort of the core EBITDA was unched despite a reduced comp expectation for the year. Can you help with sort of what changed on a core underlying basis versus your original expectations, whether it be on the labor cost front, other operating, etcetera, where the other offset might have been versus
the prior year? We are holding our sales
range flat here at 1.160, 1.170. So the one point decline in the comp range, if you guys could do the math, we give you enough numbers. It's not an immaterial number for the full year. What we're saying is really the implication here is that non comp stores are doing better than expected.
And we've also added a
little bit of sales near the end of the year for those 2 extra stores. They're actually dilutive, those 2 stores from an EBITDA standpoint, because they come in late. But again to us that is a noble pursuit. We're about long term here, but they are dilutive. So I'm not sure if that's answering your question.
Yes. No. That's We're holding sales, but we're taking the shot on this litigation expense that wasn't in our guide that was charged $3,000,000 and we actually have free spend increase related to an 18 class because it's just a straight shot hit for the EBITDA number. In our overall, we're talking about adjusted EBITDA. We wouldn't be talking about that, some of that part,
but we're in the EBITDA land now.
Okay. That's helpful. And then just last one for me, The 14 units, if you think about the cadence the rest of the year, I think there are 2 planned for October in the Q3 and then the rest in the Q4. Is that correct?
I think you have that directionally correct, yes.
Okay. And then last one on this development piece. 2018, I assume you have pretty good visibility on the pipeline. Can you give a sort of early read on large versus small, new versus existing?
I apologize. I missed the We
are going to we will probably guide that the next time.
We are
you talked about 2018, correct?
That's right.
Because I went through the 2017, but on the 2018, I think we're a little early. We will guide that on the next call. You can use your right hand, all of it.
All right. Thank you.
Our next question comes from Sharon Zackfia with William Blair.
Hi, good afternoon. Sure. I guess a question on unit productivity. Hi. Brian, if I look kind of through the comp numbers relative to the overall revenue guidance, it looks like you're expecting unit productivity to start to weaken year over year in the back half was been really solid in the first half.
Is that something that cannibalization or something else is picking up? Or is that some sort of conservatism in your guidance in the back half?
Well, we've tried to kind of talk about the store makeup. When you look at our as we grow our store base, we've got right now 24 non comp stores. The reality is only 10 of those are true large 40,000 square feet or higher. So, the large majority of the stores we've got in our non comp set are not the full blown 40,000 square foot boxes. And we've got coming down the pike stores that we expect to open.
We've got another set of couple of another
small, medium.
So, some of this is driven by when you guys are looking at AUVs, we expect these AUVs to come down over time. I mean, we're not we've got roughly half of the opportunities, large, half small, and we're building these stores in between. So our view is store productivity is really more about the more appropriate way to look at it is ROI driven and we feel very good about the ROI production out of these stores where from 11% to 15% we've got kind of over 15% ROI in year 1. We feel good about the 2016 and 2017 class. But AUVs are going to be lower moving forward than kind of the 12,000,000 AUV averages of our store base because the mix is different and it will continue to look that way somewhat.
So
I guess one follow-up question. There's been a lot of conversation on the street about performance of mall based restaurants and I know you're not heavy mall, but can you talk at all about what you're seeing in your mall based locations versus the rest of the day?
Sure. This is Heath. So if you heard the site department, mall stores represent about a third of our store base. And I think we've said it on public call that we have historically outperformed in terms of AUV and comp compared to the system average. However, after a pretty long period of outperformance, first half of this year mall comps were slightly lower than the system average.
They're still outperforming on a 2 year and a 3 year SNAP basis. So it's a little unclear to us whether this is just a tougher rollover or it's kind of something more substantive. But that's what our data shows at this point.
Thank you.
Next from Maxim Group, we have Stephen Anderson.
Yes. Two quick questions. I noticed for the first time in the last several quarters, the special events comp actually outperformed the system wide comp. Is it something is it seeing more family business there? Are you starting to notice maybe a pickup in corporate spending as the holiday approaches?
And I have a follow-up.
First of all, yes, it did outperform. It was 1.9%. It is a very small quarter, I will emphasize. Still less than 10% of overall sales in the quarter are coming from our special events. But I would not attribute anything to do with holiday or whatnot.
I think that it has to do a little bit with the different channels we've opened. The strongest channels for us in terms of bookings came from our call center and from online.
Okay. And a follow-up question on the effect of us on the sporting events. Number 1, your peers talking about maybe fewer NHL and NBA playoff games hurting results during the spring, but maybe you might have seen some of a lift from the May weather fight, particularly on the West Coast?
Well, first of all, May weather and MacGregor happened in the Q3. So we're typically not commenting on that. But I will comment in general on that because we've seen a couple of those big kind of megabytes in the past. And I would say that in general, they're pretty expensive for us to put on in every store. And they're happening at a in a timeframe where we're pretty busy anyway.
