Good afternoon, everyone. Welcome to the Dave & Buster's Entertainment Incorporated Third Quarter 2021 Earnings Results Conference Call. Today's conference is being recorded. Now, I would like to turn the conference over to Scott Bowman, Chief Financial Officer for opening remarks. Please go ahead..

Thank you, Keith, and thank you all for joining us today. Joining me on today’s call are Kevin Sheehan, Interim Chief Executive Officer; and Margo Manning, Chief Operating Officer. After our prepared comments, we'll be happy to take your questions. This call is being recorded on behalf of Dave & Buster's 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 facts.

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 Kevin. .

Thanks, Scott. Good morning, everyone. I'm very excited to be in this new role here at Dave & Buster's at this central point in our story. We have an exceptional business model, strong assets and a talented group of team members who are delivering outstanding service and experiences to our guests.

And we continue to add talented individuals to our organization. As announced a separate press release, we are welcoming Antonio Bautista to our management team to fill a newly created role of SVP and Head of International Development.

He brings outstanding experience and an impressive track record of growing businesses internationally, and we believe Antonio is the right person to take Dave & Buster's to international markets. Also, stay tuned for the impending announcement on Scott’s replacement. Scott has been the consummate CFO and his efforts will be greatly missed.

I want to thank him on behalf of the Board and the D&B team for his outstanding service. As you know, we have made great progress in reopening and building back sales, but we also know there is a lot more to do to unlock the substantial potential of this business.

As I said in our press release, we are beginning a new phase of innovation, growth and value creation here at Dave & Buster's. Let me share with you what I mean. We have a great brand with significant scale, a passionate team, and accretive stores in high traffic, high volume destination trade areas.

Our intent is to optimize our current stores’ full potential and accelerate innovation to drive incremental traffic to our brands. In order to accomplish this goal, we are laser-focused on organic growth. This will be accomplished by optimizing the performance of our existing stores, while continuing to achieve best in class returns on our new stores.

With respect to organic growth, we will broaden our entertainment offering to include more immersive sports viewing experiences, including improvements to the watch environment and the addition of fantasy sports and in sports betting option as permitted.

We also see significant opportunity to drive traffic in our off peak days and dayparts, and we are evaluating a variety of initiatives to extract more value out of our existing stores. Finally, we will amplify our best-in-class arcade with the summer games rollout supported by a significant marketing campaign.

To help fuel organic growth, we will accelerate a refresh remodel program that will give our existing stores a fresh look. And we are also evaluating relocation opportunities in some of our legacy markets where we can open new, more efficient stores and capitalize on higher potential locations.

Think of one 75,000 square foot store built 30 years ago in a part of town that has become less optimal and replacing that store nearing the end of its lease term with possibly two strategically located new stores in more relevant parts of town that accelerate growth in that market. Think one plus one equals three.

Finally, we will continue to refine our store layouts and sizes to optimize their market potential. We are making significant progress in this area and recent results are showing much higher returns than anticipated. This will meaningfully expand our brand's potential in coming years. I'm very excited about the future of this company.

We have meaningful upside. And as you can see from our third quarter results, we are on our way to realizing that potential. At this time, Scott is going to cover a third quarter results and share some thoughts on our expectations for the fourth quarter. After that our COO, Margo Manning will update on our operations.

Scott?.

Thanks, Kevin. Our third quarter demonstrated our ability to drive significant improvement and profitability with relatively flat comps for sales compared with 2019. Despite the COVID related headwinds, adjusted EBITDA increased 47% compared with the same period in 2019, which eclipse the 39% increase we experienced in the second quarter.

We continue to see benefit from a higher mix of amusements and linear operating model and lower preopening expenses due to fewer new store open.

Even with the headwinds from wage and commodity inflation, we have continued to grow margins, and have offset these impacts through a more efficient labor model enabled by technology, proactive menu price adjustments, and more effective marketing investments.

Looking forward, we are pleased for our stores to return to new levels benefiting from the removal of COVID restrictions, and return to Special Events, and the efforts of recent initiatives. For third quarter sales, we experienced a 1.1% comp excluding the 7 comp stores located in markets that had vaccine mandates during the quarter.

Including all stores, we experienced a negative 0.4% comp and total growth at 6.2% compared with 2019, reflecting softness due to the Delta variant and associated mask and vaccine mandates.

Our walk-in sales continued to post strong comp at 6%, although our Special Events business continued to lag at negative 64% compared with 2019, which has been more significantly impacted by fewer corporate events.

