Dave & Buster's Entertainment - Q1 2025

Transcript

Operator (participant)

Good day, and welcome to the Dave & Buster's First Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Cory Hatton, Vice President, Investor Relations and Treasurer. Please go ahead.

Cory Hatton (VP of Investor Relations and Treasurer)

Thank you, operator, and welcome to everyone on the line. Leading today's call will be Chris Morris, our Chief Executive Officer, and Mike Quartieri, our Chief Financial Officer. After our prepared remarks, we will 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 the discussion on our company's first quarter 2024 results, I'd like to call your attention to the fact that in our remarks and our responses to questions, certain items may be discussed, which are not entirely based on historical fact. Any of these items should be considered forward-looking statements relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated.

Information on the various risk factors and uncertainties have been published in our filings with the SEC, which are available on our website. 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 measure contained in our earnings announcement released this afternoon. Also, the presentation we will be referencing today will be made available on the Events and Presentations page of our Investor Relations website shortly after the conclusion of the call. With that, it is my pleasure to turn the call over to Chris.

Chris Morris (CEO)

All right. Thank you, Cory. Good afternoon, everyone, and thank you for joining our call today. I will begin with some brief highlights from the quarter, turn it over to Mike to walk through our first quarter financials, and then we will spend the remainder of the call presenting a status update on our strategic growth initiatives as we lap the one-year anniversary of our Investor Day last June. In our first quarter of fiscal 2024, we generated revenue of $588 million and adjusted EBITDA of $159 million. While these top-line results were well below the potential we see for this business, with the choppiness we alluded to in February, we are encouraged by more recent improving top and bottom-line trends in May and early June, as we have scaled some of our more successful organic growth initiatives.

Additionally, during the quarter, we realized more than $10 million of incremental labor and marketing costs associated with the rollout of new initiatives and certain marketing tests, which we do not expect to repeat going forward. We continue to make material progress advancing our key organic growth initiatives. We have seen meaningful success growing our loyalty database through our new marketing engine, highlighting our enhanced food and beverage offering through compelling promotions, refining our games pricing strategy, driving incremental special events, and clear outperformance in our remodel initiative, which we expect will lead to substantial improvement in revenue and profitability over the medium term. We also continue to open new stores at highly attractive returns on our investment, and have continued to opportunistically return capital to shareholders via our share repurchase program in a highly accretive manner.

I'm proud of the hard work of our dedicated team as we continue to deliver strong operating performance and generate significant free cash flow in the face of a difficult prior year comparison and a complex macroeconomic environment. We remain laser focused on delivering the $1 billion adjusted EBITDA target in the coming years. I'd now like to turn the call over to Mike to walk you through our first quarter financial results in more detail before turning to the update on our strategic growth initiatives.

Mike Quartieri (CFO)

Thanks, Chris. We generated first quarter revenue of $588 million and adjusted EBITDA of $159 million for an adjusted EBITDA margin of 27.1%, a 200 basis point margin expansion versus the same 2019. As Chris mentioned, adjusted EBITDA in the quarter decreased in part due to $11 million of incremental costs, which we do not expect to repeat, which includes labor and marketing costs related to the rollout of our new menu, our new service model, and the deployment of several new systems, as well as an unsuccessful incremental marketing campaign test. Net income in the first quarter totaled $41 million, or $0.99 per diluted share. We reported $46 million of adjusted net income, or $1.12 of adjusted earnings per diluted share.

Reconciliations of all non-GAAP financial measures can be found in today's press release. Comparable store sales decreased 5.6% on a same week basis in the first quarter versus the prior year period. As Chris mentioned, we have seen an improving trend in this important top-line metric through the first five weeks of this quarter... We generated $109 million of operating cash flow during the first quarter, contributing to an ending cash balance of $32 million for total liquidity of $516 million, when combined with the $484 million available on our $500 million revolving credit facility, net of outstanding letters of credit. We ended the year, or I should say the quarter, with a total net leverage ratio of 2.3x as defined under the credit agreement.

We entered into a sale-leaseback agreement for the sale of two additional Dave & Buster's stores that opened in 2023, and anticipate generating $45 million of gross proceeds from the sale in the second quarter. After this sale, we still have four owned and operating real estate assets and two additional wholly owned stores coming online in the second half of 2024. As a reminder, we expect to command a premium price in the market versus other comparable real estate, given our superior economic unit economics, strong credit and attractive brand attributes, and commitment to being a long-term tenant in the space. Turning to capital spending, we've invested a total of $113 million in capital additions during the first quarter, opening three new Dave & Buster's and one new Main Event.

