Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment, Inc. Second 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 Bowman for opening remarks.

Thank you, Christie and thank you all for joining us today. In addition to Brian and Margo, we also have Brandon Coleman, our Chief Marketing Officer, joining us today. After our prepared comments, we'll be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment, Inc. and is copyrighted. Before we begin our discussion on the company's results, I'd like to call your attention to the fact that in our remarks and 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. In addition, our remarks today will include references to 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 Brian.

Thanks, Scott and thank you, everyone, for joining us this afternoon. Over the past 18 months, our team has successfully navigated COVID challenges while at the same time accelerated our strategic initiatives. We have had a single goal to emerge as a stronger, more competitive company. I am pleased to report today that we have accomplished that goal. Our brand is back and we are stronger than ever. The second quarter results we announced earlier today are compelling proof that this team's extraordinary efforts have succeeded. We achieved record-setting financial performance, reaching new high watermarks on virtually all financial metrics. Second quarter revenue of $378 million was an all-time quarterly high for us, surpassing 2019 by $33 million. Our success was fueled by the return to positive comparable sales of 3.6% over Q2 2019 levels. Even more impressive was our strong EBITDA performance. We blew by the $100 million mark for the first time in any quarter in our history, achieving $114 million in EBITDA, up $36 million or 44% from Q2 of 2019. Our operations team did an outstanding job, leveraging new order and pay technologies, adapting our service model and optimizing costs to deliver our first ever EBITDA margin to crest 30%, exceeding the 2019's Q2 comparison by over 700 basis points. During the quarter, we were also able to bring our two stores in Canada back online, marking the complete reopening of our store base, an important milestone for our company. Last year, when liquidity was our imperative, we successfully rebuilt a strong capital structure, bolstered by equity infusion, a new bond offering and amended credit facility. We now have a significant flexibility to run our business and invest in our future. With the record-setting operating cash flow generated in Q2, we reduced our net debt outstanding by nearly $90 million, providing us with over $440 million in available liquidity at the end of the quarter. As further evidence of our confidence in the business, we recently announced that we intend to redeem 10%, or $55 million of our outstanding bonds using available cash. We have come a very long way in just over a year. These strong results were made possible by an unwavering focus over the past one and a half years to accelerate initiatives to make us a stronger company. In our second quarter, we introduced an entirely new menu that broadens our appeal and is easier for our stores to execute. Over the summer, we made a meaningful investment in our entertainment offering, with the introduction of seven new games. We also took steps to widen our entertainment plans by offering programmed events in select markets. While early on, we are confident these efforts will broaden our reach and increase visit frequency and we are accelerating our investment in our entertainment team to bring that to life. We leapfrogged traditional order and pay platforms with a system-wide rollout of our new mobile web-enabled platform. Mobile web adoption has been extremely strong, significantly exceeding our expectations. The majority of our guests now use the technology and our success on this front has been crucial in facilitating a more efficient operation while also allowing us to deliver a great Dave & Buster's experience. To solidify our team in a challenging labor environment, we provided temporary pay incentives to our team members this quarter and succeeded in attracting the talent necessary to deliver an outstanding quarter. Under the leadership of CMO, Brandon Coleman, who you will hear from in a moment, we onboarded new creative and media buying agencies and revamped our brand message and media strategy. These changes culminated with a concentrated media investment this summer to relaunch our brand with a new voice, featuring our new menu and games. This was part of our new marketing strategy to shift spending from the shoulder periods to increase focus on windows that would have the most impact and those changes were meaningful. Comparable sales were up 7% and in the final eight weeks of Q2, a marked improvement from the first five weeks of the quarter that were down 4%. And despite a few headwinds, we are encouraged that our comparable sales for the first five weeks of Q3, including Labor Day, are still up versus 2019, reflecting the strength and the resiliency of our brands. With dramatic improvement in our financial foundation in the first half of this year, we've also begun to rebuild our new store pipeline. With the recent opening of our store in Bellevue, Washington and one store in Brooklyn, New York planned for Q4, we expect to open four stores in 2021. We plan to open between six to eight stores next year, representing a meaningful acceleration compared to 2021. As we have discussed in the past, rightsizing the store format for the market and sales potential is a priority for us. We are extremely pleased with the performance of our most recent new 18,000 small-format store that opened at the beginning of this year. Our Gainesville, Florida store is the first freestanding small-format unit that we have built from the ground up, generating nearly $6 million in revenue during the first half of 2020 alone, absolutely crushing our expectations for revenue, EBITDA and return on investment. We are encouraged about the efficiency and throughput of this new format and the potential to leverage it in new markets. This quarter's performance proves that our brand is resilient and resonates with guests of all ages. We are thrilled with our record-setting performance and excited about continuing that momentum in the back half of the year. At this time, I'm going to ask Scott to cover our second quarter results in a little bit more detail and share some insights on our expectations for the remainder of the year. After that, our COO, Margo Manning; and CMO, Brandon Coleman, will cover in more detail the operating and marketing innovations we've implemented in the summer, as well as what we have planned for the second half.