By month, our overall comps were negative 1.2% in August, 2.9% in September and 2.2% in October, excluding the 7 comp stores located in markets that had vaccine mandates during the quarter. Regarding sales mix, amusements and other had a positive 12% comp and was 66% of our overall mix compared with 58% of our mix in 2019.

This was mainly due to minimal discounting and a continued shift to higher denomination Power Cards. Food and beverage had a negative comp of 17% compared with 2019, a substantial portion of which was due to the Special Events business.

Adjusted EBITTA for the quarter was $68.2 million or 47% higher than the same period in 2019, which reflects a 21.5% adjusted EBITDA margin which was nearly 600 basis points higher compared with the same period in 2019.

The improved performance was primarily driven by higher amusements mix, leverage on labor due to a more efficient model and lower marketing costs. Net income of $10.6 million increased $10.1 million in a quarter compared with 2019 resulting in EPS of $0.21 per diluted share.

These results generated positive operating cash flow in the quarter, despite the semiannual interest payment on our senior secured notes, the receipt of significant WIN! redemption merchandise and the payout of our first half bonus plan, which as we explained previously was done because of the uncertain environment for this year.

We ended the quarter with $27 million in cash and zero outstandings on our revolving facility. Total long-term debt was $495 million at the end of the quarter, consisting of our senior secured notes maturing in 2025.

During the quarter, we redeemed $55 million of our senior secured notes, which resulted in a $1.7 million expense to redeem the notes but will save $4.2 million in annualized interest. Subsequent to the end of the third quarter, we redeemed another 10% conscious notes bringing our balance to $440 million.

The second redemption will result in the same $1.7 million in expense and $4.2 million annualized interest savings. Turning to capital spending we invested a total of $23 million in capital additions, net of tenant allowances, and opened 1 new store during the quarter.

In the fourth quarter we plan to open 1 additional new store in Brooklyn, New York, and relocate an existing store to finish the year with 4 new openings and 1 relocation, which will bring us to 144 stores by the end of the fiscal year.

Overall, we are very pleased with third quarter results and the sound financial footing we have established going into the final quarter of the year. Turning to our outlook, I would like to offer some insights for the fourth quarter of fiscal 2021.

Regarding sales trends our comp sales for the first five weeks have been 3.5% compared with 2019, which continues to be negatively impacted by our Special Events business. Our walk-in business is up 14% on the quarter to date basis. And we are encouraged by the strong start.

We expect continued softness in the Special Events business for the remainder of the quarter, which will be more impactful in December when we typically have a much higher penetration due to the holiday parties. Additionally, we'll experience a negative impact due to a calendar shift in our key holiday periods.

This year, both the Christmas and New Year's holidays fall on a Friday, Saturday compared with Tuesday, Wednesday in 2019. We estimate that this will result in a negative revenue impact of approximately $9.5 million in the fourth quarter. Including these impacts we expect fourth quarter comp sales to be slightly positive.

From an expense standpoint, we'll have a higher investment marketing, as we invest more heavily in the holiday time period and expect commodity and wage inflation to be at or slightly above current levels. Overall, we expect adjusted EBITDA margin to increase by approximately 200 basis points compared with the same period in 2019.

From a CapEx perspective, we expect to invest approximately a $100 million in 2021 net of tenant allowances with approximately 43% dedicated to new stores and improvements to our existing stores, 14% for games and 43% for infrastructure upgrades and replacements.

In summary, our team continues to execute on our initiatives to drive organic growth, improve profitability, and produce significant cash flow from the business. We are pleased with our progress and are well positioned as we finish the year and look forward to 2022.

Now, before I turn it over to Margo, I’d just like to say it’s been my pleasure and honor to work for Dave & Buster’s for the past two and a half years. And I will take away many memories and friendships from my time here. The company has a truly outstanding team, which is at the heart of what makes it successful.

And with the plans in place, I am confident that the company will continue to be successful. And I would like to wish the entire Dave & Buster's team and the Board of Directors all the best in the future. With that, I'll turn it over to Margo. .

Thank you, Scott. And good afternoon, everyone. Let me provide some insights into the third quarter operating results and give you an update on our key initiatives.

We continue to be laser-focused on simplifying store operations, executing new beverage and food offerings, enhancing our entertainment and refining our service model to drive sales and profitability.

Regarding our food offerings we are excited by our seasonal differentiated limited time offers our winter limited time offer introduces new menu additions, such as Black & Bleu Flatbread, Cajun BBQ Shrimp, Butternut Squash Ravioli, and a delicious Apple Tart a la Mode to celebrate the holiday season. Turning to our beverage menu.