We've already opened one new Dave & Buster's during the second quarter of fiscal 2024 in Port St. Lucie, Florida. We expect to open a total of 15 new stores across both brands during fiscal 2024. We also have eight incremental remodels coming online in the second quarter to add to the nine existing remodels and anticipate having a total of 45 done by the end of fiscal 2024. Thus far in fiscal 2024, we have spent $50 million repurchasing nearly 1 million shares, and we have $150 million remaining on our Board-approved share repurchase authorization. We see tremendous value in continuing to opportunistically repurchase our shares in an accretive manner with the excess free cash flow above and beyond what is then needed to invest in our new units, accelerate our remodel program, and support our organic growth initiatives.

Now I'd like to turn the call back over to Chris to walk through the presentation and update on our key organic growth initiatives.

Chris Morris (CEO)

All right. Thanks, Mike. As I mentioned at the start of the call, tomorrow marks the one-year anniversary of our Investor Day, where we first unveiled our medium-term strategic plan. So we thought it was important to provide a more wholesome status update of how we are tracking against this plan. We've made meaningful progress on all of our initiatives, which in their own right, are meeting or exceeding expectations. We've also discovered new opportunities and initiatives, ranging from F&B realized check, to our optimized remodel strategy, to additional incremental cost savings. We expect a substantive impact over the next several months from these initiatives, scaling and rolling out from the successful tests we have run. Consequently, I remain confident in our target of over $1 billion of adjusted EBITDA. We have made significant strides advancing each of our six key organic growth initiatives.

However, as you can see on the right-hand side of the slide, we are still in the early innings of most of these initiatives, with meaningful upside to come. Within marketing optimization, which remains our largest revenue and adjusted EBITDA opportunity, we began by getting the right team in place and hired a new top-notch CMO in December of 2023. Megan has been phenomenal her first six months. She has embraced our culture and added a significant amount of data-driven rigor to our marketing engine. Under her leadership, we have engaged a new creative agency, meaningfully grown our loyalty program metrics in terms of both members and spend, and substantially improved our customer engagement. Within our strategic game pricing initiative during Q1 2024, we successfully completed the first increase in chip prices in over 20 years with a significant overhaul of our game system.

This was just the beginning of our process to optimize game prices, as we have run a number of tests at different price levels across the portfolio to try to determine the optimal level for each store. While we have done this, we've experienced significant improvement in our amusement guest satisfaction scores, spend, and sales trends. In our improved F&B initiative, we successfully implemented a new service model, and throughout Q1 2024 and into Q2 2024, we have rolled out multiple phases of our new menu across the system. We've experienced improved F&B guest satisfaction scores, attachment, check size, overall sales trends, and gross margins as we have done this. More recently, we have identified an additional revenue opportunity from optimizing our F&B pricing and menu mix, which we will describe in further detail later.

As you know, to date, we have opened nine remodels, with four fully programmed remodels performing exceptionally well, up double digits in both sales and traffic relative to the prior year. Given the strong success, we've accelerated our remodel plans and have optimized our strategy to lean in on the success of these fully programmed stores to bring as many to market as possible with a strict 20% return on investment. On special events, in order to provide more accountability at the local level, we strategically reinserted 20 sales managers into the stores in the back half of 2023 and ensured that their compensation was tied to top-line performance. We have seen significant outperformance relative to the rest of the system at those stores relative to both prior year and 2019.

Based on that success, we've added over 30 additional sales managers in fiscal 2024 to date. We expect this to have a meaningful positive impact on the revenue trends in this segment, which are already approaching 2019 levels overall. In our tech enablement initiative, the team has worked efficiently to upgrade our IT infrastructure across the portfolio, which includes, among other items, outfitting our stores with Wi-Fi and upgraded payment processors, which will improve guest experience and drive operational efficiencies in our stores. To date, we have completed over 50% of the system. We also rolled out server tablets across our whole system as part of the enhancements to our new service model. Turning to new units, we have opened 15 new stores domestically in the last 12 months and continue to produce sizable cash-on-cash returns, consistent with our historical levels of 40%+.