Thanks, Brian. Our second quarter results reflect a significant acceleration in sales and profitability for Dave & Buster's which generated impressive cash flow for the business. We ended the quarter with all 142 stores open, including one new store that opened during the quarter. With all of our stores open, we are seeing strong demand for our brand, including rapid sales growth in our California stores as they ramped up during the quarter. With record sales and strong execution of our margin-enhancing initiatives, we were able to produce record profitability for the quarter. Total revenues of $378 million were an all-time record and included a 3.6% increase in comparable store sales compared with the second quarter of 2019. Average weekly sales were $208,000 per week for the quarter versus $206,000 for the second quarter of 2019. In terms of category sales, Amusements were up 17% compared to 2019, while the food and beverage business was down 17% compared with 2019. For Amusements, the increase was driven mostly by an increase in per capita spending. For food and beverage, the decline was mainly due to a decrease in units sold, partially offset by a slight increase in per capita spending. Sequentially, units versus 2019 improved significantly for both food and beverage and Amusements compared with the first quarter. Comparable store sales showed acceleration during the quarter compared to 2019, with comps of negative 4% through the first five weeks of the quarter and plus 7% for the last eight weeks of the quarter. This sequential improvement was driven by improved traffic trends which were partially driven by more effective marketing and the ramping up of our California stores. Regarding sales mix, Amusements and other accounted for 67% of total sales for the quarter compared to 60% in the second quarter of 2019, driven by fewer discounts and a shift to higher denomination Power Cards. EBITDA for the quarter was an all-time record of $114 million or 30.2% of sales and represented a 729 basis point improvement compared with the same period in 2019. The improved performance was driven by a higher Amusement mix, leverage on labor costs due to lower staffing levels and our lean operating model, a $3 million reduction in preopening costs and operating expense leverage from higher sales. Adjusted EBITDA for the quarter was $119 million or 31.6% of sales, representing a 660 basis point improvement compared with the same period in 2019. Net income increased 63% from 2019 to $53 million in the quarter, resulting in a 19% increase in EPS to $1.07 per diluted share. These improved operating results produced $121 million in operating cash flow during the quarter and we ended the quarter with $108 million in cash and zero outstanding on our revolving credit facility. Total long-term debt stood at $550 million at the end of the quarter, consisting of our senior secured notes maturing in 2025. As part of our capital allocation strategy and to capitalize on our current cash position, we recently made the decision to redeem $55 million of our senior secured notes using a redemption option in our indenture agreement. As background, we may redeem up to 10% of the notes at a redemption price of 103% of the principal amount during the first 12 months after issue. We may redeem another 10% of the notes during the second 12 months after issuance which begins at the end of October. By executing the 10% redemption, we will pay a $1.7 million premium over the principal amount to redeem the notes but we'll save $4.2 million in annualized interest. Additionally, at the end of the quarter, we had approximately $41 million of negotiated rent deferrals on the balance sheet. We expect to pay back approximately $14 million of deferred rent throughout the remainder of fiscal 2021, $22 million in fiscal 2022 and the remainder thereafter. Regarding tax refunds; due to current IRS backlogs, we now expect a delay in receiving approximately $60 million in refunds from CARES Act legislation and the carryback of 2020 losses. We now expect to receive these refunds in mid- to late 2022. Turning to capital spending; we opened one new store in the second quarter and invested a total of $39 million in capital additions net of tenant allowances. Subsequent to the end of the quarter, we opened one additional store at the end of August. In the fourth quarter, we plan to open one additional new store and relocate an existing store to finish the year with four new openings and one relocation which will bring us to 144 stores by the end of the fiscal year. Overall, we are very pleased with the second quarter results and the sound financial footing we have established going into the back half of the year. Turning to our outlook; I would like to offer some insights for the third quarter of fiscal 2021. As a housekeeping note, I would like to provide some details on reporting and guidance going forward. Regarding our profitability metrics; we will place more emphasis on adjusted EBITDA versus EBITDA going forward. This is to be responsive to investors who prefer this metric, as it better represents the true normalized earnings power of the business. Regarding guidance; as the business continues to normalize, we will be reverting back to annual guidance starting in 2022, with updates provided quarterly. Regarding recent trends, comparable store sales for the first five weeks, including Labor Day, have been over 1% compared to 2019, reflecting broad-based strength despite negative impacts due to changes in school calendars, unfavorable weather and COVID resurgence in our Southeast markets. Based on these current trends, we expect total third quarter comparable store sales to be approximately in line with the quarter-to-date trend compared with the third quarter in 2019. We expect third quarter EBITDA to be significantly higher than third quarter 2019 but with some slight moderation compared with the percentage increase in the second quarter. This reflects margin improvement that exceeds our 200 basis points target which is driven by improvements in gross margin, payroll and benefits and preopening expenses. Keep in mind that the level of these benefits may change over time as we continue to work towards more normalized operations. From a CapEx perspective, we are updating our guidance and plan to invest $95 million to $100 million in 2021 which compares to prior guidance of $55 million to $70 million. Based on our current financial position, we are taking the opportunity to invest an additional $14 million in our stores to accelerate the rollout of new technology, upgrade our WiFi capability and upgrade equipment in select stores. These upgrades will improve the guest experience and will accelerate our technology deployment to further drive strong returns. Additionally, we are taking the opportunity to accelerate development on several of our pipeline stores to help maximize their impact in 2022. In summary, our team has done an outstanding job during the first half, fully reopening all of our stores while implementing a number of impactful initiatives that have enhanced profitability and cash flow. We're well-positioned for the second half and are positioning the company for further growth in 2022, while closely managing the ongoing effects of the pandemic. With that, I'll turn it over to Margo.

