Good afternoon, everyone. Welcome to the Dave and Buster's Entertainment Incorporated First Quarter 2021 Earnings Results Conference Call. Today's call is being hosted by Brian Jenkins, Chief Executive Officer. He will be joined on the call by Scott Bowman, Chief Financial Officer and Margo Manning, Chief Operating Officer. I'd like to remind everyone that this call is being recorded and will be available for replay beginning later today.
Now, I would like to turn the conference over to Scott Luman for opening remarks.
Thank you, operator, and thank you for joining us today. After our prepared comments, we'll be happy to take your questions. I'd like to remind you that this call is being recorded on behalf of Dave and Buster Entertainment Incorporated and is copyrighted. Before we begin our discussion on the company's results, I'd like to call your attention to the fact that in our remarks and our responses to questions, Certain items may be discussed, which are not entirely based on historical fact. Any of these items should be considered forward looking statements relating to future events within the 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 have been published in our filings with the SEC, which are available on our website at www.baitandbuster.com under the Investor Relations section. In addition, our remarks to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website. Now, I'll turn the call over to Brian.
Well, thank you, Scott. Good afternoon, everyone, and thank you for joining our call today. The StarLink's first Quarter results we announced earlier today provide solid evidence of the strength of the DNB brand and another great example of the And commitment of the entire DNB team. I continue to be inspired by what we've accomplished together over the past year to strengthen The company on many fronts. Scott will provide a review of our Q1 financial performance in a few minutes, but I want to call out a few of the highlights.
After closing out fiscal 2020 with accelerating momentum, our sales trend strengthened further during the Q1. Despite continuing to operate with capacity and other operating restrictions, we saw a significant improvement in demand across our store base, including at our recently reopened New York and California stores. The reopening of our store base, Coupled with stimulus payments, expanding vaccinations and excellent operational execution drove significant revenue recovery. We generated $265,000,000 in total sales, surpassing the top end of our expected range for the quarter and established a new high watermark in our post COVID sales recovery. Encouragingly, we exited the quarter with total comp sales down only 12 Percent in April compared to 2019 with close to half of our comp stores exceeding their respective 2019 performance levels.
This strong sales rebound combined with our lean operating model produced outstanding flow through during the quarter, driving $72,000,000 in EBITDA, Only 19% below the Q1 of 2019 and reflecting 280 basis points of EBITDA margin improvement. Through the 1st 5 weeks of the Q2, comp sales continued to accelerate, down just 4% And total sales are running slightly ahead of 2019 levels. This trend coupled with our summer initiatives points to a promising second quarter. As of today, we have all stores back online except for our 2 Canadian stores that we anticipate will open late in the second quarter. Clearly, we've come a long way over the past year.
We are optimistic about our future as we implement Strategic initiatives to modernize and enhance our food and beverage menu, service model, entertainment offerings and guest engagement. With these initiatives and the steps we took during 2020 to bolster our financial foundation, We are now a more competitive, more guest centric company and positioned to be a more profitable business as our sales fully recover. At this time, I'm going to ask Scott to cover the results of our Q1 and to share some insights on our expectations for the Q2. After that, Margo will join me to provide an update on our 2021 strategic plan. Scott?
Thanks, Brian. The results of the Q1 mark a major inflection point for Dave and Buster's as we have begun to move beyond the significant impacts of the pandemic. We ended the quarter with 138 open stores, including 1 new store that opened during the quarter. With most of our stores opened since mid April, Our business is showing strong momentum, generating revenues well above expectations for the quarter and extending into the 1st 5 weeks of the second quarter. We've also achieved a dramatic turnaround in profitability, driven by our lean operating model and the extraordinary efforts by our entire operations and support teams.
For the Q1, total revenues of $265,000,000 reflected a 35% decline in comparable store sales compared with the Q1 of 2019. In terms of category sales, the F and B business was down 49% comp, while amusements were down 25%. Amusements outperformed mainly due to a higher average spend for power cart purchases. Throughout the quarter, comparable store sales Steady improvement compared to 2019 and were negative 59% in February, negative 31% in March and negative 12% in April. This sequential improvement was driven by the reopening of our stores and improving comp trends in our previously reopened stores.
As a reminder, we will continue to report comparable store sales against 2019 as we believe this is a more meaningful comparison. Regarding sales mix, amusements were 67.5 percent of total sales for the quarter versus 58.5% in the first EBITDA for the quarter was $72,100,000 or 27.2 percent of sales and represented a 280 basis improvement compared with the same period in 2019. The improved performance was driven by a higher amusements mix, Strong sales leverage on labor costs due to lower staffing levels and reduced marketing and pre opening costs. From a store perspective, 84% of our stores posted positive EBITDA for the quarter and 90% of stores did so in April. The company also returned to profitability for the first time since the onset of the pandemic, posting net income of $19,600,000 or $0.40 per diluted share.
These improved operating results also produced $77,000,000 of operating cash flow during the quarter, of which $60,000,000 was used To completely pay down our revolving credit facility, we ended the quarter with $20,000,000 in cash $340,000,000 of availability under our revolving net of $150,000,000 minimum liquidity covenant and $10,000,000 in letters of credit. Over long term debt stood at $550,000,000 at the end of the quarter, consisting of our senior secured notes maturing in 2025. Additionally, at the end of the quarter, we had paid down all but $3,000,000 of our deferred vendor payables balance and had approximately $45,000,000 of negotiated rent deferrals on the balance sheet. We expect to pay back approximately $17,000,000 of deferred rent due to the remainder of fiscal 2021, dollars 25,000,000 in fiscal 2022 and the remainder thereafter. In addition, we received a tax refund of approximately $8,000,000 in the Q1, resulting from and paid $22,000,000 in semiannual interest on our senior secured notes.