Internationally, we signed up seven additional international franchise units committed to development, bringing our grand total to 38. In terms of cost savings, we realized all of the $25 million in upsized targeted synergies from the Main Event merger and continue to go after additional opportunities as we make solid progress on the incremental $40 million-$60 million outlined at Investor Day. In the coming months, we have a lot of plans on each of our initiatives. On marketing optimization, we will continue to optimize our media mix and messaging, and leverage our scale and presence to drive traffic. We also have a number of partnerships that we expect will help improve traffic and sales trends.

We are particularly excited about a number of these partnerships and the potential impact they will have during the summer movie season, as well as the upcoming fall and winter sports seasons. We believe there is still significant upside on games pricing. Through overhauls to our game system, we now have the functionality to have differentiated pricing by region. We will use that new functionality to continue to optimize the price levels of our stores. We will also make sure that going forward, we will raise prices in line with inflation, something that we have not done historically. Additionally, we are excited by the prospect of optimizing existing and developing and implementing new yield management strategies, which should help drive check during peak periods and traffic during off-peak periods.

We are launching the next evolution of our new menu in August, which is primarily focusing on beverage innovation and our special event menu, and we will continue to refine and improve the operating model to drive attachment and guest satisfaction scores, which continue to be at historical highs. We will increase the pace of remodels and expect to have 35% of the fleet completed by the end of 2024, 68% completed by 2025, and 100% by 2026. Given the encouraging results with our pilots, we plan to continue to add special event managers to our stores and markets and expect to benefit from our improved special event menu, operating model, and event management capabilities. We plan to complete the integration of our new IT infrastructure in the coming quarters and implement new POS systems to optimize workflow across our stores.

We are on track to open 10 more stores in 2024, with 16 additional units hitting our fleet each year in 2025 and beyond. We expect to have several international stores open in the coming months, and we will continue to leverage the D&B brand to drive more international franchise agreements. We have historically executed on our cost savings initiatives and think there is still a lot of opportunity. It is an ongoing focus for us, and you can expect to see more progress on that front in the near future. As we have been focused on executing on our plan, we have identified three incremental opportunities to keep driving our performance.

On F&B, as we will show you later, we have realized significantly less price compared to our peers and believe there's an opportunity for us to optimize our prices and menu mix in order to close this gap. As we've discussed, our remodels continue to deliver impressive results, and we believe there's a strong opportunity to accelerate and improve the pace of these remodels. On cost savings, due to additional efforts, we believe we can take out another $10 million-$20 million in addition to what we announced at Investor Day. As I mentioned earlier, our marketing optimization strategy is progressing, and our KPIs are clearly highlighting that. Hyper-targeted promotions and data-driven insights are helping us craft unique campaigns that have helped us drive website visitors up 49% and our social media engagement up multifold.

Loyalty members, who, let me remind you, spend more and visit 2.5x versus non-members, are up 23%, which we think is very meaningful in driving spend and traffic. We believe that these strong leading indicators that customers are thinking about and engaging with us more, coupled with our other initiatives, will ultimately lead to strong same-store sales growth. As we discussed, yield management is an important part of our strategy. One element of that is using targeted promotions to drive traffic during off-peak periods. During the quarter, we tested a number of promotional messages to help bring in incremental customers during the week. As you would expect, some of these tests worked well and others did not, both of which provided us with significant learnings. One area we saw success was driving traffic in sales during the week.

As you can see on the page, while same-store sales were up versus prior year during the week, we were most excited by the almost 11% improvement in sales trends. It shows that we have started to identify some levers that can meaningfully drive the business. We will continue to test and learn in order to find the optimal mix of promotional messages in our media. As you know, we believe that our amusement offering is significantly underpriced. We showed you last year that D&B hadn't increased its chip pricing for more than 20 years, and that the prices of our games were meaningfully below the prices of our competitors. We have and continue to believe that there is scope for us to thoughtfully increase our game prices while still remaining an attractive value proposition to our guests.

During the quarter, we experimented with a number of different price levels across the system. While we saw an improvement in amusement sales trends universally, what got us most excited was that the stores in the highest price increase tiers actually saw the biggest improvement and have turned positive in amusement same-store sales. Notably, we've experienced significant year-over-year increases in customer satisfaction despite these changes to price levels, which means that they are not materially negatively impacting the customer experience. We are very encouraged by these results, and we will be moving a significant number of stores onto this pricing structure in the second quarter and beyond. As we have previously discussed, we've been making a lot of improvements to our F&B offering in order to drive attachment, guest satisfaction, and ultimately, sales. As you can see on the page, we have been making substantive progress in those areas.