Thank you, Scott. I echo the appreciation for our team's tremendous second quarter efforts. We believe the new menu, games and service model initiatives that we've been implementing over the past nine months and the concentrated focus that we have put against streamlining store execution is helping to drive our strong sales and enhance profitability. Let's start by talking about our menu initiative. Its design simplifies operational execution and provides our guests with quality ingredients and enhanced flavor profiles. Since deployment in May, half of our top 10 bestsellers are either new or refreshed options. In addition, we conducted an extensive menu pricing test that gave us confidence to take a price increase effective late August to offset inflation pressure. Based on our guest visitation rate, we'll continue to watch the menu performance to gain a full understanding of its impact on sales and the guest experience over a longer time frame. On the beverage front; we completed our beverage analysis and are now using the research to evolve our beverage offerings. The good news here is that the research data indicates our beverage menu is attractive to our guests and simply needs some targeted refinements to expand its appeal and reach. Our goal is to launch a freshly curated beverage menu in Q4 to improve relevance and attachment in order to drive beverage sales. Next, I want to talk about our entertainment initiatives, which is among some of the most important work we are doing. In Q2, we launched several tests to determine the entertainment appeal of programming. We successfully hosted games and trivia nights with Geeks Who Drinks. These events are easy to execute and are also easy to market to our guests. We intend to rapidly expand these tests to more markets this fall based on its early success. Additionally, we continued to refine our live music tests. These are highly engaging events. They are held during the week and they bring guests into our stores to have fun during what is typically considered off-peak times. This fall, we'll introduce additional entertainment formats, incorporating music, film content and live interactions. And of course, it would not be fall without talking about fall football. This year, we'll be amplifying the D&B football experience. From an entertainment standpoint, we'll lean heavily into our custom video content with new proprietary video elements to help our guests pregame before kickoff, with an added integration to D&B's live radio format. In key markets, we'll introduce live hosts to amplify select football games. These performers will engage guests before, during and after the football game with activities and prize giveaways. Our intention is to use this program model throughout the year and expand it further in 2022, as we continue to look for ways to give the guests more reasons to come visit D&B. Now, let's turn to staffing. The labor market continues to be challenging. In Q2, we made a temporary investment in hiring programs and retention incentives and we gained significant staffing traction that bolstered our staffing levels for what was a very busy summer. Q3 will bring a seasonal drop that combined with our new technology tools will put less pressure on staffing. This will give us time to lift our sites to the holiday season. Our intention is to selectively extend aspects of the staffing programs as we need to ensure that we have the team in place to bring in the critical Q4 holiday season. Our brand-wide rollout of a new service model has been completed and it provides a more integrated in-store guest experience. The new service model combines tablets and a mobile web platform to enable a completely contactless order-pay experience. From full deployment to date, over 50% of our guest chats are utilizing this mobile channel. This technology will help transform our business model and it allows us to operate more efficiently. Due to the strong adoption by our guests, we are continuing our test of a completely self-serve mobile web-enabled guest experience in two of our stores. On our prior earnings call, Brian mentioned that we implemented a new guest feedback tool, Medallia. It's a comprehensive tool that gathers in-store and social feedback to identify trends to improve the offering and the execution. Given the challenging environment, we're really pleased with the summer results and we'll use these guest insights to continuously improve our in-store experience. To wrap up, I want to recognize and thank our entire team for the exceptional performance this quarter. During my store visits, I see team members working hard to deliver a fun experience to the guests and here at our home office, this team has worked to provide the critical support needed to set our stores up for a great summer. We're energized by our record-setting results this quarter and we'd love to carry this momentum forward. And with that, I'll turn the call over to you, Brandon.

Thank you, Margo. Today, I have some exciting news to share as we have completed our first campaign under our new marketing strategy. I'd like to begin today by reviewing the campaign's performance and then look ahead to our future marketing plans and our new loyalty program. The summer campaign which ran from mid-June to early July, employed our new window-based media approach that concentrates marketing dollars into periods where Dave & Buster's is most relevant. This change in strategy provides focus and depth in our marketing communications and prioritizes incremental visitation over general brand awareness. We also dramatically changed our media mix during the summer campaign by shifting the majority of our spend to digital media. This shift has enabled us to be more surgical with our audience target, while maintaining high levels of video impressions as a percentage of total media. For this campaign, we also leveraged first-party and third-party data to improve conversion rates across media channels. This more intelligent approach to audience targeting was punctuated by fresh creative, highlighting an intentional shift in our brand communications from discount-driven value messages to emotional brand connections that drive visitation. The new creative captures the shared winning experience in a simple yet powerful visual and auditory brand expression, Ding Ding Ding. The strengthening in consumer demand, combined with this strategic marketing pivot, enabled us to deliver a substantial improvement in the comparable sales trend during the commercial window. We were also able to codify learnings for the back half of 2021. For Q3 and Q4 this year, we will focus on two media windows; our fall football and winter brand campaign. The fall football media will support selected stores which over-indexed for sports watching audiences. Reaching about half our system, this media spend will be lower than the summer campaign. In addition to the media push, we will also be bolstering the brand's sports credibility in driving buzz among sports fans through a partnership with Pardon My Take, whose audience and satirical approach to sports talk match well with the Dave & Buster's brand. In November, we will launch a new winter campaign that follows the framework of the summer campaign but they return to higher media spend and a more diverse array of activations across channels. The media targeting for this campaign will again leverage our consumer data to improve conversion. This campaign also has a data collection component to drive enrollment in our new loyalty program. That's right; after several iterations in consumer testing, we have developed an engaging new D&B rewards program. The new D&B rewards program will elevate our loyal guests from transactional rebates to aspirational status achievement. The program, which launches in early Q4, incentivizes guests for games played, similar to airline programs that incentivize for miles flown. The new D&B rewards will also introduce a functionality called challenges, where guests can complete unique combinations of activities to earn both digital and physical rewards. Finally, this program will be inextricably linked to the D&B app, adding incremental functionality and further improving the app's relevance for our growing user base. From loyalty to media to insights, our marketing team is always learning and optimizing to meet the changing consumer landscape. We are focused on increasing our known guest database to drive more profitable sales, increased personalization and ultimately connect more deeply with our guests. This constant informed evolution will enable Dave & Buster's to help maneuver competitors and build brand relevance for years to come. Now, I'll hand the call back to Brian for his closing remarks.