We expect to receive an additional tax refund of $3,000,000 in fiscal 2021, resulting from CARES Act legislation and expect to receive a refund of over $50,000,000 Late in Q4 or early in Q1 of 2022 related to the carryback of fiscal 2020 losses. Turning to capital spending. We opened 1 new store in the Q1 and adjusted a total of $12,000,000 in capital additions net of tenant allowances. We expect to open one additional new store in each of the remaining three quarters of the fiscal year. As we look forward to the remainder of the year, We are very encouraged with our progress and are very grateful for our outstanding operations team and supporting functions that have driven our success.
Turning to our outlook, I'd like to offer some insights for the Q2 of fiscal 2021. For the 1st 5 weeks of the 2nd quarter, We continue to see strong demand for our brand with comp sales down 4% compared to 2019. 2 of our Canadian stores have yet to reopen. Based on current trends and barring any significant setbacks, we expect total second quarter revenues to be in the range of $335,000,000 to $350,000,000 which is comparable to 2019. We expect EBITDA margins to decline compared to the Q1 due to higher commodity costs, Higher labor and seasonal marketing costs and a moderation of our MuseNet sales mix.
Importantly, we expect EBITDA dollars to be in line with 20 $65,000,000 to $70,000,000 in CapEx for fiscal 2021 with approximately 49% dedicated to new stores And other operating initiatives, 19% for gains and 32% for maintenance needs. Finally, I'd like to reiterate our commitment to achieve 200 basis points of EBITDA margin improvement as we reached 2019 AUV levels, which will be largely driven by structural changes in our hourly labor model, management labor and G and A spending. With that, I'll turn it back over to Brian and Margo to discuss our strategic initiatives.
Well, thanks, Scott. We're very encouraged by 1st quarter results and the continuing early second quarter momentum that Scott just covered. Over the past several quarters, we've Outlined our strategic initiatives to enhance the guest experience and we've made great progress implementing them, which has set us up for what we think going to be a really strong season for our brand. I'm going to turn the call over to Margaret to bring you up to date on the progress on several of those initiatives And then I'll follow-up with some additional commentary. Here's Margot.
Thank you, Brian, and thanks everyone for joining us this afternoon. When we talked at the end of March, We were already making progress on our key initiatives. I'm excited about the positive momentum and appreciate the opportunity to give you an update today. The overarching objective of our food and service model initiative is to efficiently drive increased sales, improve the guest experience and enhance our long term profitability. On the food front, we have completed the transition to a new menu With the Food Identity inspired American Kitchen, this new menu offers 28 items, representing 33% fewer items Then we're on our menu prior to COVID.
While it is still early, dishes like the IPA Fish and Sips, Hawaiian Chicken Sandwich and Mushroom Stout Burger are big sellers on the menu and clearly resonating with our guests. As we move into summer, we'll be evaluating the performance of the fully deployed menu to better understand its longer term impact on sales And on the guest experience. This summer, our guests will be tempted with seasonal drinks in the form of LTOs limited time offers. Our summer LTO lineup includes EldaFlour tonics and Bomb Pop Margaritas. Starting in September, We'll be offering our guests a heartier selection of food and beverage LTOs that pair well for both fall football and Oktoberfest.
We plan to use our LTO strategy to take advantage of the freshness of seasonal product to give our guests a Constant stream of amazing new culinary options to drive food attachment and sales. Additionally, we have completed the brand wide rollout of our high speed ovens and kitchen management system upgrade, Both aimed at simplifying our operations, these back of the house initiatives make it easier for our teams to execute at a high level by reducing cook times by 40% on a third of the menu and also by facilitating a more seamless flow of food in the kitchen. Our research shows that the D and D guest defines food quality by food that is served hot and fast. The combination of our new menu, high speed ovens and new kitchen management systems set our teams up to deliver a Great dining experience to our guests. We expect our new menu to drive an improved guest experience and increased food attachment rates, all aimed towards increasing food and beverage sales.
Next, we'll move our attention to the beverage menu. The same disciplined approach and extensive guest research will be used to evolve our beverage offering, with We need great people in order to fully bring the Fund to life at DNB and the labor market that we are facing today It's the most challenging one that I have seen in my career. To improve our staffing levels for the demand that we expect this summer, We have earmarked an estimated $5,000,000 largely in Q2 for hiring programs and retention incentives. This is a significant investment that's been thoughtfully placed to help us attract the talent that we need to capitalize on the upcoming summer season. Another key initiative is to deliver a more integrated experience by evolving our service model to give the guests more control over their in store This involves deploying a combination of a new service model, tablets and a mobile web platform to enable a completely contactless order pay experience.
The stores operating on this platform Have been able to expand the size of server sections and reduce staffing levels to be more efficient. We have over half of our stores on this new model and we'll have brand wide deployment next month. Our rolling 4 week average for mobile ordering adoption is over 40%. Due to the strong adoption by our guests, We are also testing a completely self serve mobile web enabled guest experience into stores. We believe this technology will help us transform our business model, allow us to operate more efficiently and grow our culture of social fun by freeing up our team members to focus on the guest touch points that matter most.