We are featuring limited time offers such as the Peanut Butter Old Fashioned and Monkey Shoulder Punch, and have refined our overall beverage offerings with targeted enhancements that expand our menu’s reach and appeal.

We'll be launching a tightly curated beverage venue this quarter that elevates the experience, add new flavor profiles and improves relevancy in an effort to drive beverage sales. In Q2 and Q3, we launched several tests to determine the entertainment appeal of programming.

We successfully hosted themed Trivia Night with Geeks Who Drink! and have expanded the test to a dozen more markets. We also set out to amplify the D&B football experience complete with interactive hosted events with NC’s entertaining guests before the games, during commercial breaks and at halftime.

The activities and prize giveaways have created a game energy in our test stores that has resonated with our guests. Our Q2 and Q3 tests indicate that our guests have an appetite for new entertainment offerings. So we will continue to fine tune these offerings with the goal of giving our guests more reasons to visit.

New programs and our tests include twists on Murder Mystery parties, Bingo Game shows and Standup and Improv Nights and competitive karaoke nights. Moving to our Q4 marketing campaign. We are very excited about our Everyone's a Winner sweepstake promotion that began on November 15.

This promotion gives guests to enter a 100% change of winning a prize, including the chance to win $250,000 or free gameplay for life. Guests are welcome to come back every day beginning November 15 through January 2, and when applied, once per day during this period.

Through the first 2 weeks of the campaign, we've seen an encouraging result with over 120,000 new e-mail address captured. The new D&B rewards program, which is linked to the D&B app, launched on November 8, and incentivizes guests for games played similar to airline programs that incentivizes for miles flown.

The 3-tier status earned by playing games will bestow unique rewards and benefits that deepen the member connection with our brands. While it's early, our loyalty guests have quickly embraced the concept of tackling in-store challenges, and we have already seen some promising guest engagements. On the people front.

The labor market remains difficult, and we have seen stacking challenges in a handful of our markets. However, the third quarter typically brings seasonally low volumes. So we saw less overall pressure in our stores with regards to staffing.

And we have ramped up our hiring efforts to attract the talented team members that we need for the busy holiday season. The brand-wide rollout of our new service model is complete and 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. We are now leveraging insights from our guest feedback, through Medallia, to identify how we can further refine our service models so that we continuously drive an improved guest experience.

To wrap up, we've recently completed our first employee engagement survey in over 18 months. And I am pleased to report that according to Gallup, our engagement levels are 24% higher than the current average for the U.S. workforce.

Our team is responsible for bringing the fun to life every day in our stores, and we are proud of their high level of engagement. Lastly, I want to thank the entire D&B family for their commitment to our guest experience. Your passion for the brand makes a meaningful difference. And now Kevin, I'll hand the call back over to you..

Thanks, Margo. As you have heard, we are pleased with the results we delivered in the third quarter despite numerous headwinds, including vaccine mandates, mask requirements, age and labor pressures, supply chain challenges and a lagging special event business.

We look forward to seeing a more normalized post-COVID environment in the future as each of these headwinds will become tailwinds, helping to further fuel our business. As I said earlier, we have an exceptional business model, strong assets and a talented team.

There's meaningful upside potential for this company, and we are laser-focused on driving that to reality. Our team is extremely excited about the prospects for 2022 and 2023 and well beyond. Now let's take your questions..

. Our first question from Andy Barish with Jefferies..

Let me get one in for Kevin and then maybe one for Brian, real quick.

Just, Kevin, on being involved in the business, obviously, closer day in and day out, what are you seeing that kind of gives you confidence from the programs that were put in place under the prior CEO? And I assume international is going to be a focus going forward, given the announcement today.

But any other areas we should be thinking about as you occupy the Interim CEO role?.

coming in and taking a fresh look at everything and determining the odd and the possible. I'll just give you 2 perspectives on some of my past experiences. So I came to Avis Rental Car when it was an employee-owned business. We converted that and turned it into a very successful IPO.

And then I returned years later to buy a second car rental brand, Budget, and optimized that to the best result of leveraging 1 commercial brand with a leisure brand, and as you can imagine, taking advantage of all of the opportunities in that transaction.

And another was Norwegian cruise line, where they were on the brink of bankruptcy, and we went on to be best-in-class.

Most recently at Scientific Games, who were overwhelmed with acquisitions and of its core values and its responsibilities to their shareholders towards driving operational improvement, market share improvement and realizing the substantial opportunity that was there.