Thanks, Brandon. We are extremely gratified to see how enthusiastically guests around the country have returned to Dave & Buster's. We feel more confident than ever about the unique position we've built over the past 40 years and the innovations that we've implemented over the past 18 months to enhance the guest experience in every facet of our business. We're focused on fully implementing the remaining elements of our new beverage menu, service model, programming and marketing initiatives and to fully staff our stores. Our record-setting second quarter performance proves the resilience of our brand and the tenacity of our team. I want to thank them again for their dedication and their passion and for everything they do every day to help our guests turn an ordinary day into an extraordinary entertainment experience. Now, we'd like to open the call to your questions. Operator?

We'll go first to Andy Barish from Jefferies. Your line is open.

Hey guys, amazing results over the summer; congrats.

Thanks, Andy.

I think you're expecting or beginning to hope for a greater shift to Food and Beverage sales with the introduction of the new menu, but that really didn't happen noticeably during the quarter. Is there anything you would like to add on that topic, or is it just an effort that will take a bit more time considering customer habits?

It's a great question, Andy. We were very pleased with the traffic increase we saw in both Amusements and Food during the quarter. By the end of July, our Amusement traffic was back in positive territory, showing an increase of nearly 2% as measured by Power Card center. Our Food traffic, as indicated by food counts, was down about 3% at the end of the quarter. However, this shows significant sequential improvement compared to the first quarter. We are extremely satisfied with returning the business to positive comparable sales for the first time in quite a while. Along with the traffic improvements we've observed, as Scott mentioned in his remarks, we continue to experience a notable increase in per capita spending in the Amusements sector. We are seeing high buy-ins without discounting, so it’s not surprising that Amusements is outperforming.

Got it, understood. And then a quick follow-up as long as we have Brandon on the line. On rewards, as you look out to '22, does this drive frequency more so of existing customers or spend? And then any explicit cost to roll out the program, or discounting commentary when customers are at points where they can redeem rewards and things like that?

Absolutely. A great question, Andy, and thank you. First, I'll address the intention of the program. It's intended to drive both frequency and spend. The points for games played incentivize guests to do what they love to do with Dave & Buster's, which is play games. So that can be achieved through more visitation or increased spend per visit. There are three levels to this program and the member progresses from player to icon to legend and there will be significant rewards in each step of that progression. There will also be micro awards in between based on behaviors and activities. These awards range from digital badges to free appetizers to bonus play chips. But we're seeing about an 8% cost on that as a percentage of total loyalty spend.

Got it. Thank you very much.

Thank you.

And next, we'll go to Jake Bartlett from Truist Securities. Your line is open.

Thank you for your question and congratulations on the impressive return to above 2019 levels so quickly. I’m trying to understand some of the drivers behind the volatility in same-store sales trends. While it’s encouraging to see the deceleration over the past five weeks remain positive, could you identify the key factors contributing to this? For instance, could it be related to your advertising focus during peak periods, possibly leading to a pullback after that window? Additionally, a major concern for investors seems to be the delta impact and how you are assessing whether it is a primary cause of the deceleration. I also have a follow-up question.

Yes, good question. It's great to hear from you, Jake. First of all, as I mentioned in my remarks, I’m very encouraged by the strong recovery we experienced during the second quarter. It’s great to be back in positive comparable sales territory. We talked in previous calls about aiming for this summer as the right time to amplify our media presence with new games, alongside our new menu, and to make significant investments during that period. That approach proved to be impactful, and we witnessed a nice upturn in the latter part of Q2. I’m very satisfied with the results; our team and operators did an excellent job entertaining our guests this summer. As we move into August and the third quarter, I’m pleased that our brand is performing positively as we enter this period. While there is a slight decline from our Q2 results due to various factors, including shifts in school calendars in some markets and challenges from recent hurricane activity, as well as resurgent COVID cases affecting certain regions, I see this as a temporary setback. Last year was a significant downturn, while this year feels more like a small bump. I’m confident we will navigate through this, and I’m very optimistic about the current state of our business.

Great. I would like a follow-up regarding your entertainment content and viewership. We've been waiting for updates on sports betting and any potential arrangements. I saw your press release about Barstool this morning. Can you provide any updates on that? Perhaps some details on why we haven't seen the agreement yet or if it's no longer being pursued? Any information would be appreciated.