As I wrap up, I want to thank our team, the very heart of D and V. Our strong Q1 performance is a result of every team member embracing change and looking for how they can bring the fun back to our guests. D and D has an exceptionally talented operating team And I'm very grateful for the resilience and passion for our brand. With that, I'm going to turn the call back over to you, Brian.
Thanks, Marjo. I'll take the next few minutes to update you on our new entertainment and guest engagement initiatives Designed to fuel a strong summer season and balance the year, we continue to work diligently to ensure that Dave and Buster's remains the Premier destination where guests can discover the latest entertainment to enjoy together. This summer will feature 7 new games across our entire system, All of which launched exclusively at Dave and Buster's, games like a life-sized version of the classic board game Hungry, Hungry Hippos In the arcade version of Minecraft dungeons, which has already established themselves as 2 of our best performing titles in their categories. With the postponement of the new Top Gun movie to November, we made the decision to push back the release of this proprietary VR game to capitalize on the brand awareness that will accompany the film's launch later this year. However, this has given us an opportunity to draw more awareness to our enhanced version of Terminator: Guardian of Fate Special Edition, which we Released earlier this year and that has already become one of our most popular VR titles.
Finally, we are broadening our entertainment offering Through the production of high energy interactive events, we recently brought on a new leader for our dedicated entertainment programming function and began executing our plan, starting with a very successful live music test in our Tampa store, Produced in partnership with the well known dueling piano brand How at the Moon. In the coming weeks, we will begin testing national themed trivia nights In conjunction with market leaders, geeks who drink and will continue developing a wide range of recurring events. By expanding our entertainment lens, we look to broaden our appeal and increase visit frequency. For the upcoming football season, we have a number of initiatives planned to establish Dave and Buster's as the ultimate tailgate destination. These include proprietary video content, live entertainment in select markets, contests designed to draw our guests into the game, And of course, compelling food and beverage promotions.
We also continue to make progress in our discussions with 2 is an important quarter as we look to drive deeper guest engagement. And we see 3 forces converging this quarter To accelerate our sales recovery, 1st, we're seeing pent up demand in the marketplace from people, speaking, social entertainment After the lockdowns of the past 14 months, coupled with higher levels of household savings and punctuated by the reopening of our stores. The second course is our new brand positioning, which highlights how Dave and Buster's turns ordinary situations And to extraordinary social moments. This transformation is signaled by the iconic arcade sound Ding, ding, ding and is prominently featured this summer in the first campaign of our new seasonal window strategy. This will be followed by a holiday campaign that we will begin will mark the next significant investment in marketing to reach guests and drive conversion during our Q4.
The summer campaign leverages a new media mix, Which shifts the brand to a significantly higher digital social mix, while increasing our video reach To audiences through connected TV within our key trade zones. The new modern approach to media will be accompanied by unique activations ranging from bank We know that new product news is a powerful motivator for visitation and it will be an important message to drive conversion this Summer, communication of this key message, both outside and inside our stores, will highlight new games, New food and new beverages. As we look to drive deeper guest engagement, we're also developing a new loyalty program to encourage guests To level up by eating, drinking and playing games, launching in late Q3, the program will have a robust marketing Personalization capabilities will also bring additional relevance to our mobile app as guests must use the app To complete challenges and earn rewards, our research suggests that this program is significantly more attractive to guests than our current offering and will drive higher engagement. It is truly an exciting time at Dave and Buster's as the strategy, the planning And the preparation that occurred during the pandemic are now coming together to accelerate our recovery.
I'll close today by emphasizing how much I appreciate the team's commitment, how encouraged I am by the proven resilience of our brand And how confident I am in our plan to drive Dave and Buster's to new heights. Our brand is back. We have a solid financial foundation And we are ready to move full speed ahead into summer. Now we'd like to take the call to your questions. Operator?
Thank And we will go to our first question from Chris O'Cull of Stifel.
Hey, good afternoon, guys. Thanks for taking the question. I'm doing well. Scott, the company's 2nd quarter total revenue guidance is similar to 2019 actuals Based on our math, the implied AUV for the 2nd quarter is about 10% lower than the Q2 of 2019. First, is that correct?
And then I had a follow-up.
That Yes, it sounds about right. Okay. I don't have to make the summary, but that sounds pretty close.
Okay. And then the company has stated the EBITDA margin would be 200 basis points higher than 2019 at Similar AUV levels to 2019, but if you exclude the $5,000,000 labor investment that you guys are making in the 2nd quarter, It would seem the company is able to achieve the 2019 EBITDA margin at a much lower AUV level. Am I thinking about that correctly?
Yes. Let me give you a couple of things to think about because as we think about the 200 basis points and savings, First off, you are correct. As we approach the 2019 AUVs, that's the point where we thought we could achieve that level of savings. With kind of how dynamic things are right now, just kind of give you a couple of items to think about as we get into the Q2.
First off, food costs are a little
bit higher on the commodity front, which is I think common, very common out there. So I expect we'll see a little bit more in higher commodity costs in the second quarter and kind of the back half of the year as well. And you mentioned this one on the labor cost front. We are having some incentives out there to kind of bolster Our staffing position and so we'll spend some money there about $5,000,000 to try to attract more talent For staffing, from a marketing standpoint, we're kind of taking a little bit of a different position and we kind of touched on it a little bit Where the Q2 and the Q4 are going to be heavier, right? And so we're taking this windows based approach where Especially in the Q2, we're going to really have heavy media during the summer timeframe, Excellent.