Our speed of service is up meaningfully as our attachment and guest satisfaction scores. We are encouraged by these results, and importantly, as we rolled out the new menu and service model, we saw improving F&B trends throughout the quarter and subsequent to the quarter. We will continue to drive these guest metrics and expect them to continue to drive top-line improvement over time. As we mentioned earlier, we have also identified another significant opportunity within F&B, specifically around realized check. The chart on this page lays out a number of publicly reported peers and their check growth relative to 2019. As you can see, on average, the peers increased check by about 22%, which is roughly in line with CPI growth over the same time period. And you can also see D&B has only realized approximately 6% check on its F&B relative to 2019.

Upon investigation, we discovered that we took fewer price increases than our peers since COVID, and we also discovered that a menu change that was made in 2021 was well-intentioned, but actually was constructed in a way that incentivized trade downs. We've been testing a few different ways that we can close the gap. Our initial tests have been encouraging. More to come on this topic as we learn and explore more, but we do believe that over time, we should be able to close a significant portion of this gap. Our remodels are delivering significant sales and traffic growth consistently, and we are highly encouraged by the results and excited by the opportunity to implement this across the board. In aggregate, we have seen success and increased year-over-year sales in the remodels we have opened to date.

However, what has been most encouraging is that our fully programmed remodels have driven double-digit growth in sales. Even more encouraging is that these remodels are also up double digits in traffic. Our plan is for almost all of the remodels going forward to be fully programmed, and we expect to have 35% of the system complete by 2024 and 100% done by 2026. As you can see, our strategy around in-store sales managers for special events is bearing fruit, and stores with an in-store sales manager have significantly outperformed the system. This is what we expected, as we strongly believe that local accountability and the right incentive structure can lead to meaningfully improved results in this area. Given these strong, strong results, we've accelerated the placement of managers and will place three times more managers in stores in 2024 as compared to 2023.

We believe having a sales manager will significantly impact the recovery of our event business to 2019 levels and beyond. Our new unit model continues to be highly compelling, with our 2022 and 2023 cohorts delivering 40% ROIs consistently. We continue to believe in a long-term potential of 550 stores, which we estimate is an EBITDA opportunity of $150 million-$225 million, with long-term potential of 550 stores in total. We continue to make progress on the international front. We've signed 7 new franchise stores since Investor Day, with a total pipeline of 38 international locations. We expect to have the first international locations open within the coming months, which will be a huge milestone for the company.

As we highlighted at Investor Day, we believe we trade at a very low valuation, and there is significant upside to our share price as we continue to execute on our key initiatives. Given the strength of our business model, as well as the clear and actionable opportunities for growth we see in this business, we do not believe D&B's current trading multiple is warranted, and we believe our stock is materially undervalued.... To that end, we continue to be laser-focused on executing on the most lucrative opportunities to deploy or return capital to shareholders. To date, we've repurchased $50 million of shares, and since 2023, we have repurchased almost 9.5 million shares, representing approximately 20% of outstanding shares. We will continue to weigh most optimal uses of cash and monitor the share price and valuation levels to appropriately repurchase shares as the opportunity arises.

In conclusion, we've made significant progress on each initiative outlined during the 2023 Investor Day. But also want to remind you that most of these initiatives are in their early innings. In fact, we increased internal expectations on a number of initiatives, including F&B improvement, remodels, and cost savings, and we remain confident in our target of a billion-dollar adjusted EBITDA. Given what we know about our business and its potential, we see our stock as meaningfully undervalued, and we would expect to see meaningful equity value appreciation as we scale and roll out our initiatives. So, and with that, operator, please open up the line for questions.

Operator (participant)

Thank you. We will now begin the question-and-answer session. To ask a question, you may press Star, then One on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then Two. Please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question comes from Jake Bartlett with Truist Securities. Please go ahead.

Jake Bartlett (Senior Equity Research Analyst)

Great. Thanks for taking the question. You know, my question was about the traffic. You know, I assume that your pricing increase, your food and beverage and your game price initiatives should have, you know, driven check up and price up. So to me, it looks like just traffic has decelerated. So the question is, what is driving that deceleration? I imagine it's macro pressures, but I'd like to hear from you. It sounds like your initiatives, you're encouraged by your initiatives, yet it does look like traffic is decelerating at this point. So any comment there would be helpful.