Each experienced significantly increased organic growth, improved margins and return on invested capital and outsized valuation improvements, by the way. We have a very similar situation here, as you could expect having gone through a few years of having a very difficult time with organic growth and then moving into this period of COVID.

We need to spring back into action and boldly lead our brand to the optimal position. So as you can imagine, having been the Chairman here, I was able to glean and understand a lot of what was going on, and I saw what I believed were opportunities.

Having been here for a couple of months, it's enabled me to clearly see the enormous opportunities that lie ahead. And job one is the organic growth. Organic growth is job one. It's critical. It's what we need to do each and every day. And we have an enormous number of opportunities.

And Margo mentioned a few in her part of the call on the broadening of the experience during the evening hours, but we also have huge opportunities when you look at each and every day, and every daypart. So we'll be focused on all of those opportunities. As we talked about, we also are going to benefit from the refresh and remodel.

I talked about some of these relocations where we could take these big stores that are in parts of town that might have been optimal 30, 35 years ago, but maybe not the same today, and taking that opportunity and moving it into a couple of different stores in more prominent parts of town. So those are some of the opportunities.

But when you get to some of the bigger things that we alluded to sports viewing, and we're working very hard in getting to an agreement on sports betting and fantasy sports. And to me, there's a great opportunity there first because of the economics that go along with that agreement.

But the other part of it, and that's where the art is to make sure we get the best result, is in the promotional activities that we can create with the partner that we have in that agreement. So that's the second step.

And then the biggest part of this opportunity is if we are successful with that initiative, you're going to bring more people into the stores, you'll increase frequency, and where you're really going to get the icing on the cake is people will stay longer.

They have an additional beverage, they'll maybe have another appetizer or some other food offering. So think about all of the side benefits that go along with that. Also, other dayparts, just as examples, late evening, lounge. So we have a good group of people that come in the evening time.

Having them stay a little bit longer, maybe introducing a DJ or something, to expand that experience and drive more traffic as people know about that opportunity. We're looking at Thursday nights very seriously as our opportunity to get people starting to think about their weekends and how we can get more traffic in the stores on that evening.

So lots of things going on, and just stay tuned for what we come out with as the coming quarters come together..

Thanks, Kevin. It's awesome. I look forward to seeing a lot of that getting brought to life. And then, Brian, just real quick on the on the margin guide for the 4Q. It's in line with kind of the long-term improvements that you've talked about coming through the labor efficiencies and things like that.

But are you willing to share with us just how much you think the softness in Special Events and just the holiday shift of nearly $10 million in revenue is impacting the margin?.

Yes. It's certainly impacting comp store sales. The softness in Special Events hit us especially hard in the fourth quarter. The penetration is about double that of the other 3 quarters in general. So it's about 15% of our total sales historically in 2019. The other 3 quarters is 7% to 8%. So it does impact us more.

It is improving, but it's just slower to improve than the walk-in business. So we are encouraged with the walk-in business. And we do think that there's some kind of more informal get-togethers that are coming in from a walk-in standpoint that is bolstering that business, and so we are seeing that in our stores. From a margin standpoint.

As you look at the fourth quarter, a couple of things to think about there. I don't expect us to expand the margin as much in Q4. Part of it is the weakness in the Special Events business. But also from a marketing standpoint, we are much more heavier in marketing in Q4 than Q3, about $3 million more. And so that does have an impact.

And then when you think about just labor in general, we'll be a little bit more fully staffed. Wage inflation will be slightly higher, we think, and then commodity costs, we think, will impact that margin a bit as well in the fourth quarter relative to Q3..

The other thing I would just point out, and I alluded to this in the commentary, but you guys should just think about the enormous benefit here that we're running through this fourth quarter, and we're going to have a solid quarter.

But as you get into 2022 -- and when Scott mentioned, we're down 64% in Special Events, and that's about -- just under 10% of our business, figure that's growing back to its normalized size, and that was 2019 levels. So that's going to provide a very nice opportunity for us if we do our job correctly in 2022, which we will..

We'll take our next question from Jake Bartlett with Truist Securities..

Yes, my first one was just a clarification. I think I'm clear, I just want to double check. But the guidance for a slightly positive same-store sales in the fourth quarter, that includes the negative impact from the holiday shift, the $9.5 million.

So it truly would be reported as slightly positive, correct?.

That's right, Jake..

Right. And that's the power of what's really had to be here..

Great. And then the other question is just the visibility you have on the fourth quarter. I know a lot of the business obviously comes during the holiday season. I think 15% of the fourth quarter comp base sales were Special Events in '19.