Siding with our new menu and new games, we want to have a pretty strong push with marketing And really get the reach that we need to make an impact. And so that's a little bit of a shift from how we've done it in the past That is with more of a little bit more of an even spread. So that will give us a little bit of a headwind in Q2. And then in Q4, you'll see the same thing. We'll lighten up a little bit in Q3 and then we'll be heavier in Q4 from a marketing standpoint.
And then from a sales mix standpoint, you can kind of see the numbers that we were over 8 points higher in mix In amusements than we were in the prior year, and so obviously that carries with us some nice upside in our overall margins. We expect that that will moderate somewhat. Time will tell exactly how much kind of what that new normal is. But We saw some pretty heavy increases in our per cap, just people buying higher value power carts and really contributed to the sales and the mix Jeff Barron, Amusement. So we did assume some moderation in amusements in the second quarter as well.
So those are some nuggets there That kind of helps you take a look at the modeling for EBITDA. But I think the important takeaway here Number 1, we feel very comfortable with the savings areas that we have lined out. And as a reminder, about 3 quarters of that is hourly labor, management labor and G and A costs. And So from a structural standpoint, we still feel comfortable with that. But the only caveat is you may see some Fluctuations quarter to quarter until we get there.
Just to wrap up on this, you talked about roughly 150 basis points or more of incremental cost the Q2, with margin flat relative to 2019 and volumes 10% lower than 2019. Am I thinking about that right?
Yes, that's correct. Okay. Great. I think another Yes. One of the other things to think about as well is just from an occupancy expense standpoint, That's going to be a big drag for us because that is no more fixed in nature.
And so really throughout this year with the lower volumes, we'll see a pretty hefty drag from occupancy.
Great. I'll pass it on. Thank you, guys.
Thank you.
And we'll go next to Jake Bartlett of Truist Securities.
Great. Thanks for taking the question. My first one was on the quarter to date sales. I think you mentioned that you were running roughly in line with the Q2 of 2019, but The guide or actually no above, but the Q2 guidance was more in line. So I'm just wondering what the drivers to that maybe more modest Your increases for the rest of the quarter are?
Well, Jake, I appreciate the question. Our guide for the quarter is actually the top end is above our 2019 level by a bit. So we are currently 5 weeks in, just surpassing 2019 in the top end of our guide, basically Saying the same thing here. So I don't know that it's any materially different than what we've seen so far in this quarter Got the top end of the guide here. And I think, as Gus said, we definitely have first of all, we're extremely optimistic about where Businesses right now, we're seeing a lot of strength really broadly across our store base here.
So we're extremely optimistic about the quarter. There are some elements and drivers here that We're watching around some of the per capita that Scott mentioned on our amusement business that we've not seen in our history before here. I've been here 14 years The buy ins on our counterparts are really high and elevated. A lot of that is driven by things we've done, purposeful things around Pulling discounting, we're virtually not discounting right now. So effective price increase, if you will.
And that's that is helping the forecast quite a bit on amusements. But there is elevated demand here right now and A lot of folks are talking about pent up demand and as COVID restrictions come off, people get now being locked up, there's a lot of stimulus money. I think we're a benefactor of that a bit. And so we'll see how that all settles out. But we're super excited about The recovery and the patterns we're seeing in the recovery in California and certainly New York.
So, I think we are positioned to have a really good summer. We are going to get back out with a voice for in some ways the first time Since COVID, we had a little bit of media back and I think it was the Q3 of last year that we couldn't cancel, but we've been relatively quiet And we were saving our powder, if you will, to get out big and strong this summer and I think the timing is perfect. COVID is fears are waning a bit. Obviously, the vaccines, we've got some great product that we're going to be able to put in front of our guests and the team is really energized. So we're really excited about what summer is going to bring.
There's a lot different this year than a year ago, let's put it that way.
Yes. Well, I appreciate that. That sounds great. The other question I had was on last quarter you provided quartiles of performance. I'm just wondering how much that is tightened.
If you could maybe provide that again in terms of It sounds like I'd imagine that a good portion of your stores are doing better than 2019. Maybe if do you have any of that Data that you can share just in terms of the range of how stores are doing right now?
Sure, sure. Yes. That said, Jake, we're seeing broad recovery, strong broad recovery right now. So we're really encouraged by that. That said, as you might expect, we have certainly some regional variability as a company and there's a couple, I think key factors in our minds that are driving that, I think you've seen some of the sort of we called it the maturity curve Graphs that we put out early on in COVID, our stores that are in markets that have been open longer and really further along in that maturity curve, I'm really talking about some of the southern markets are performing better.
We've got I would say the other factor here is There are certain markets where COVID fears and discomfort is different. And We think that's impacting some of the regions. And then clearly, we have a number of locations that are still subject to some form of operating restrictions. And we've got about 40% of our store base where we still operate with either a capacity restriction or something else. So, Those are kind of the 3 big things that sort of separate the quartiles and the regions for us.
The good news And our view is that we think all these factors are going to self correct over time. Stores are ramping up. Here, I'm going to speak specifically about California. They got it out of the gate very strong, much stronger than Other stores and regions, but they're still pretty green in their maturity curve. I think COVID fears are declining with the expanding vaccinations And we expect to see operating restrictions get lifted.
So we're pretty optimistic here, but there are separations being created. Specifically on your quartile question here, that separation has created differences. Our top quartile In the last 5 weeks, it's just shy of 120%. So, they're above 2019 by about 20%. The lowest quartile we have is about 75%.