I'm going to let Margo discuss the broader entertainment aspects. We are actively pursuing programming and I will get to sports betting shortly. We are very pleased with the lineup of new games we launched this summer. It was a significant investment with seven titles, the largest introduction we've had in two years. We're excited to bring new content to our guests. We have additional exciting titles planned for the remainder of the year, including a Transformers VR title set for launch in our fourth quarter, which is one of the highest-grossing franchises of all time. We mentioned last quarter that the Top Gun VR title we have in development is being delayed again due to the film being pushed to next summer. However, we are prepared with that title. Now, regarding your question about sports betting, we are continuing to explore a sports betting partnership, which we believe will significantly enhance our appeal as a sports-watching destination. We are in active discussions and will share more once we finalize that agreement. I don’t have any further updates on that at this moment.

Yes. I'll provide some additional insight on our programming. We recently brought on a new programming leader and are really excited about the positive impact he's made in a short time. We've hosted various types of trivia nights and have seen significant interest, prompting us to not only increase the number of stores participating but also test weekly trivia events due to high demand. You'll hear more as we refine this format and expand testing across our brand to determine the ideal frequency and content. We're also revamping our live entertainment format, which is encouraging. As for fall football, we're looking to blend video elements and live hosts, emphasizing the importance of finding the right scale and style for our approach. We aim to launch in 2022 with diverse offerings, including movie and TV premieres. Our capacity to explore various content is what excites us the most. We'll keep you updated on programming as we delve deeper into our execution and the types of content that resonate with our guests.

Thanks a lot.

Next, we'll go to Jeff Farmer from Gordon Haskett. Your line is open.

Thank you. You guys did touch on menu pricing but can you quantify any pricing actions you've taken across the Food and Beverage segments or Amusement segment side of the business over the summer? And again, any insight into what you might be planning to do with the potential August price increases?

Yes. So we talked about the menu price increase in mid-single digits. We haven't done anything proactively on the Amusement side. But keep in mind that, in effect, we do have an effective price increase on the Amusement side, similar to what we talked about last time. And that's due to really very little discounting in the Amusements area with the demand that we've seen lately in amusements. We haven't really been doing much of any discounting but we're still seeing the demand there. And so when you think about the per capita increase that we're seeing in the Amusements business, close to 30%. We measure about 40% of that or estimate about 40% is just really due to not doing the discounting that we've done in the past. So that has been a favorable for us without taking specific pricing actions, just pulling back on the discounting. So that is helping us; the food pricing that we thought was warranted. It's been about two years since we've done any kind of pricing activity on Food and Beverage. And so that will help offset some of the other inflationary pressures that we see in the business.

Did you clarify that the mid-single-digit food increase that we're talking about is really just a recent event here? August 30, we say.

Yes, that's right.

Okay. That's helpful. And then a similar topic, you had also mentioned or touched on at least wage rate inflation. So, question is, I guess what are you currently seeing in the wage rate inflation environment? And I'm not referring to overtime and things like that but just pure wage rate inflation for hourly employees in terms of what you saw, I would say, in the second quarter and then your expectations for the third quarter? Are things going to get much more challenging? Or are we seeing things get about as challenging as they're going to get and then it sort of moderates as we head into 2022? Any sort of insight there would be helpful.

As we examine wage inflation, we've experienced similar pressures to many others in the industry. We estimate that we are seeing a mid-single-digit increase annualized compared to 2019, and we anticipate that trend will continue in the latter half of the year. We believe there will be sustained high demand for labor, and the labor market is likely to remain tight. However, a few factors could influence this outlook, such as the imminent end of unemployment benefits and the possibility of more individuals returning to work. This could impact our estimates. Nonetheless, we expect a comparable level of inflation for the rest of the year.

I think, Jeff, I mean the good thing here is that despite some of the wage pressures, the efforts of our operators in terms of implementing and rolling out some of the new technology around mobile web and our POS handhelds have really helped us in a big way. Margo and her team has done a phenomenal job working through that, that's helped mitigate some of that wage pressure that we're seeing just in terms of how efficient the teams have become with that tool. And we're still...

Early days.

Yes.

All right. Thank you, again.

And next, we'll go to Brian Mullan from Deutsche Bank. Your line is open.

Hey, thank you. If we look at your EBITDA margins for the first half of this year, they appear to be up about 450 basis points versus the first half of 2019 which is obviously very strong. Scott, I'm wondering if there might be any updates to your prior EBITDA margin expansion framework. Even if there's some moderation from here to the EBITDA margin expansion in a normalized year, could it ultimately prove to be greater than 200 basis points on a sustainable basis?

Certainly. To revisit our initial commitment, we aimed for a 200 basis points improvement once we reached 2019's average unit volumes, based on the cost structure from that year. Various factors, including inflation trends and enhanced gross margins alongside reduced preopening expenses, could influence that projection in the future. However, the 200 basis points goal was specifically linked to the 2019 cost structure and our proactive measures to cut costs in that segment. We've actually exceeded that expectation. Looking ahead, we are optimistic about maintaining improved gross margins, largely driven by a higher Amusement mix, which we believe will be sustainable in the near term. In our recent second quarter, we experienced significant performance, with positive comparable store sales contributing to our margins through strong flow-through. Our gross margin for this period surpassed last year's figures, mainly due to the Amusement mix, and we also saw substantial decreases in preopening expenses stemming from fewer new store openings. These factors exemplified our anticipated 200 basis points of improvement since our focus primarily lay on the structural aspects of our business. We had chosen to exclude the gross margin and preopening expenses from our calculations, understanding their variability. Fortunately, these turned out to be advantageous for us. Additionally, we've noticed improvements in payroll and benefits. The rollout of new technology has aided our operations, although we are still in the process of hiring more staff. As we continue toward normalized staffing levels, we expect that advantage to slightly decline. Nevertheless, we are genuinely enthusiastic about our progress and the potential for our future performance, keen on upholding the commitments we made. As sales grow, we anticipate positive impacts on our bottom line.