And then so you see a much larger percent, maybe if you could share what percentage of that is in, say, December? But how much visibility do you have on that business? You expect it to be down. But do you have visibility that it might not be down so much? It does seem like a lot can really make up from the walk-in side of the business.

So any clarity on what you have in terms of visibility there would be helpful..

Sure, Jake. First off, in the month of December, Special Events typically, based on 2019 numbers, is about 20% of the business. Okay? And then from a visibility standpoint, we do have a fair amount of visibility as we see the bookings come in for that business.

And so as we look at our forecast, we'll look at those booking numbers and see how they're trending and that shapes the forecast that we have..

Okay. Okay. And then if you could go over some of the -- what is going to be driving the sales in the fourth quarter? Maybe what you have now and what's coming? I think in terms of new amusements, I think you're planning the Transformers VR. I'm not sure if that's still on track.

And then also the new kind of approach with marketing is much more targeted windows during peak time.

So when is the marketing window in the fourth quarter? And how does the marketing weighting in the fourth quarter of '21 compare to '19?.

Yes. So from -- I'll start off with the marketing piece. So we started our -- a marketing campaign in mid-November. And so that will last towards the end of December.

And I think the takeaway here is, our marketing windows are somewhat shorter than what we had in 2019 because 2019 was kind of almost an always-on scenario, and we weren't able to go deep enough to really get that reach that we needed to.

And so what we're seeing by having these shorter windows is that we are able to increase our reach, and we're seeing it affect our results. And so we're really encouraged on what we're seeing so far. And we have a better marketing strategy and a better creative, and we see that coming through.

And so every campaign that we run, and this is really only the second major campaign with new strategy, we have takeaways and learnings that are really helping us and will continue to help us as we shape that marketing strategy for next year..

Great. And then my last question -- sorry.

Yes?.

I was just going to follow up on your questions about amusement. And so amusements will have new Summer of Games kind of event for next year, similar to what we did this year. We will roll out several new games, a couple of VR titles. So Transformers won't be out until the March time frame. So it will be ready for spring break.

And then we've talked about in the past, our Top Gun VR attraction, which we're looking forward to. And with the delay of the movie, we've had to delay that attraction. It appears that the movie is on track to launch over The Memorial Day weekend, and so we will time to roll that out or our VR attractions shortly after that movie.

So those 2 VR attractions as well as several new games that we're excited about will be part of the Summer of Games, and we think that, that will give us some nice traction on our amusements and will be supported by some marketing as well..

Okay. And then last question is really on the comments around remodels and the scrapes and rebuild. First, on the remodels, how extensive do you plan that to be? I know you went through a pretty extensive process. I think it was from about 11 to 15.

Is that the kind of depth of the remodel that you expect going forward? Or is it much less than that? I'm trying to figure out how much -- how incremental you think it could be to sales. And then the question about the scrapes. I think the guidance for next year for '22 is 6 to 8 openings.

Do those include some scrapes and rebuild? So I guess I'm trying to make sure I understand what the net growth would be that we should expect in '22..

Sure. From a remodel standpoint -- so the cost and the scope of those remodels can vary. We have what's called a refresh, which is kind of a mini remodel, which refreshes certain aspects of that building. And then there's a more formal kind of full remodel. And the full remodel could be $2 million-plus, and the refresh, maybe $0.5 million.

And so as we look at our store base, what our plan is, longer term, even beyond 2022, is to think about that strategy more from a programmatic approach.

So we have our 143 stores, and we'll start to prioritize those stores in terms of what they need, is it a refresh or a full remodel? And what year is most prudent for each of those stores to fall into. So this next year will be kind of the first year of that approach.

After we do a few of those remodels, we'll have a better sense of what that needs to be long term and what tweaks we need to make to it. But I think that is kind of the key thing that you take away here is that it will be a programmatic approach, and we're going to start that journey next year and continue to remodel those stores in need..

And then -- I was just going to add that, that programmatic approach is critically important, and it's easy to fall away from companies. But you have to stick to that and refresh stores every 6 or 7 years, otherwise, they start to age.

And I suspect, if you went through this -- a few stores in our group that are not to the level that we need to be, and those will be the first ones to be attended to..

We'll take our next question from Nicole Miller with Piper Sandler..

The first question, what kind of food inflation are you seeing? And are you able to use the menu you talked about today, for example, as a way to optimize or offset some of the commodity inflation?.