So we definitely have separation. We view that as an opportunity to get the Bottom quartile moving higher over time. And I'd point to California as being sort of a big part of that, because as I said Earlier in their maturity and there's still quite a bit of restrictions in that market. So in our second and third quartiles, I'm going to say just right at 2019 levels, average between the 2 of them. So we feel really good about the store base.
We see the boats are rising. And as I said, we're really optimistic as we head into summer.
Great, great. That's helpful. And then my last question is just on the staffing challenges. And I believe you're giving bonuses for summer hires and things like that. But if you can and you guys are Because you're having to ramp up so quickly, I think you have a great insight as to how difficult it is.
So can you provide any insight as to whether there's been any change in the last Weeks or months in terms of that getting better. And then how do you feel your Q2 is going to be in terms of staffing?
Do you think there's going to
be You're right. I know there's this extra cost from the bonuses and other efforts, but maybe stripping that out, do you think you're going to be running fairly lean because of the staffing Yes, Shnees?
Well, so I'll jump in and then Brian or Scott can join on. Just The first part of your question, which is it getting better. We are seeing in markets where they are pulling back on some of the stimulus. We're seeing the applicant flow increase in some markets actually pretty significantly. So in terms of staffing Getting a little bit easier.
We are seeing that in specific markets. And not only is the applicant flow increasing, But you're actually having people accept the offers and show up at work. Sometimes we were having applicants flow and then that wouldn't translate into an interview or it would interview. It almost looks like activity, but they didn't result in a higher and that we're seeing change. So we're encouraged by that as we go into Q2.
We're also seeing some of the recruiting and retention programs that we had mentioned start to take hold, specifically in our referral programs. And so we're encouraged by that as it relates to staffing in Q2. So I don't think that you're going to see Q2 be as difficult from a staffing standpoint as what we've operated in the past quarter. Additionally, the new Technology that we're rolling out and the new service model has been really powerful for us. It's allowing us to operate more efficiently.
We're able to have servers cover off on a bigger station. The teams like it. The technology is Pretty easy for the guests to acclimate to. So we're really encouraged about the combination of all of those things coming together to help make just the staffing situation better for us in the upcoming months. Anything you want to add?
Sounds great. Yes.
Great. I appreciate. Thank you very much.
Sure.
And we'll go to our next question from Jeff Farmer of Gordon Haskett.
Thank you. I actually just wanted
to follow-up on some of those lean staffing comments that you guys just made. So In terms of thinking about the big picture of the initiatives you guys have put in place over the last several months, Where do you stand? Did the Q1 sort of see the full benefit of those initiatives? Or theoretically, are there more to come in terms of cost controls as you get in deeper into the Q2?
Well, I mean, The sort of efficiency initiatives that we've put in place, we're really rolling out over the course of the Q1. We're not, as Marta said in our prepared remarks, We're a little over halfway through the system in terms of rolling out our mobile web and POS handhelds That really helps facilitate the new server and service model. So and we'll be done tail end of July. So we still have room to go on that. So we'll see some dividends over that as we get through the rest of the Store base over the course of this summer.
Okay. And then separate question, you mentioned it in an answer to an earlier question, but With all the 2 of the stores open today, I just wanted to better understand what Effective capacity, whatever term you want
to use
is, what that effective capacity number looks like currently, meaning in terms of your ability to use All of the bar areas, the amusement floor, whatever it might be, where that stands today versus where you think it might be moving deeper into the summer?
That's a little bit of a hard call. As I said, we've got roughly 40% of our stores that have some form of Still have a form of capacity limitation, could be particularly California not being able to use the bar or table limitations on Games, which I think is less of an impact for us. But I think we feel like that over the course of the coming months, we're going to see these things get listed. And I know we read a lot of stuff in terms of casual dining and pointing to this as the primary factor Kind of limiting business, as I said before, this is not as big of an issue for us just because of our sheer size and scale, The number of square feet we have. Certainly, as these stores recover and get to bigger numbers, it can put pressure at peak hours and stuff.
But When you look at our top quartile producing 120%, we've had stores that have been well over 100 With restrictions, capacity restrictions. So it's impactful, but It's not the same kind of magnitude that you would see in cash flow guidance.
And I apologize, just one more quick one. So a lot of conversation about Staffing levels and where you guys are and what the labor market looks like, but any early thoughts on potential wage rate inflation, not Only for your business, but just sort of looking more broadly out across the sector and your thoughts on wage rate inflation as we get into the back half of 'twenty one moving into
Sure. I can start on that one. So far, The kind of incremental wage inflation that we've seen, most of that is actually due to additional overtime. With lower staffing levels, we are augmenting more with overtime than we had in the past. And just from Store opening standpoint, of course, when you add California to the mix, that's going to kind of raise our average by itself Just internally.
But as we kind of get into the second half, I mean, we expect the wage pressure to moderate somewhat As some of these labor charges ease, which we think we will see that. And I say that just for a couple of reasons really. As unemployment benefits start to go away in early September and even earlier in some states that have already pulled back, We think that COVID fear should start to subside with more folks willing to return to work. And As schools reopen as well, we think there's a few factors out there that over the course of the next few months should Help the labor shortage situation. In the meantime, we'll continue to augment with some over time, But also with the technology that we've kind of talked about with the tablets and service model, that's definitely helping us As well as fewer operating hours for the time being.
Appreciate it. Thank you. Thanks, Chad.
And we'll go next to Andrew Strelzik of BMO Capital Markets.