Okay, great. That's great color. And then on the development pipeline, encouraging to see you're expecting six to eight new units in 2022. My question is, as you look out to 2023 and beyond, what is the right pace of unit growth for this business? Is six to eight units going to be the sweet spot for you? Or are there scenarios where maybe you could open more than that? Just any color on your current thinking.

As I mentioned, our financial foundation is very strong, and we're generating a significant amount of cash. We are more profitable than we have ever been. Our development team, which I believe is the best in the industry, is actively working on our pipeline. In 2020, we had to pull back and protect our position, but currently, we are aggressively pursuing new units. We are targeting six to eight for next year, and I am confident in our ability to achieve those numbers. We have nine properties currently under lease in our pipeline, as well as nine additional locations, and we're seeing growth as we plan for 2023 and beyond. We are focused on both 2023 and 2024 at this time. While I don’t want to specify an exact number right now, we still have work to do to strengthen our leadership and rebuild after the challenges of 2020. We are optimistic about our position and are actively working towards our goals, but I prefer not to announce a specific figure today.

Thank you.

And next, we'll go to Nicole Miller from Piper Sandler. Your line is open.

Thank you for the update and congrats on the performance. Two questions. The first is, it's helpful to get the current lay of the land. Could you translate that comp of 3Q to date into average unit volume or share the 2021 versus 2020 comparison? So we get, really, I'm thinking about the seasonality, right? And also the same for EBITDA. Can you revisit what you said about EBITDA? I couldn't write that down quite quickly enough. And if possible, translate that to dollars as well.

So which part would you like to repeat on EBITDA?

I'm sorry. In this, you said 3Q should be higher but then you said something else. I just didn't catch that. I'm sorry, in relation to 2Q.

Okay. So yes, as we think about third quarter EBITDA, we think it will significantly beat the 2019 numbers from a dollar standpoint. What I was trying to convey was if you look at the percentage beat that we saw in Q2, we don't think it will be as much as Q2 from a percentage standpoint versus 2019. But based on current trends, we see Q3 EBITDA significantly beating Q3 of 2019.

Okay. And then the 1.3% comp, what is that on an AUV basis, or just underlying that? I know it's a hot crazy percentage number but what does it translate to the 2021 versus 2020 comp? Either way, it will fill the GAAP.

Yes, we have been comparing our performance to 2019. I believe that our average unit volumes should reflect this comparison. In 2019, our average unit volume was approximately $10.5 million per store, and it should be slightly higher than that with the 1.3% comparison.

Okay, that sounds good. Regarding the pipeline, it would be useful to discuss the reacceleration moving forward. For 2022, you mentioned six to eight, which seems like almost all the letters of intent are signed leases, but I just wanted to verify that. Are these new stores in the pipeline or were they already there? Additionally, where are they set to open? Also, I recall international expansion from the past, and I thought I might get your thoughts on that since you're in a great position and it could represent a potential opportunity.

It's great to hear from you. The six to eight stores we're discussing for 2022 were already in our pre-COVID pipeline. This involves reactivating stores we had previously planned. They are primarily focused on existing markets, including a few in New York and California. We are also introducing some small-format stores in new markets, with a couple being around 20,000 square feet or smaller. We are genuinely excited about this format and its potential impact on our total addressable market. We are currently reassessing how much we can expand given the strength of our locations. All eight of those stores were top priorities and were part of our pipeline before, along with the additional nine we are currently working on, many of which were also paused during the pandemic. We are looking at new properties that were not originally included and some additional sites that we had on our radar before COVID. We are in a much better position now compared to the lease negotiations we faced for most of 2020, and our development team is focused on rebuilding the pipeline. This is very encouraging. Regarding international expansion, we de-emphasized it before COVID to concentrate on the core domestic business. However, we are currently revisiting that strategy. I don't have any specific updates right now, but it is something we are actively considering.

Thanks, again. I appreciate it.

And next, we'll go to Andrew Strelzik from BMO. Your line is open.

All right, great. Thanks for taking the questions. A couple of quick ones for me. I'd love to hear a little bit more about what you're learning and maybe any surprises or anything that's been different with the rollout of the web platform and the tablet that you have going on there. I don't know if there's check implications or consumer behavior implications, or you've mentioned efficiencies a couple of times, if there's margin implications there? Just anything on that would be great to hear.

It's Margo. So, obviously, in the difficult staffing environment, one of the critical things about this has just been the ability to help offset staffing challenges. It also has really enabled us to think through the guest experience and what are the touch points that we want our team to really focus on. And to your point, we are seeing some impact. It is early days, so I don't want to go into a great deal of detail but we have been able to expand server sections and we have been able to reduce server hours. And again, when I talk with you about it being early days, one of the things that we believe, over time, is as we get our guests more comfortable with it, as we get our team more comfortable with it and as we learn the best way to refine it, that it will become just more powerful over time. So we're very encouraged with the short time horizon. It's really too early to comment on exactly where we think it will end up. But we'll definitely share that with you as we continue the journey. And I guess when you go to the surprise, the question on your surprise, I have to tell you, I was definitely surprised about the guest level of adoption. So to have over 50% of our guests take us up on using this has been a really positive surprise for us.