Chris Morris (CEO)

Yeah, sure, Jake. Well, the first thing I'll tell you is, you know, we don't—as you know, we don't disclose the breakdown between check and traffic, and that's something that we haven't done for a very long period of time, and that's just simply a function of, you know, traffic is just an estimate in the business. It's not an actual precise number, just given how our stores are constructed and how people use our stores. But with that said, I mean, clearly, macro trends, it's a complex macro environment, and it's been challenging. But, you know, as we said in our prepared remarks, you know, we do, we are encouraged by the fact that throughout the quarter, we've seen trends improve and as our initiatives have started to take hold.

Those initiatives are a combination of both price and traffic. As our initiatives have started to take hold, we have seen, you know, some improvement in the business, and, you know, that gives us a lot of confidence as we move forward, knowing that many of the initiatives are just now starting to take hold. You know, I'd also point you to remodels. You know, we're very excited about what we're seeing on our fully programmed remodels. And the remodel is really the best representation of our strategic vision of the future because it's everything that we're doing, all wrapped into one, along with a brand-new product offering and a new look and feel for our stores. And as you heard us say, we're seeing very significant improvement on our fully programmed remodel stores.

We're seeing double-digit sales lift and double-digit traffic growth in those stores. So, things are improving. It's a complex macro environment, and so that's creating a little bit of headwinds, but, you know, we're very encouraged by where things are going.

Jake Bartlett (Senior Equity Research Analyst)

Got it. Great. And then just as a follow-up, you mentioned the improvement in the last five weeks, I think, you know, particularly in the last several weeks. What do you think is driving that improvement? Do you think it's more, you know, it's something that you're doing? You know, maybe, you know, in your answer, you can address kind of this, how some of these initiatives are reaching scale. Maybe just explain exactly, you know, how, which initiatives are getting, you know, other than having more remodels, but the other initiatives, how are they becoming more and more impactful, you know, as the year progresses here and maybe as the quarters progress in the second quarter?

Chris Morris (CEO)

Yeah, sure. So during the quarter, we rolled out our brand-new menu. At the same time, we rolled out a brand-new service model. Both of those are designed in a way to elevate the guest experience, very much focused on setting our operators up for success, to drive more throughput in our stores, as well as to grow F&B attached. So still very, you know, early in, but, you know, all signs are looking very good. Keep in mind that these are initiatives that we tested, and I think, you know, by now, I think we've proven that we mean what we say. This is a management team that is very measured, very deliberate, and we test, you know, we test, we learn, we refine, and then we roll.

And so, you know, the new menu and the new service model are working the way that they were designed and, matching what we saw during the test. And so, we're encouraged by that, but it's still, you know, we're very much in the early innings, but we fully expect that those initiatives are going to continue to drive incremental sales. Our half off food promotion, you saw, you know, we've had a number of initiatives that we've been fine-tuning on the marketing side of things to stimulate some demand off-peak, Monday through Thursday. And so we have All You Can Eat Wings on Mondays and Thursdays. We have the long-standing evergreen value of Half-Price Games on Wednesdays, and then we wrap that with a half-price food offer through loyalty member engagement.

You know, the combination of all of those, you know, we're very pleased with what we're seeing midweek, and so that helped as well. We've just got, you know, we've got a number of different things, as I said, both on pricing and on traffic, that are all working at different levels. As we move forward, you know, we'll continue just to pick up more and more, more and more momentum from here.

Jake Bartlett (Senior Equity Research Analyst)

Great. Thank you.

Chris Morris (CEO)

You bet. Thank you.

Operator (participant)

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Hi, good afternoon. I had some questions around the kind of full remodels. When we think about that and the ramp you're having, could you talk about kind of the downtime that you see or the inefficiencies while you're doing the remodels, and then how quickly kind of the labor normalizes once the remodel is complete? I've noticed there does seem to be some kind of labor optimization that has to occur when the new units, or I should say, the revamped units are kind of fully out there. And I'm just curious on how we should think about that as you ramp this up aggressively.

Chris Morris (CEO)

So in terms of the construction period, you know, I'd say it's about eight weeks, where the units have some negative pressure. But we keep the units open. Our teams, you know, we've got, you know, a world-class construction development team. They've been doing this for a very long period of time, and they are very skilled at, you know, going through a remodel and doing it in a way to where it's less intrusive on the guest, and so it allows us to stay open. But we do see somewhat of a negative impact on comps for about eight weeks. And as we start to do more and more remodels, we will start to quantify that, you know, to the extent that we feel is necessary to understand our comp performance.