Sure, Nicole. So right now, we're seeing commodity inflation in the high single digits. And so as we rolled out the new menu, we are seeing some benefit of the new menu in terms of its structure and on cost. And so that is helping to offset that. But we don't want to change the menu just because of commodity costs by themselves.

We think we have a good menu. We're getting good response from our menu from our guests. And so we're going to -- any changes that we make to the menu would be either limited time offers or driven by feedback from our guests.

But overall, we've been able to keep commodity inflation and labor inflation, mostly offset by what we've done on our leaner operating model and some of the technology that we put in our stores to improve efficiencies..

Was there a new price increase associated with the seasonal menu? And how much price is in the system currently?.

Not necessarily with the seasonal menu. We did take some price kind of across the board for our menu of about 5%, but seasonal items is more variety versus a menu pricing action..

And then just a last question on the Special Events space. I mean it's clear it's a drag, and we appreciate that, but it's obviously also the inverse is it is rebounding.

And so is it the local social guest that's coming back? Or something on the business side? And as you think about the opportunity to remodel, is there something different you would do with that space over time?.

So I'll -- Nicole, it's Margo. So in terms of what we're seeing from that, we certainly saw the social business come back earlier. But team is indicating through the holiday season that we're seeing activity on the corporate side as well.

And I think what you'll see in the upcoming year is a sales team that has been sort of repositioned to go after corporate sales in a pretty thoughtful way. So we're very excited about the opportunity to bring this back fully next year because we think it's going to be a strong addition for us.

And in terms of looking at the Special Events, base, it's interesting that you bring that up because we have had conversations about how we can look at that space and have it be more flexible, particularly as we start to build out the programming arm of what we're doing.

So I don't have anything to share with you right now, but it is a thought that we are entertaining as it relates to how we can make that space to be utilized more frequently in a more broad way..

And I think the important thing there is it's not necessarily an either/or. Being flexible, like Margo mentioned, we can still use it for Special Events, but when we're not using it for Special Events that opens up the opportunity for other uses..

We'll take our next question from Brian Mullan with Deutsche Bank..

Kevin, I'm hoping you could provide some of your thoughts on the long-term unit growth opportunity domestically and whether you're taking a fresh look at that with you taking over. I mean do you have a sense today of how many stores you think the U.S.

can support over the long term? Maybe what's the right pace of growth that the organization can handle in a normalized environment, while still driving consistent same-store sales at the existing base of stores?.

Yes. There's a few pieces to that question. So let me cover the ones, and then maybe Margo or Scott will jump in. But as we find out that these new slightly smaller stores are significantly better returns and have a more optimal use of space. It is that new concept opens up a lot more markets for us to expand the brand.

So we have plenty of room to grow for years and years to come.

The other part of the conversation is that I think it's -- hopefully, everybody is focused on is these big, big unyielding locations that have been historically really good but have waned over time because of the locations and maybe the traffic patterns and the market has changed where the center attention is.

So taking some of those big stores and converting them into a couple of stores also expands the footprint. So there's plenty of opportunity.

I think we need to be thoughtful here though, and Scott talked a little bit about the opportunity that we have to relook at the stores and the exciting factor in each and every store that we have across the system, to make sure that when a guest comes back to a store, that they feel a refreshing experience.

That there's something new to make them feel -- so we have a big opportunity that we're working on with the arrival experience to immerse them immediately into the experience, something that I think is a big opportunity that is coming. So just stay tuned on that.

But also the investment in the existing stores enables us to have a huge increase in -- if you look at it, these stores come back almost like new and get a lot of people to come in and try it again. And if we do it right, that then expands the traffic and the demand in those markets.

So that's all -- so I think we want to be balanced because I feel strongly that we need to make sure the existing stores are the right experience for our guests, but also keeping -- and since we generate so much cash flow, we still have the ability to build a number of stores each year.

And we have to be attentive to doing and balancing all of the capital allocation across all the uses of cash to make sure we're being as thoughtful to our shareholders as possible.

And then the last part, as you alluded to, and it's a frustration, so not I don't want to blame anybody, but I think as an audience say, we missed the point on this, and we never put the right person or a person in charge of it. And when you don't have an owner, you're never going to get anywhere.

And I think we're overly complicated the way we were going to market in this. There's a very seamless way of getting this done, with franchise models, stated franchise agreements. And I think when we get this running, it will be very, very successful.

If I get calls -- and a lot of us are getting calls about, "Hey, we need a store here, we need a store there," all around the globe. And you could think of the markets that make a lot of sense.