Jim, my first one, I think over the last couple of quarters, you've talked about the demographics driving the sales recovery really being more Millennial heavy, and I'm curious if you're seeing that start to broaden out to include more families or is this sales recovery still really being driven by one of those two buckets of the customer
Hi, Andrea. It's Margo. So I'll add a little color and then Scott and Brian can join in. So We're seeing both families and adults return to Dave's Investors. And while it's been great to welcome our guests back to the fun, We are also looking to learn more about the guest through a new tool that we've launched in May, Medallia.
And it's basically It's a comprehensive guest experience platform and it's going to offer deeper insights. It kind of captures everything for you in one spot. It's in store experience, it's guest relations feedback, it's all mobile and all social. So think about all the review sites, your Yelp, your TripAdvisor, all of that. And it's going to help us better understand what the guests want and it's going to put us in a position from an operation standpoint to have actual feedback about improving the execution.
So we're excited to not only welcome the guests back, but also to Wow Dome. And but yes, we're seeing more of a Pre COVID reflection in the guest space where to your point earlier it was planted more adult. It's a
little bit more balanced now. Yes. Andrew, this is Juan. I just had one thing. So I think I mentioned this on one of the prior calls.
We really just launched this program here in May. And during the course of COVID, we actually pulled back on a lot of the investments we had made and kind of Our guest satisfaction in those tools just due to cost management. So We ended up kind of reengineering the whole platform here that we feel a lot better about. It's kind of Mariso's Comprehensive. The dashboard that we get today compared to before is significantly different.
So, A lot of what we are talking about in terms of returning Genasys is a little more anecdotal today than it was when we had a System and platform that was in place and was in place for a long time. So not to be evasive on the specifics, but that's the reality here.
Good color coming in the future. Hey, Tim.
It sounds like an exciting opportunity. My Second question is just you were talking about how you pull back on the promotions.
And I'm just curious how you're thinking about kind
of more broadly promotional levels and layering that back in over Matt. How much do you think of this as sticky versus how you're thinking about alluring that back in? I mean, that's a really great question and we're talking about it frequently now. I mean, we Right now, I don't feel a strong need to go back into the discount territory here. We're seeing strong demand without it and it's having a significant impact On sort of our per capita, as Scott mentioned in his prepared remarks.
So it's not something going back to an always on discounting Strategy, it's not something that we plan to do near term, because we're going to opt much more towards Pulsing things versus just a constant discount trend.
Okay. If I could just squeeze one more quick one in here. It sounds like F and B on kind of the service model changes that you're implementing, You mentioned testing in 2 stores, this fully automated kind of F and B situation. Can you just give a little more detail about what that looks like?
Yes. So we have 2 stores where we have basically Offer to the guests the ability for them to order via their phone, food and beverage, so that they can control the complete Experience themselves. That being said, if a guest is uncomfortable and is looking for the server experience, we can adapt. But what's been interesting is in both of these situations, we've had high guest adoption and it's been Really pretty well received. So we're encouraged by that.
Additionally, as we're rolling out the Mobile web platform in the different regions. The other thing that we've seen is that we've gotten better at the rollout And better at best practices. So every week when we're bringing on a new region, they come on with stronger guest adoption in the beginning. So it's been an encouraging situation in our overall brand rollout additionally in the 2 stores That are basically a contactless mobile enabled experience for the guests throughout the building.
Yes. I mean, just to add something here. This is a pretty transformative change in terms of how we're thinking about Using technology to really transform the service model. So here And the 2 stores, one is in Dallas and one is actually in Times Square. We're talking about Really moving the transaction piece of the experience over to the technology and the roles are being rewritten.
So In this environment, there's technically not really a server role. So we've defined roles, scripted roles to drive engagement And enhance the guest experience of move transactions over, reimagine the roles of our team members. So it's been a lot of work and it's evolving and our technology team along with our operations team have really done Great work here. And we'll see where it goes. I'm excited about it.
I think it could be very transformative for our brand. Great. I really appreciate the color. Thanks a lot. Sure.
And we'll turn next from Nicole Miller of Piper Sandler.
Thank you. Good afternoon. Just two questions. The first, Around, I think you said half of the CapEx would be for new store development. I wanted to understand, how the bench Strength is how do you kind of get the pipeline restarted and just in making sure that that's sitting on G and A as We pencil out both the top line and EBITDA here.
Thanks.
Well, I guess, There's no doubt that with the events of COVID, we put ourselves back a notch or 2 in terms of Our ability to build out stores and that's at this point less about capital because our cash flow is now returning. We're seeing a lot of strength in the business and our financial foundation is getting stronger by the day. So I think we have flexibility to begin to reaccelerate development. Our development team Really is in place. They were heavily focused on lease negotiation.
It was a complete pivot During COVID, in terms of what the role was, but we have an incredible development team and they still are in place and We are pivoting their focus obviously now. Where we have the pain points and more difficulty is the bench strength in the field just Because we are operating at lower par levels post COVID, and we've had some people move on to Other industries and move on to other companies. So that's something that's going to take some time to rebuild. And that's the work that we have now is to think about the rebuilding of the leadership team that's really going to fuel The stores, every day that goes by and as our recovery gets better, our numbers get better, we're adding back more pars, but That's going to take a little time. So I don't foresee we're not going to be in a position where we're going to move back to 15 stores and kind of the numbers That we were running pre COVID in the near term.
That all makes sense. There's nothing that would Changed dramatically. I mean, the team was basically in place. I think the pivot point comment is super important. They're just going to, Again, shift direction.