I do think it's important to note, when we refer to the lift that we're seeing in sales, we are excluding that construction period. So, the lift that we see in remodels is a pure lift. As it relates to the labor optimization, you know, now that we have the service model out there, the teams are getting, they're very efficient now. We've been working on this for a very long period of time, and so we don't expect there to be any inefficiency from a labor standpoint post-remodel. So our expectation is, you know, we're at the optimal level day one.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Can I ask a follow-up? I know you just have a handful right now. I mean, how are you planning to kind of grow customer awareness of the revamped offerings as this rolls out more broadly?

Chris Morris (CEO)

Yeah. No, that's an outstanding question, and, you know, another reason why we're, we're so excited about this is the results that we're seeing are all done, you know, just through that local awareness. As you can imagine, once we get to a certain amount of scale, we'll be able to bring more awareness at a national level on the new product offerings and the new experiences. And so we think that that's just going, that's just gonna be additional fuel to the fire. And so our teams, you know, each one of these remodels, we're doing local activation. We get the community involved before the opening to try to generate some excitement. We partner with micro-influencers to get the word out. We do some earned media, and then we have some paid media as well.

All done, you know, in the zip code, in the general zip code of the store, so all done at a local level.

Sharon Zackfia (Partner and Head of Consumer Equity Research)

Okay, thank you.

Operator (participant)

The next question comes from Andrew Strelzik with BMO. Please go ahead.

Andrew Strelzik (Equity Research Analyst)

Hey, good afternoon. Thanks for taking the questions. I guess my first one, and then I have a follow-up. But my first one, there's obviously a lot of initiatives that you guys are working on, and so I'm just trying to think about the sequencing or, you know, how you guys are gonna be layering those in. And so, you know, can you kind of help frame what could be most impactful in fiscal 2024 versus what will be more kind of 2025 and beyond?

Chris Morris (CEO)

Sure. So without getting into, you know, like, a lot of specifics, you know, I will tell you that the price initiatives that we've rolled out through our strategic game pricing are working very well. And as you heard me say, you know, no, no noticeable impact at all on the guest satisfaction scores. In fact, we've seen guest satisfaction scores go up in the stores where we had the highest price increase. And so the reason that's so significant is that it does two things for us, one, from a pricing standpoint, now we have the ability to price to take price across the entire universe of product offerings.

Up until this point, we were limited to only, managing price through food and beverage, and so now we have the ability to drive, you know, price through the game offering, which is two-thirds of our business. So that's, that's number one. Number two is, you know, towards the end of the year, we believe that, if things move, the accordingly, that we will, we're continuing to evolve the technology, and we will have the ability at towards the end of 2024 to start to have more of a flexible pricing model to where we can, continue to drive, you know, business, between peak versus off-peak. And so that has us very excited. So I would say, you know, the pricing on strategic games is, you know, very meaningful.

But, you know, at the same time, the work that we've done through our food and beverage offering and the new service model, you know, should not be underestimated because we believe, and we're seeing in our guest experience metrics, that we are making a very noticeable impact on the guest experience. And we strongly believe that the best way to grow this business is through elevating the experience that happens in the four walls of every one of our stores. And so I truly believe that the combination of the food and beverage menu and the new service model will continue to gain momentum as we move forward. The teams are gonna get, you know, more skilled.

We're gonna continue to, you know, just take care of the guest at a higher, you know, at an elevated manner, and we believe the guests will return back with repeat visits. So, you know, the combination of those two, you know, I feel very good about.

Andrew Strelzik (Equity Research Analyst)

Okay, that's helpful. And then my follow-up is on the visitation, I guess, between cohorts, specifically your loyalty customers, where you're seeing, you know, nice growth in membership there and the non-loyalty customers. I think you said, if I got this right, that your loyalty members visit 2.5x as often as regular members. A year ago, at the Investor Day, you said that was, I think, 1.5x, and so you're seeing that gap widen.

Chris Morris (CEO)

Correct.

Andrew Strelzik (Equity Research Analyst)

So I guess, is that a function of just the traction that you're seeing with the loyalty members, or are you also seeing moderation in kind of your less frequent customers underneath that? I guess I'm just trying to think about the drivers there and the implications. Thanks.