So getting a footprint in that and getting that started, I'm not going to turn into economics in 2022 or even in 2023, but it becomes the seeds that we plant for '24, '25 and on and on. And then when you look at that out 4, 5, 6, 7, 8 years, it starts to incrementally help our top line growth rate and can be a few percent of growth on the top line.

So when you look at a business, you'd have to look at the 20 different opportunities to grow revenue, and it's not only organic or it's not only new stores, but it's doing a better job in each and every opportunity. I hope I answered that, okay..

Yes, that was great color. And then just as a follow-up, it was encouraging to see the share repurchase authorization.

Can you just talk about how you plan to approach deploying that? Do you expect to be more programmatic in nature? Or perhaps more opportunistic? And is there a target leverage ratio investors should be mindful of as you think about managing your capital allocation from here?.

Yes. Let me start that, and Scott, I'm sure, has some points of view on that. But our leverage where we finish the year is -- it's almost a hash market. I think it's 1x.

So where does that belong? And what is -- we have a responsibility to our shareholders to drive value to them, and that is what I want to make sure each -- and what I'm doing actually, making sure each and every one of our leaders understand that we come to the office every day trying to create value to -- for the reason that we have the benefit of having jobs.

It's our responsibility. So when you look at the allocation of cash, and as we talked about the number of stores that we're building, and I think that's a full complement in 2022. And we talk about the investment in the existing stores and the investment in new games and the maintenance, et cetera.

We still have an enormous amount of cash to sit on our balance sheet.

And what do you do are 2 basis points in the bank? Or do you do something smart for our shareholders? And when you have an investment sentiment right now, and I'm sure for a variety of reasons, including where we've managed to look at in the pecking order of industries, we're trading at a very low multiple, and it's incumbent on us to return the appropriate balance of capital back to our shareholders as the business allows.

So I mean we're not going to be reckless here. We're going to be prudent. We want to be able to see a lot more visibility in the marketplace and how the environment improves. But once we have some confidence in that, it makes sense for us to be thoughtful about buying shares for our shareholders and bringing down our share count..

Yes. So we'll continue to monitor trends and we want to be opportunistic. We think that we are undervalued, and we are pretty close to the business, and we think that's the case. And so we want to have that flexibility to get back into the market at some point when the time is right.

As far as the leverage ratio, and we don't have a specific target right now. We are very happy with the lower leverage ratio we've been able to attain.

But longer term, it really depends on the opportunities in front of us, whether that be internal investments, whether that be buybacks and things like that will balance those needs and those opportunities against our leverage, and that will help us kind of form more of a definite leverage target here in the future..

We'll take our next question from Jeff Farmer with Gordon Haskett..

Great.

If you guys were to theoretically pursue a sports betting partnership, what would the next steps include? Would you guys end up testing this in a few markets for several quarters? Basically, the question is, how quickly could you move forward with sports betting if you decided to pull that trigger?.

I think there's a bunch of answers in that question because you want to make sure that we develop the right relationship, and we're talking to a couple of prominent players in that field. And when we get that deal done, you want to make sure there's a deep partnership because we can both benefit by having a deep relationship.

So that's part of the process that we're going through currently. And then once you get that deal done, then you start to roll it out. And as you're right, you're going to focus more in the states with sports betting already in place and test the concepts and constructs over a course of a couple of quarters.

And then I see it quickly moving out across the brand, at least with the sports fantasy and the opportunities to talk about what our capabilities are..

Okay. And then unrelated, just in terms of what you've seen as a concept over the last several quarters, going back to 2020 in terms of rising and falling COVID case numbers, and even COVID case headlines.

What has that impact been on your customer traffic trends? Sort of where have we gotten to now, when people are -- some of your customers read about Omnicron or see headlines about Omnicron, what's been the impact on traffic for your business?.

We haven't really seen a big impact to our traffic with the Omicron variant at this point. As I mentioned at the outset, our walk-in business continues to be very strong, and so we haven't really seen a big impact there. I think our Special Events business with or without Omnicron, we expected that to be softer for the fourth quarter.

But we're very encouraged by the strength of the walk-in business..

Okay. And then just final question along those lines. Nice sequential improvement quarter -- Q4 quarter-to-date in terms of the same-store sales performance versus 2019.

Is there any specific driver or initiative that you point to in terms of what drove that sequential improvement?.

I would point to a couple of things. We've rolled out our new loyalty program and our marketing campaign. So our marketing campaign started in the mid-November time frame. And similar to the summer marketing campaign, we've seen some lift in our business.