So, thank you for that. The second question, I know it's a little bit more Because everybody is coming back in real time and you're doing some research around the guests. But how are they spending their Time, we understand like the percentage mix as you've reported, but are you kind of able to track the behavior, Meaning, how long are they sitting to eat and how long are they playing or watching sports? What days of the week are they coming? What times of the day?
Kind of just on an absolute basis, but also very curious to how to understand how that on average might compare to those stores running above, right? I you said 125% was the top 120% was the top quartile. How does the behavior look the same or different in those stores? Thank you.
That's a lot of questions in there. Obviously, we have a pretty Big separation and kind of amusement performance relative to F and D in the Q1, and we're still seeing that You know here early into the Q2. If you just kind of drill into sort of traffic, Which is sort of indicative of how people are spending their time. The traffic metrics for us right now In our food and beverage business versus amusements are pretty similar. They're down about the same number.
And as Scott mentioned, We've seen pretty massive increase in per capita spend on the amusement side, entertainment side. So in terms of how they're spending their time, they're consuming and attaching to our offering in similar ways. The higher per cap spend and amusement would indicate they're spending more time to put more chips On their power price, but we don't I don't know, I can't give you understand going from an hour and a half to 2, we don't really have that stat, but I would point to that a bit. That said, in our release, you may notice that we had a pretty large deferred revenue Adjustment in the quarter. And I think some of that is, we've got some of these Yes, they're buying the cards and they're deferring some of those shifts because we had a pretty big pressure on that metric, biggest number Since I've been here in terms of reduction to sales and sort of a direct hit to our quarterly performance.
So In terms of consuming food, consuming beverage, it's sort of that mix is about the same. I think you're spending probably a little more time in the arcade.
And just to confirm on
a lower store,
let's say, sales and someone above 100% in 2019, It sounds like the behavior of the consumer isn't shifting at all. It's just whether how they can use the store in their geography in terms of mobilization. But I want to make sure I don't miss the finer point of any consumer behavior Shifts that you see?
No, I think the separation when you look at the top quartile stores, it was much more driven about traffic, No, return of people in the box, less about certain geographies or It's consuming a lot more food relative to or less or more food relative to amusements, it's less about that. It's more about People coming back into our box. And that's where our opportunity is. California is on the train. We got those stores open.
They still trail the rest of the system right now. I think that's going to change. California likes our brand. They'll be back.
Thank you very much. I appreciate it.
Thank you, Nicole. And we'll go to our next question from Andy Barish of Jefferies.
Hey, guys. A lot of the stuff's already been asked. Wondering if You've done any recent work or even anecdotally can sort of comment on the competitive set out there and closures that you're seeing in some of
the folks that you track?
That's evolving. Good question, Andy. Clearly, when COVID hit, We saw temporary closures in virtually every competitor. As we sit here today, I would say virtually every competitor is Largely reopened at this point, and that's kind of where it sits right now. There's a few that have some units that are closed permanently, But the competitive sets largely open at this point.
I think during COVID, we all wrestled with The challenges of that, we saw pronounced deceleration in openings obviously in 2020 Relative to what was pretty strong growth in 2019 and those earlier years. And Just as we look at it and kind of look at the competitive stuff, we do expect competitors to accelerate into 2021 versus 2020, which is probably obvious, right, because 2020 was somewhat shut down. And it appears to us That the collective set is going to grow faster than 2020, but not collectively as high as what they were doing back in 2019 earlier. So That's kind of temporary role that we talked about. Did happen, it's still probably there in 2021, but I think We're not as I said before, we're in an attractive space.
We understand that there will be investment is likely to reaccelerate. I think we're going to see competitors begin to gear back up In 2022 and beyond, as will we. As I've said before, I think for us, I would say, in my view, we have the best team. We have a very strong business model. We have a balance That is much stronger.
We have flexibility to invest and we have a great plan. So I'm confident that we're going to Emerge as an even stronger competitor as we all hear back up.
Thanks very much. Helpful.
And we'll go to our next question from Sharon Zackfia of William Blair.
Hi, good afternoon. I guess I just wanted to clarify something. Brian, I think you talked about pent up demand. Are you seeing any kind of ebbing of sales volumes for the stores or the locations that have been In areas that have had less restrictions now for quite a while?
We're seeing stronger performance where people have less restrictions for a while, if I would
No, no. So I think there's a hypothesis on pent up demand, Meaning that when you first reopen the doors, all these folks come in and then there's a big honeymoon and it tapers off. So I was just wondering, obviously, you have stores All over the country, some of those areas have been open quite a bit longer. Are you seeing any kind of slowdown in sales trends Has the market has been open longer or is it maintaining?
No, I look,
not we haven't published it because we had so many fits and Stops and starts with COVID, we had a pretty good start out there on our maturity here, kind of how stores had gradual and continued improvement over time. Hi. I think our most recent states are New York and California. They're doing better today than they were doing in the 1st week of reopening. So I think we're seeing sort of that same maturity curve kind of reality in our performance and a gradual recovery.
That said, these stores have we have stores in space that have been open a long time that are over indexing Significantly, Florida in particular. So I would say that they have dialed back. We've got a lot of strength In that top quartile in particular, and as I said before, the 2nd quartile is surpassing 2019 and The 3rd quartile is just shy of 100%. So we feel really good about it, kind of where we sit.