Chris Morris (CEO)

Yes. No, I mean, we're, we're excited about that metric. I mean, you think about that, that's substantial, going from 1.5x to 2.5x, and we've seen a, you know, growth in our loyalty platform. So we've grown loyalty membership by 23%. And so I think it's just a reflection of us. It's, it's a priority in the business. We have, we have exceptionally talented people focused on, you know, the right metrics and going through a test and learn process and continuing to engage with that, with our loyalty members and in, in a more effective way. And so, and you're seeing it, you know, through those metrics. And so we believe that, that's, we're just gonna get better and better as we move forward.

So I think we're just being smarter about it, and we've got the right people focused on it.

Andrew Strelzik (Equity Research Analyst)

Great. Thank you very much.

Chris Morris (CEO)

Thank you.

Operator (participant)

The next question comes from Dennis Geiger with UBS. Please go ahead.

Dennis Geiger (Equity Research Analyst)

Great. Thanks, guys. Chris, I wanted to ask a little bit more on, you know, sort of some of the customer behaviors that you saw in the quarter in light of some of the macro pressures that you commented on and that the industry is seeing. I know you don't break out the traffic and the food and bev versus the entertainment piece, but anything on spend? You talked a little bit about days of the week. Any kind of additional breakdown on maybe where you're seeing more pressure versus where you're seeing, you know, less pressure, if there's anything on that front to touch on?

Chris Morris (CEO)

I wanna, you know, so I wanna stay on spend. You know, one of the trends that we've noticed in the business that we discussed last quarter was on our lower income consumers. There was more weakness within lower income consumers versus moderate income and high income. And we saw, you know, some strengthening in the higher income last quarter. Those trends continued into Q1, and one of the things that, you know, as we continue to fine-tune our marketing approach and get smarter about targeting the right guest and delivering the right message to that guest, one of the things that we've been very encouraged by is, as we've started to focus on midweek promotions, we've actually been able to recapture some of the low-income consumers.

And so we've been able to return them back to Dave & Buster's. And as they've returned back, we've been able to convert them into our loyalty platform, and as they've converted, those individuals are engaging at a higher rate. And so we think, you know, that's just a testament to the type of work that we're doing now and just being very surgical about how we approach our guests. First, understanding where the deterioration is occurring, and then being very smart about, you know, getting the right message to the right guest at the right time. We still have a long ways to go, you know, to where we want to be, but that's a data point that, you know, that things are moving in the right direction.

Dennis Geiger (Equity Research Analyst)

That's very helpful. And maybe just one more following up on the promotional side of things that you touched on there, which sounds encouraging. Just on the food promo, if there's anything more to add there on what you saw in the quarter relative to your expectations, what you attribute that to, and then what that means maybe on the go forward. You just mentioned kind of the midweek promos, which sound encouraging. Anything more on, you know, promos going forward at a high level on how you're thinking about that? Thank you.

Chris Morris (CEO)

Well, you know, I think what, what you're gonna continue to see from us is. You know, just being, you know, going through the testing and learning process, be fine-tuning the process, and then being very targeted in, in how we, how we approach the business. I would say, based on the success that we've seen in the midweek, you know, that's something we're gonna continue to focus on. We're still running half off food right now. That's not gonna be an evergreen marketing approach whatsoever. But for in the near term, you know, we're gonna continue to run with that, run with that. We think it still has some legs. But we like what we're seeing on All You Can Eat Wings. We like what we're seeing on, on the evergreen promotion of half off games on Wednesday.

And so we really like, you know, the approach that we're taking to driving off-peak demand. In terms of other promotions, you know, that's something that we're going to just be, you know, very smart about what we're doing. We have some partnerships that, that I mentioned during the call, you know, that we're quite excited about, that we think are going to really give us some juice here in the summer months, as well as in the fall. And so it's gonna be a constant balance between you know, having the right promotion, having the right partnerships, and having the right pricing strategy.

Dennis Geiger (Equity Research Analyst)

Appreciate it. Thanks, Chris.

Chris Morris (CEO)

Yep, thank you.

Operator (participant)

The next question comes from Brian Vaccaro with Raymond James. Please go ahead.

Brian Vaccaro (Managing Director of Equity Research)

Hi. Thanks, and good evening. You noted the improvements that you've seen in the last several weeks after the first quarter, you know, came in below expectations. So I guess in the spirit of level-setting trends and reasonable expectations, could you provide some more color on the comps that you saw sort of moving through the first quarter, and how the quarter to date is trending or, you know, what a reasonable expectation would be as it relates to the second quarter? Could we see comps get back to flat, if not positive? Just trying to level set expectations a bit.