That's good to hear. I'd like to ask about marketing as well. There have been many changes in the channels and levels. As I consider the margin profile moving forward, will this year be larger than usual for marketing, or will it be standard? Are you still figuring out what that will look like based on this year’s insights? Any guidance on the expected trajectory over time would be appreciated.

Yes, absolutely. We're still gaining learnings as we come through each marketing promotion. But right now, for the full year, we anticipate spending to be slightly over $30 million, and that's versus $21 million last year and $45 million in 2019. Due to our window-based approach, approximately about two-thirds of that spend will be concentrated in Q2 and Q4. A lot of that concentration comes from consolidating the media spend within a quarter, not necessarily pulling from other quarters. But does that answer your question, Andrew?

Yes, that's exactly what I was looking for. Just one last quick question from me. Regarding the capital allocation philosophy, if Dave & Buster's is not going to achieve more than 10% unit growth moving forward, and I understand you're not providing guidance, the performance and cash flow are very strong. I'm curious about your thoughts on how you're planning to allocate that, whether through dividends or returning cash to shareholders. It seems like there are numerous opportunities, so I would like to hear your perspective.

Sure, Andrew. So from a big picture standpoint, we do want to maintain our flexibility here. And near term, our intent is to delever the business over time. And we'll balance that against a broader capital allocation strategy. The key priorities for us will be the new store openings. So we are starting to ramp up some there. We've seen great returns on our stores. We have some revised, more efficient format that could help us see even bigger returns, especially on the small-store format. So we want to make sure that that is kind of at the top of the list. But we also want to invest in our core business. We've done some good investments in our core business with our technology but more recently, we're spending more dollars to upgrade our equipment; our AV equipment to make it kind of a best-in-class for that watch customer. And we want to make sure that our store is in good shape. And after that, returning cash to shareholders through share buybacks and dividends. They'll have lower priority, at least in the near term, and that may change over time. But for right now, we're most interested in growing the business and delevering the balance sheet.

Great. Thank you very much for your perspective.

And next, we'll go to Chris O'Cull from Stifel. Your line is open.

Hi, thanks guys for taking the question. I have a follow-up question regarding the development. It sounds like you're hoping to get back to like a 2019 development pace, maybe within the next couple two to three years, given the type of growth you're talking about. Is that a reasonable assumption or am I hearing you right?

I haven't finalized the 2023 forecast yet. Right now, our focus is on achieving our goals for 2022, which involve a significant acceleration to reach eight. We are satisfied with that progress, as it's manageable for us. This is really all we can accomplish for 2022. I believe that over time, we can expect some acceleration. However, I won't specify exact figures for 2023 and 2024 at this moment. We need to strengthen our leadership team and our capabilities to successfully open our stores. Before COVID, we excelled in that area and had an excellent track record. We need to rebuild that strength, but I believe we can work towards some acceleration without providing a specific number.

Brian, before the pandemic, I know the company was investing in a brand study to identify opportunities to improve the brand's relevance and compete better. And I'm just wondering, do you still believe there's a need to complete, I don't want to say a major but a remodeled program within the system?

I believe it's crucial to reinvest in our core business, whether that's enhancing our look and feel or investing in content such as games and expanding our entertainment offerings through programming. We recognize the importance of being an innovative company, especially since we lead the industry for a reason. Many new entrants are trying to match our unit volumes and returns, which emphasizes the need for ongoing innovation. Therefore, I think it's vital to invest back into our core business and consistently update our stores. This is truly important.

My last one is then, should we expect the CapEx spending to continue to rise from this $95 million to $100 million in '22? Or should it stay at this level?

Yes. So, I mean we're not really giving guidance yet on that. But what I can say is that in all likelihood, they will increase. And just for the simple reason that we want to build more stores, that will cause an increase. And then what Brian is saying as well. So we've been spending less on store maintenance and things like that because of the need during the time. So we're slowly ramping that back up and we will continue to do that next year. Looking at refreshes and remodels, that is in that consideration set as we look at capital plans for next year.

Great. Thanks, guys.

Thank you.

And next, we'll go to Brian Vaccaro from Raymond James. Your line is open.

Hi, thanks and good evening. Just following up on seasonality and just to make sure we're all on the same page. I believe August is an average month historically, so maybe around $200,000 that we're thinking about if we're thinking about August of '19. Scott, can you confirm that's accurate? And then just also remind us how that monthly sales seasonality sort of moves through the rest of 3Q.

Sure. I would say, Brian, that as August begins, the first couple of weeks are relatively normal, but then we start to see a decline in the latter half of August. Following that, during the latter part of August and into September and October, we experience our seasonal dip, which typically represents about 85% of the average sales for the entire year across the chain.

Okay, great. So that up 1.3% that you did quarter-to-date, that quarter-to-date average weekly sales is in that ballpark of around $200,000 then?

For the first five weeks of the third quarter, the average weekly sales was $187 million.

Okay, great. And on the small store format, I'm glad to hear games was off to such a strong start. Can you remind us what the expected cash investment is on that smaller prototype?

Yes. So for that type of prototype, or I mean the average is an 18,000 square foot store. So it's between $6 million and $6.5 million.

Okay, great. And then just last one, back to capital allocation and thinking about the balance sheet. What's the right level of debt for the business in your view in a post-COVID world? And are there any targets on net debt to EBITDA or adjusted leverage that you have in mind?

Yes, good question. So we don't have a hard leverage target yet. For us, we'll need a little bit more time to establish kind of a new normal for cash flow and understand our CapEx needs that we need to grow the business. And so as that picture becomes a little bit more clear and as we're also able to continue to delever the business a bit, we'll take that all into account. But first and foremost, we want to make sure that we have the dollars available to invest back into the business, whether that be existing stores or new stores or other things. But also, the leftover cash, to the extent there is some, we would like to continue to delever the business for the foreseeable future. So as things start to normalize a little bit more, we'll probably be able to talk more about a leverage target but that's our general thoughts for right now.

All right, I appreciate that context. Thank you.

And next, we'll go to Sharon Zackfia from William Blair. Your line is open.

Hey, it's Matt Curtis on for Sharon. Thanks for taking my question. I just had a question on per card spend levels. I apologize if I missed this during your comments. But have you seen any moderation in per card spend so far in the third quarter?

Not really. Yes, for Power Card, it continues to be very strong. So we haven't seen any meaningful drop-off.

Okay, thanks. And then, just a quick question on labor. I understand, or at least it sounds like you feel comfortable, basically, on your staffing levels. But I'm wondering if you could tell us anything about what your staffing levels are like now versus 2019.

Yes. So I can start off. So staffing levels still are less than 2019. So there's still a little ways to go to kind of get to ultimately where we want to be. But we're making progress. And I think the other thing to keep in mind is the technology that we put in, in the store with our mobile order and pay functionality as well as our tablets is really helping. And keep in mind that we just finished the rollout of that technology towards the end of July. And in some cases, stores are kind of still learning and getting efficient with that technology. But we think that will surely help us continue as we continue to move forward. So still making progress but still a little ways to go and we will keep the updates coming as we move forward.

Okay, got it. And then, last one for me. Could you talk a little bit about the private party business and how that's been trending? And then how are you thinking about that business heading into the holiday season, given that this one is going to be relatively normalized compared to last year, obviously?

Yes, that's a great question. First and foremost, we are very pleased with the recovery in our walk-in business as we report the numbers for the second quarter. We saw a significant increase in walk-in sales for the second quarter, indicating a strong recovery. However, our special events business is currently lagging behind walk-ins. While we are experiencing sequential improvements in bookings compared to 2019 as we approach our fourth quarter, it is not at the same level as our walk-in business right now. As we look towards the fourth quarter, which is particularly important for special events, we usually see bookings increase significantly in late September, followed by a strong pickup in October leading into November for the critical December month. It is quite challenging to predict how corporate special event demand will unfold at this stage. We believe the booking window may be somewhat delayed and possibly more compressed than in a typical year due to the recent COVID resurgence. The positive aspect is that we have ample opportunity ahead of us as we approach a traditionally big fourth quarter. Our team is working hard to maximize our potential during this period.

The other thing I'd add to that, Brian, is that we are being proactive about driving the business and we have several key initiatives that we're launching here at the beginning of Q3 to go out and get that business and not just wait for it to come to us.

Okay, I appreciate you squeezing me in. Thanks.

You bet.

And we'll take our last question from Jon Tower, Wells Fargo. Your line is open.

Thank you for taking my question. I'm interested in how customers are using your services differently compared to 2019, especially with the increased focus on Amusement over Food and Beverage. Could you share insights on customer behavior beyond that? For instance, how do weekdays compare to weekends? Additionally, are you noticing an earlier start to the day, particularly in the second quarter when more kids are out of school? And what trends are you observing regarding larger family visits? Are those still lower compared to the individual visits in 2019?

We have received a lot of questions. I wouldn't say our business varies significantly by day of the week. Our late-night operations are not as robust as they used to be. Currently, Friday and Saturday nights aren’t performing as well as they did before COVID. It's impressive that we are achieving our current numbers given the constraints we face in late-night hours. We are pleased with our current business mix. Looking ahead, many of our initiatives are focused on increasing utilization and frequency, especially on off-peak days such as weekdays. The programming efforts Margo mentioned are specifically aimed at boosting business on those days, aiming to enhance visits on Tuesdays and Thursdays compared to historical levels. Wednesdays still perform very well for us, primarily driven by discounts, which is our only incentive currently in place. We aim to create compelling reasons for customers to visit more frequently throughout the week. There is considerable capacity that remains underutilized, and addressing this is a significant priority for us.

Got it. And on Friday and Saturday nights, are you still constrained on your hours, meaning, into this fiscal third quarter?

We've expanded the hours and fall, obviously, because of fall football. But we don't necessarily have all the stores staying open as late as they did. But we have expanded those hours for the third quarter in order to accommodate the programming associated with fall football.

Got it. And then the last one for me. I know this was mentioned a few calls ago but I am curious if there's any updates to be had on the virtual brand testing that you had done in a couple of markets.

I'm sorry, it's Kitchen. I'm sorry. So we continue to offer our Buster's American Kitchen as well as Dave & Buster's virtually. And that actually continues to be delivering the same amount of sales that I think that probably first offered. We were really excited about our Wings Out virtual kitchen and, due to really just supply chain issues, walked away from that. If that stabilizes, we have started a plan to talk through rolling that out. What we want to do is make sure that we can take care of the demand that we have in our stores because wings tend to get highly focused during fall football. So we want to make sure that we're stabilized there. But then we have an interest in taking Wings Out throughout the brand because that test was the most encouraging out of all of the virtual kitchen tests.

Awesome. Thanks for taking the questions. Have a good night.

Thank you, Jon.

And that does conclude our call for today. Thank you for your participation. You may now disconnect.