Okay. And then on the revenue guidance for the Q2, and I'm sorry if I missed this, but I know you talked about normal seasonality. It was kind of The thought process as you look to giving that 2nd quarter guidance. But as you all mentioned, you've been really quiet on the marketing front and that's changing. So I'm just wondering, did you include in any kind of sales lift from the marketing that's starting now?
Yes, we definitely did. There are many inputs and that was one of them that we did assume lift from.
And we will go next to Brian Vaccaro of Raymond James.
Hey, thanks and good evening. Just want to quickly circle back on the quarter to date sales you mentioned. And Scott, I think the down 4% puts somewhere in the low to mid-1.90s range on average weekly sales across the system. I just wanted
to hopefully level set that
and make sure that's right. And then any additional quantification on the pace of recovery you could provide on California or New York since both have reopened in recent months?
You want to take the first?
Yes, sure. Yes, you're correct on the first one and then Brian can give you some color on New York and California.
Yes. Brian, we talked a little bit about New York last time around, I think it's I think we just opened up, if I remember right. But both of those markets got out of the gate Stronger than really any state in terms of kind of those initial weeks. In our view, that actually makes a lot of sense, right? They've been closed for so long in a lot of the kind of earlier states.
There are still a lot of COVID here. So, they got out of the gate stronger in terms of that index that we've been quoting. New York a bit better than California. At this point, I think we had it in our I think we said this, but our New York stores Essentially back to kind of our overall system average at this point. So that's good news, right?
They're sort of If you look at our minus 4, they're kind of right in the hunt. California is trailing, it's lagging. That's been It started off out of the gate a little slower and it's recovering. It's better than the 1st weeks of reopening. That is a state that's still subject to restrictions.
York has opened up. We're not restricted there. California still has a lot of restrictions. And I would argue, I think, when I talk about what are the factors, The COVID fear, I think there is a fair amount that would be one of the states that I would probably point to. I think there is still some consumer and Here in California around COVID, it's been locked down a long time.
They've been pretty aggressive as a state. But look, I think that's the opportunity. I think we're going to think people are people, they want to get back to They are live and socializing and I think California will be back. It's just recovered a bit slower and but we are going to get there.
It makes sense. And I guess thinking about historical seasonality during the summer, how important is the end of the school season It differs around the country, but how important of a driver is that for your business moving into July August relative to the month of May and suppose June as well, though it's a little bit more mixed on that front.
Would you expect that to
be an incremental driver of sales, I guess, moving from here as the school year ends around the country? Well,
you want to take that?
Yes, sure. So when you're talking about, so in May, we do typically under index the average About 89% of our average weekly sales. And then as we get into the August timeframe, We're about EBIT. We're about at our overall average weekly sales. July is June July are heavier for us.
June, we see a ramp up and then July is one of our highest months. It's Kind of the top 3 as we look at it, just normal cadence at least of average weekly sales and seasonality.
All right. That's very helpful.
On the labor front, if I can just squeeze one more in. On the labor front, can you help us level set where current Staffing levels are compared to pre COVID-nineteen levels or maybe how many employees you see yourself as needing to hire to be able to catch up to the strong Demand you've seen?
It's going to it really will vary pretty dramatically by market.
Yes, I don't know if I have that stat here, Brian, right now. I think pre COVID, we had a team, correct me if I'm wrong here, around 14,000 Hourly, I want to say we're in the 10,000 something range right now.
Yes. We've actually done a little better over the last couple of weeks. We're just short of 12,000? Yes, you said short of 12,000 people. So we are catching up.
We still have a little bit more to go. Yes, we're not operating at the full volume yet. And so, yes, we're getting better, but there's still some ways to go there.
Yes. Okay. That's great. And commodity inflation, a topic on everybody's radar as it seems these days. I know it's not a big driver of your cost structure Normally, and E and obviously today as
well, but what level of
inflation do you expect moving through the rest of 'twenty one? And I'll leave it there. Thank you.
Yes. First off, you are correct. It's not as big of an issue for us, thankfully. But as we kind of look at Some of the key proteins and down the list, chicken, beef and dairy, obviously the biggest inflation, chicken at the top, Not surprised. We feel like as we get towards the end of the year and from The balance of the year actually was estimated about a 6% to 8% increase in food costs is what we're seeing right now at least.
And we do have a follow-up question from Brian O'Cull with Stifel.
Hi, guys. I just wanted to make sure to
clarify a question or a response to
a question earlier. Scott, did you say that the advertising that's planned is the list of the potential sales from that is reflected in the guidance?
It is.
Yes. So I'm curious with the quarter to date comp down roughly 4% in the midpoint Of the guidance below that quarter to date trend, what am I missing? Why are you expecting some sort of underlying softening?
That's a good question. And as we kind of look where we are, we've talked about the really big increase We're seeing in per cap, especially on the amusement side. We see that moderating. It may be a question of when that moderates, but we have built some of that in there. And with Also, the pent up demand that we're seeing, we're assuming that there'll be some moderation of that as well.
But there's no perfect science to understand when exactly that will happen, but that's that is built into our assumptions as we look at the Q2.
Very helpful. Thank you.
And do we have time to take additional questions?
No, I think we've overshot this by a little bit. I appreciate everybody's attention and sorry for running over here about 10 minutes, but I think we We probably ought to call it.
I'll turn the call back to the presenters for any final comments.
Well, look folks, we really appreciate you guys joining the call today. Wish you and your families A great and active summer. Get out there, get to one of our stores very soon because we're open for delivery, but Canada come out and see us and have a great night. Thank you very much.
And so this concludes today's call. Thank you for your participation. You may now disconnect.