Mike Quartieri (CFO)

Yeah, it's Mike here. When you think about, you know, what we were experiencing coming into the beginning of, I would say, the calendar year, January and February were tougher comps on the year-over-year basis. You had the weather that we saw in January, so, you know, the beginning of the calendar year started off slow as well for us and everybody else. As we got into January, February, we kept still seeing that lower income, that $75,000 and below customers still being challenged. That's not news to anybody. You've heard that on the news, you know, more so for the last, you know, at least four to, I thought, three to four months that we've seen. So sales in that period from January, February into March were choppy, as we said on the call.

Spring break this year was a much more shorter period, so it did cause a little bit of what I'll call either mismatch or just a shorter period, which meant it was more condensed. So we didn't get a real benefit of a prolonged spring break, where more activities would have taken place over that more prolonged period. But as we've moved out of that and got into, call it, the end of April into May timeframe, we've seen considerable improvement in the traffic numbers. The promotions of like what we talked about, half off food, has helped drive in the largest increase from a cohort perspective, came in from that under $75,000 a year consumer. So that was an opportunity that we kinda continued to see in keeping that offer out there for a week, day basis.

And so at this point in time, we're kinda seeing that low single digit negative comp right now. But we do see that trend getting better as we get more into the summer months at this point.

Brian Vaccaro (Managing Director of Equity Research)

All right. That's very helpful. Thank you, Mike. And on the marketing front, could you just level set, what was your ad spend in the first quarter? And what level of spend do you contemplate, all things you know today, kinda in 2024 compared to the, I think it was $65 million or $70 million you spent in 2023. Thank you.

Mike Quartieri (CFO)

Yeah, I would say that part of the, I'll call it, lean in or a little bit more heavy spend in Q1, we had three larger events that we kinda got ourselves behind on, or at least put the muscle effort into. The biggest one being around the spring break and the season, and I should say the Spring Break Pass, which, that's the test that we, you know, alluded to in our costs of just not being as successful as we were hoping for. But we do see, you know, the marketing spend as we get further into the year to be more normalized across Q2, three, and four. It just was a little bit more heavy in Q1 than we had normally would have spent because of that.

As well as helping the promotion of the half off food offer, which was really more about driving awareness and, you know, bringing customers into the building to experience the new food and new service menu or new service model.

Chris Morris (CEO)

Yep, and I can jump in and just add a little bit more color about, you know, some of our comments on, you know, say, look, during the quarter, you know, we had some things that worked, we had some things that didn't. Clearly, in Q1, we have the two areas that where we weren't pleased with was our labor performance and the marketing spend. And so, you know, labor is very clearly, it was related to... We rolled out the new food, we rolled out the new service model, at the, and we had all these different systems that were being implemented at that point in time. And we just kinda got out of line, you know, for a couple of periods.

But the good news is, on labor, we got it right back in line, very quickly. The business has stabilized back to, you know, the numbers that we would expect, and they've been consistent throughout the month of May and heading into June. So that was a blip. We took care of it. You know, this is a team that's always going to communicate with you directly when things are working well, and also directly when things aren't. On the marketing side, the Spring Break Pass that you alluded to was just, it was a mistake. It was constructed before our new CMO got here. You know, I'll own it as a CEO of the company, but it didn't work. It was designed poorly.

It had too high of a price point, and had too short of a period of time. It was about a $6 million spend, and we got very little out of it. So that's a mistake that we've learned, and we're not gonna repeat. So when you look at, you know, our quarter, it's why we quantified that impact, so you can have a better feel for how to think about the overall financial performance. There's, you know, over $10 million there that we do not expect to occur, and we are managing this business with those learnings in mind going forward.

Brian Vaccaro (Managing Director of Equity Research)

That's helpful color. Thank you. I'll pass it along.

Chris Morris (CEO)

All right. Thank you.

Operator (participant)

This concludes our question and answer session. I would like to turn the conference back over to Chris Morris for any closing remarks.

Chris Morris (CEO)

All right. Thank you, operator. We continue to see a tremendous amount of upside in this business, and based on what we're seeing in terms of leading indicators of success, are very optimistic that the financial inflection point we have been driving towards is quickly approaching. Thank you all for joining. We look forward to speaking with you again soon.