So getting enough incremental to offset the cost is a pretty tough proposition. But we remain committed to becoming and building awareness on our D and B sports. And so we think it's important for us to carry things like McGregor, Mayweather and Pat, we covered Mayweather, Pacquiao and all the rest of that. But it is hard on a Saturday night to be able to kind of boost sales enough to make the economics of that overly attractive for us. Okay.
Thank you.
Our next question comes from Andrew Strelzik with BMO Capital Markets.
Hey, thanks for taking the question. The first one is on the food and bev side. I mean, you talked about the lower incidence of the wing promotion at the higher price point. It looks like you're working on some bundles, things like tacos and beers and gameplay, for example. Do you think that maybe price point on the food and bev side is creating any headwinds within your trends?
And also within those bundles, how do we think about the margin impact of those?
Well, EPC is something so EPC is our shorthand for Eat and Play Combo. It is something that we've had in place for a very long time. I mean, we've had Eat and Play Combo as an opportunity for folks since, I want to say 2,007, 2006. So that's been out there a long time. We have seen a reduction in the incidence of that.
So one of the things that we're trying to point out is we do have this value message out there. It's a Sunday through Thursday mostly promotion. You can get it Friday through noon. But we're trying to not do it on peak. And again, we've seen a reduction in the incidence of that.
So trying to make sure that people are aware of that, we think it's important.
In the
research, yes, value comes back as one of the main reasons for not buying, but actually promotional activity comes back one of the chief reasons for buying food and beverage products. So it seems like you have both sides of the coin. So we want to make sure everybody is aware of the big value opportunities that we have out there.
So the $10 power card with, I think it's, for example, 2 tacos and 2 beers, that's just part of the broader eat and play? That's not something that's separate? I saw it advertised on the website in a number of different places. So I thought maybe that was incremental. Is that not right?
Well, that is done on a more local basis. That's not something we are doing everywhere on a national basis. But as you mentioned, it is a promotion that we run-in a number of our stores for Thursday night.
Okay. I got you. Another question that we get a lot is about the traffic versus ticket in the amusement business. And I know in the past, you've mentioned it's hard to kind of disaggregate the comp among the 2. Have you gotten any better visibility on that as maybe you've been able to get better insight on the data?
Do you believe that your traffic overall is up? Or is it really ticket that's driving that piece?
Well, I mentioned the pricing we took in the quarter was about 2.3 on food, 1.9 on dev. We actually had about 0.5 percentage point on amusement related to eat and play combo increase we took last year at some point. So overall, weighted traffic was our price was about 1.2 for the quarter, in line with Q1 and fairly similar to what we had in 2016 on a full year basis. So, reasonably similar. Obviously, with the comps that we've put up in food and bev that applies negative traffic and mix and counts were down on food and bev front.
On the amusement front, we actually did see counts go slightly negative in Q2. And we think there could be a part of that due to the summer play pass that we offered this quarter for a number of weeks where you could for $50 or more, you could play unlimited video all summer. So, it's a little difficult to tease through traffic. But overall, our spend per card went up quite a bit in the quarter, maybe partly on the heels of the play path, But card counts themselves were slightly negative.
Okay. And then my last question, CapEx ticked up because of the new stores the incremental stores, excuse me. How do we think going forward, just as we're thinking about the free cash flow profile? How do we think about the CapEx trajectory over the next several years? Not asking for you to guide 2018, but there's 4 remodels you mentioned that those roll off and some various puts and takes.
So what's the CapEx trajectory look like from here?
Well, I don't think we are prepared to give multiyear CapEx guidance right now, Andrew, we are pretty committed to kind of the game level of spend and maintenance spend that you see in our guide right now, which is if you look at it, it's about $38,000,000 Kind of look at that by store and that's got a few bathroom redos in it. So, we've got a pretty healthy number in there. I think the number that in our that may move down some over time is our what we call remodel spend. We've got about $18,000,000 in our guide around remodel type projects. And we're coming closer to the end of those opportunities, so that number may drop.
And the big number that's left is what we decided to do on store growth. So not really prepared to talk about what our store unit number pick is going to be for next year right now on this call. But that will be the driver of the capital.
And the pipeline is strong, so we have some choice.
J. Rice:] The last choice.
Okay, great. Thank you very much.
Ladies and gentlemen, that does conclude our question and answer session. I'd like to turn the floor back to management for any additional or closing remarks.
I just want to thank you for joining the call today. We look forward to reviewing our Q3 results with you in early December. Thanks again.
Ladies and gentlemen, that does conclude today's conference call. We appreciate your participation. You may now disconnect.