And we think that at least part of that is due to the marketing, based on some of the testing that we've done and some of the analysis that we've done. I hesitate to say that it's all due to that because of our many variables, but we're seeing some good trends here with this kind of condensed marketing period with more heavier weighting.

And so we think that is definitely playing a part here, and we look forward to continuing to refine that strategy..

We'll take our next question from Andrew Strelzik with BMO..

Great. My first one, Kevin, in the first answer in the Q&A that you gave when you went through some of your prior experiences you mentioned, the prior times when you've grown those sales and margins. And obviously, there's been a lot of focus on the top line side so far in terms of the strategy and the outlook there.

But I'm curious on the margin potential and how you think about the margin potential of the business. Obviously, Scott has outlined 200 basis points or so of structural improvement.

But do you think that there is, over time, more upside there? And then some of that can be tied to the sales volumes as well, but just separate of that, I'm just curious how you're thinking about the margin potential of the business going forward..

Yes, I think a little bit of that -- It's a good question. A little bit of that, though, is going to be subject to market conditions. If we get a little bit of an improvement back in the labor situation, if the commodity costs come back a little bit is to reality, there's so much noise, as you know, in getting goods and services today.

I do think things will stabilize at some point next year. That, coupled with -- I think part of the thing, from my experience is, when you have a fresh look at things, you do step back, and we've got initiatives that we're looking at right now.

And how are we doing it? Are we lean in the way we are doing it? Are we going to market as smart as possible? The team has done a tremendous job, Margo and her team, of bringing technology solutions to bring efficiencies to the headcount and the labor cost. So I think a continuation of that.

If we are successful on the organic initiatives, I see that the margins should be at least as good as it is, then maybe we start to benefit as we get some future from the market normalizing and from all the initiatives that we're working on behind the scenes..

Okay. That's helpful. And then obviously, the 14%, I believe there was comp growth on the walk-in side. I know that was a quarter-to-date number. So maybe you don't want to speak to that. But just more broadly, I remember you were seeing pretty significant check growth. And so I'm curious how that's continued to evolve.

And how much do you think could be sustainable or you would hang on to kind of as we go forward into next year?.

We're still seeing significant growth in check and specialty and amusement. We've talked on prior calls that our per cap on amusements has been close to 30%, and it's been pretty consistent. It's still in that range.

And so we feel like there is staying power with that higher ticket, especially in amusement for the remainder of the quarter, and then we'll see and kind of reassess as we get into 2022..

Okay. And then my last question is just on G&A, which was a bit higher than we anticipated for the quarter. Was there anything in there to kind of call out? Or is that a reasonable kind of run rate for 4Q and moving forward? Just curious for any color on that would be great..

Sure. There's a couple of things to note in our G&A costs. One is, there's about $2.7 million in additional severance costs. We had about $1.4 million additional in bonus and about $2 million additional and stock-based comp. So that really kind of bridges the gap between this year and 2019..

And Scott, I just want to wish you all the best in your next chapter..

Appreciate it. Thank you..

And we'll take our last question of the day from Alex Vasti with William Blair..

Just start with one quick one. Thanks for the color on the monthly comps in the quarter.

Could you maybe talk about per card spend and how that has held up?.

Yes, per card spend, it's held up very nicely for us. It still is about 30% higher than 2019. And so we're very encouraged by the consistency that we've seen there. And that does give us some confidence that we feel it has some staying power for the remainder of the quarter..

And then on the recent announcement with Antonio taking over international, how are you guys planning to frame up that opportunity there, maybe in size, if you can? And then how quickly do you guys expect to reach any partner agreements there?.

Yes. So it's a little early. He doesn't start until January 1, but he's a go-getter, and that was one of the things that attracted me to him that he's like a bull in a china shop in getting stuff done, which I think we need to do in getting this off the ground.

But to be realistic, '22 and '23 are investment years in getting the contacts, starting to develop the relationships, getting agreements in place, and selecting partners, et cetera. So you're not going to see EBITDA from that until '25. And then it starts to ramp up from '25 to, say, 2030 to the point where it's a good sized number.

And when I look at it, based on my experience, I see it as being in an achievable business model and are you going to be aggressively moving on that once he starts in January..

Ladies and gentlemen, this does conclude today's question-and-answer session. I would like to turn the conference back to your speakers for additional or closing remarks..

Hey guys, just thanks, everybody, for taking the time to listen to us and I'd just ask you to stay tuned. We've got lots happening. We're really excited. We've got a huge opportunity here and just stay tuned. Thanks so much for the call and happy holidays, everybody..

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect..