Dave & Buster's Entertainment Inc (PLAY) 2016 Q3 法說會逐字稿

Good afternoon, everyone. And welcome to the Dave & Buster's Incorporated third-quarter 2016 earnings conference call. Today's call is being hosted by Steve King, Chief Executive Officer.

I would like to remind everyone that this call is being recorded, and will be available for replay beginning later today. Now, I would like to turn the conference over to Jay Tobin, Senior Vice President and General Counsel for opening remarks. Sir, please go ahead.

Thank you, Don, and thank you all for joining us. On the call today are Steve King, Chief Executive Officer and Brian Jenkins, Chief Financial Officer. After comments from Mr. King and Mr. Jenkins, we will be happy to take your questions. This call is being recorded on behalf of Dave & Buster's Entertainment Incorporated and is copyrighted.

Before we begin our discussion of the Company's results, I would like to call your attention to the fact that in our remarks and our responses to your questions, certain items may be discussed which are not based entirely on historical facts. Any such items should be considered forward-looking statements and relating to future events within the meaning of the Private Securities Litigation Reform Act of 1995.

All such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ from those anticipated. Information on the various risk factors and uncertainties has been published in our filings with the SEC, which are also available on our website at Daveandbusters.com under the Investor Relations section.

In addition, our remarks today will include references to adjusted EBITDA and store EBITDA, which are financial measures that are not defined under generally accepted accounting principles. Investors should review the reconciliation of these non-GAAP measures to the comparable GAAP results contained in our earnings announcement released this afternoon, which is also available on our website.

Now, I will turn the call over to Steve.

Thank you, Jay, and good afternoon, everyone. We appreciate your participation in our quarterly conference call and interest in Dave & Buster's. Today, I will review the quarterly highlights and provide an update on our current initiatives and plans. Brian will walk through the key financials and latest guidance, and then I will discuss our development and remodeling efforts before we take your questions.

We are pleased to report very strong third quarter. We delivered industry-leading comparable store sales growth of 5.9%. Our comp store sales continued to perform exceedingly well, and we expanded margins significantly as we leveraged our operating costs. Although we are certainly not immune to the macroeconomic environment, the uniquely customizable experience we provide across four platforms, eat, drink, play and watch, provides us with some degree of insulation from casual dining trends, and that certainly played out this quarter.

As we mentioned before, our strategy is to lead with entertainment, the most differentiated part of our offering. This helps to separate us from the competition, especially as we add proprietary content. Our objective is to drive traffic by featuring games, food and beverages on national cable television with immediate call to action, which usually includes an element of free game play. Once guests are in our stores, we want to sell them the complete experience, including our F&B offering, but we consciously are not doing anything that would shift revenue to food and beverage at the expense of amusement sales.

For the quarter itself, we grew total revenues by nearly 19%. Net income was $10.8 million driven by a 42% growth in adjusted EBITDA and a 350 basis point improvement in adjusted EBITDA margin. Of the 88 stores we operated during the third quarter, 22 stores or 25% of the totals were non-comp stores. Very strong performance continues to demonstrate the broad appeal of our brand as we work towards building out our North American store potential of over 200 stores.

Looking ahead, we are off to a good start in the fourth quarter and given our results to date, we are increasing our annual guidance. Brian will elaborate on that in his prepared remarks.

Now, I would like to draw your attention to a few of our new products and marketing initiatives. First, a couple of thoughts on amusement. In recent quarters, we have talked about strategic advantage that Dave & Buster's has in terms of acquiring new games for our time period that is unique and exclusive to us. As part of our future strategy, we will continue to pursue games that have these exclusive windows, and to market them on national TV.

More recently, we have begun unveiling a new and improved dimension of proprietary games that will be exclusive to us on a permanent basis. Our first proprietary game, Star Trek, made its Summer of Games debut in the latter part of Q2. The game immediately became our second-highest grossing game, often rising to number one on our daily banking since then. Recently, we introduced Tailgate Toss, another proprietary game for D&B. This is a Dave & Buster's conceived spin on the classic bean bag toss game that we believe also helps to further our goal of becoming the ultimate football-watching destination.

A third example of a proprietary game that we will launch in Q4 is Rock 'em, Sock 'em Robots, a giant take on an old favorite. This also is our first self-developed title. From license to concept design, to manufacturing distribution to operation, D&B has conceived and delivered a product that will have our guests returning for countless robot battles between a life-size Red Rocker and Blue Bomber.

This strategy of bringing new, exclusive and in some cases, proprietary content will carry forward into FY2017, as we continue to discover and build titles and content that can drive traffic to our stores. We are very appreciative of the efforts of our SVP, Kevin Bachus and his team as they continue to work with our many game manufacturing partners to find the newest, exclusive and most exciting games available.

At the end of Q3, on a system wide basis, we launched Power Tap, our new RFID-enabled merchandise. The assortment consists of RFID bracelets, pendants and wands, and guests can purchase these in place of a Power Card to activate our games. While it is still quite early in the life of this new product, and we have relatively modest expectations for its impact on our business, sales have been in-line with expectations. We will launch additional promotions in Q4 to build greater awareness, as our tests show that this product drives higher spends.

On the marketing front, during Q3, we wrapped up our popular Summer of Games promotion and then transition to football-related messaging tied to our D&B sports branding in September and October. We promoted all-you-can-eat wings for the first five Thursday, Sunday and Monday of the NFL season for $29.99 with a $20 Power Card.

On the food side, new menu items included two shareable appetizers, a Carnivore Pizzadilla and a Bucket of Bones, in addition to a new sandwich and a new combination plate. Within our beverage lineup, we introduced three one-of-a-kind cocktails, leveraging popular brands and on-trend flavors like Patron. We, again, thank our CMO, Sean Gleason and his team for their ongoing ability to express the brand in new and creative ways.

Now, let us hear from Brian, who will provide a financial update.

Thank you, Steve, and good afternoon, everybody. Before walking through the numbers, I just want to thank our many team members across the country. They are clearly our greatest asset and standard bearers of the service levels, the programs that drive our sales and profit growth on a daily basis. Their commitment to Dave & Buster's is the key reason we are in a strong position to deliver on our improved annual guidance for all key metrics.

Now, in terms of the third quarter, total revenues increased almost 19% to $228.7 million. That is up from $192.8 million in the prior year due to contributions from newer stores, as well as strong performance in our comp store base. Revenues from our 66 comparable stores increased 5.9% to $177.4 million. That is up from $167.6 million, while revenues from our 22 non-comparable stores, including 2 that opened during the quarter, increased 106% to $50.9 million. That is up from $24.8 million in the prior year.

Turning to category sales, the mix shift to our more profitable entertainment business continued. As amusement and other sales grew 24%, while food and beverage collectively increased 13%. During the third quarter, amusement and other represented 55.7% of total revenues, reflecting a 230-basis point increase from the prior year period.

Now, breaking down the 5.9% increase in comp sales, our walk-in sales grew 5.7%, while our special events business increased 7.6%. In terms of category sales, amusements rose 10.4%, while our food and beverage business was up 0.8% and 0.6%, respectively. We were able to extend our out-performance, relative to Knapp-Track, to 18 consecutive quarters, and our GAAP to Knapp widened versus the second quarter.

On a two-year stacked basis, our comparable store sales growth accelerated to 14.7%, an improvement compared to the trends in the first half of the year. Our strength was broad-based across the countries and across the entire quarter and we experienced less volatility. The impact of cannibalization and competition was at a level we had anticipated, and our Texas stores experienced meaningful sales improvements that took them close to the system average.

We estimate that 160 basis points of our comparable store sales growth in the quarter related to the combination of a favorable calendar. And that is mainly a Halloween moving from Saturday to Monday, and actually shifting into the fourth quarter, and favorable weather conditions. I would also remind you that we cycled over a lofty prior year comp of 8.8%, including an F&B comp of 6.2%.

In terms of cost, total cost of sales was $42.1 million in the third quarter and as a percentage of sales, improved 50 basis points. Food and beverage cost as a percentage of food and beverage sales were flat compared to last year. The benefit of food commodity deflation, which is moderating at approximately 2.4% in food pricing and 1.7% in bev pricing, was offset by typical new store inefficiencies and some shift in item mix. We expect that deflation will continue to moderate during the fourth quarter, and our preliminary estimates for 2017 are for slight commodity inflation.

Cost of amusement as a percentage of amusement and other sales was 30 basis points lower than last year, as we cycled over the benefit of our e-ticket initiative, which you guys may remember rolled out during the second quarter of last year. We experienced a favorability in our ticket redemption patterns, fueling some further margin improvement this quarter. E-ticket has been clearly, the most impactful technology we have introduced in the past decade. Driving annualized savings of over $8 million, while also creating an improved guest experience. Total store operating expenses in the quarter, which includes operating payroll and benefits and other store operating expenses, were $126.9 million. And as a percentage of revenue, improved 250 basis points year-over-year to 55.5% of sales as we leverage fixed expenses on strong comps and overall sales growth.

Our operating payroll and benefit cost improved 80 basis points, as we leveraged our comp sales growth partially offset by hourly wage inflation of about 5% during the quarter and a growing mix of non-comp new stores. While our non-comp new stores continue to perform well and are generating excellent returns, from a labor perspective, they are not as efficient as our mature comp store base.

Store EBITDA was $59.6 million for the quarter, reflecting growth of 34% compared to $44.5 million last year, an improvement of 300 basis points to 26.1% of sales. This is the highest store EBITDA and margin we have ever generated during a third quarter, which is seasonally a low quarter for us.

G&A expenses were $13.5 million, that is up 7% to last year, but as a percentage of revenues, were 70 basis points lower at 5.9% as we leverage these costs against our overall sales growth. The increase in dollars were primarily driven by increased labor cost at our corporate headquarters, as well as higher incentive and share-based compensation compared to the prior year.

Pre-opening costs totaled $4.6 million compared to $2.4 million in 2015, reflecting both the timing and the number of new store openings relative to last year. I ask you to recall that for large format stores, we typically spend about $1.4 million, and for large (sic -- small) format stores, we spend around $1 million.

Now taken altogether, our adjusted EBITDA grew 42% to $48.9 million and margins improved roughly 350 basis points to 21.4%, representing a new high watermark for our third-quarter performance. So again, I want to thank all of our team members for this achievement. Net interest expense for the quarter fell to $1.6 million, down from $2.2 million in the prior year driven by the lower interest rate under our recapitalized debt, as well as reduced debt levels. We generated net income of $10.8 million, or $0.25 per share on a diluted share base of 43.3 million shares compared to net income of $4.6 million, or $0.11 per share in the third quarter of last year on a diluted share base of 42.9 million shares.

Now turning to the balance sheet for just a minute, with our capital structure and strong free cash flow, we have significant financial flexibility. At the end of the quarter, we had $278.6 million of outstanding debt on our credit facility, resulting in leverage of 1.1 times with an available borrowing capacity in excess of $200 million. Our capital allocation strategy remains focused on investing in growth via new store development, while preserving some dry powder for incremental stores and other growth opportunities. With our low leverage, we also have the ability to return our value to shareholders.

Recall that we have a $100 million share repurchase program in place through the end of FY2018, and our intention has been to buy back shares to offset dilution related to our extended stock plan. During the third quarter, we repurchased 132,000 shares, bringing our total inception to date repurchases to 171,000 shares, or $7.4 million. As both our performance and leverage improves, we will continue to evaluate the appropriate strategy to maximize shareholder value.

Turning to our outlook, in view of our strong third-quarter performance, we are raising our guidance on all key performance metrics. Total revenues are expected to range from $998 million to just over $1 billion, that is up from $983 million to $995 million previously. Comp store sales growth for the fourth quarter is projected between 2.5% of 4.5%. This would imply full-year comp growth between 3.1% and 3.6%, up from our previous guidance range of 2.25% to 3.25% per set.

We remain excited about our year-to-date performance and the upcoming initiatives for the balance of the year. From a development perspective, we are now targeting 11 new store openings. That is at the high-end of our previous range. We have already opened 10 stores year-to-date, and expect our Daly City, San Francisco Bay Area store to open later this month.

We are projecting net income in the range of $86.5 million to $88.5 million; that is up from our $80 million to $85 million range. Adjusted EBITDA is anticipated to range between $265 million and $268 million; again, that is up from $254 million to $260 million previously.

Our effective tax rate remains at 36.5% to 37.5%, and our diluted share count estimate remains at about 43.2 million shares. We are projecting net capital additions after tenant allowances and other landlord payments of $148 million to $158 million; that is up from $130 million to $140 million previously. This was driven by increased development costs for new stores, as we expect to be at the high end of our previous range in 2016 and anticipate higher pre-spend on a strong pipeline of 2017 stores. We are also making additional strategic investment new gains including our upcoming launch of Rock 'em, Sock 'em Robots.

Finally, while we are not yet in a position to provide detailed guidance for 2017, I would like to relay our preliminary view on the upcoming year. Coming off what we expect will be another record year in 2016, we believe a move toward more normalized growth is most likely for 2017.

We anticipate low double-digit growth in revenue, net income and adjusted EBITDA on a comparable 52-week basis. We will provide more specific guidance for 2017 when we report our fourth-quarter results in late March, including our thoughts on the impact of the 53rd week, as 2017 will be a 53-week year.

With that, I will turn the call back over to Steve to make some final remarks.

Thank you, Brian. I would like to review our recent and upcoming store development activity and some of the remodel program. We are pleased with the response to our recent store openings. During the quarter, we opened two stores; a store in Fresno, California and a store in Summerlin, Nevada, which is a suburb of Las Vegas. Nevada is a completely new state for us.

In the fourth quarter, so far, we have opened stores in Toledo, Ohio; Silver Spring, Maryland outside of DC; and Toronto, Ontario, Canada. In fact, we opened that store today. We remain focused on having buildings and teams ready to handle the typically strong opening weeks that we have in our new stores. At the same time, we are constantly refining our process to ensure greater efficiency during this pre-opening and the first 90-day opening process.

While we had previously guided to between 10 and 11 openings, as Brian mentioned, we are now confirming 11 store openings for the year. Of these 11 stores, 6 are in new markets for D&B, and 5 stores our in markets where we already have a brand presence. While it is early, our 2016 class of stores is performing quite well.

Our position as a premier sought-after entertaining and dining concept enables us to tap into an increasing supply of real estate that meets our criteria and gives us confidence that our long-term goal of 200 stores in North America is within our reach. Between well-known big box retailers and department stores announcing closings, and mall owners emphasizing entertainment, as well as dining options versus traditional fashion retail in their redevelopment plan, we are very well-positioned and can therefore be selective in choosing the best sites for our brand.

As a reminder, we are targeting 10% or more unit growth per year, including a combination of large and small store format. As we mentioned, it is likely to be 12% to 13% next year. Our 2017 target is that 11 stores to 12 stores, with that growth rate of 12% to 13%. As in years past, we will use the entire spectrum of store sizes, between 25,000 square feet at 45,000 square feet. Currently, we have 23 signed leases and 9 of those units under construction.

We will also anticipate our first of seven licensed stores in the Middle East built at some time in FY2018. We remain excited about our partner in Dubai and are working the additional agreements for other geographies outside of North America, as well.

In 2016, we will have substantively completed three models of our D&B store space, but recently, we extended the lease terms of four stores. And as a result, we will have the opportunity to remodel those stores in 2017, as well. So just to wrap up, we had a very strong quarter. We increased our 2016 new store openings to the top-end of our previous expectations, raised our full-year financial guidance and remain highly confident in our long-term outlook.

Before we take your questions, I would like to congratulate Margo Manning on her promotion to Chief Operating Officer and Senior Vice President. Margo is a true D&B veteran with more than 25 years of service to the Company, including as a Senior Vice President of Human Resources for the past 6 years. She has been integral in building our brand and exudes an incredible passion and energy for D&B that is truly infectious.

Her well-deserved promotion comes on the heels of Dolf Berle's resignation, as Dolf expects to accept a position with another company shortly. We greatly appreciate Dolf's work at D&B and his contributions, and wish him well as he pursues a new opportunity.

Thankfully, between Margo's leadership and our operations team's bench strength, we are well-positioned to continue executing the strategies as I laid out earlier, and in fact, do not anticipate skipping a beat. As always, we anticipate your continued support and interest in Dave & Buster's.

Now, Operator, please open the lines for questions.

(Operator Instructions)

Jeff Farmer, Wells Fargo.

Thank you. You did touch on it, but relative to your expectations across traffic mix, weak part trends, that is, regional trends, any other day part sales component. Where did you see Q3 same-store sales outpace your expectations by the greatest level?

I guess I will share a little bit in terms of -- we did not share that any of our day part data so far on the call. We saw a very strong performance in the lunch and afternoon day part. It was -- it clearly outperformed dinner and late-night for us. We think, in terms of day of week, Mondays, Wednesdays, and Saturday, Sunday were all very strong days for us. You know, we were out there promoting D&B Sports, as well as some great new game titles, so we felt like we had a good line-up of product. And you see it when you look at the comp performance in amusement; I mean, we were up over double-digits growth. So we felt very good about how the quarter shaped up for us.

And as a follow-up, so the operating income margin -- just margin expansion, in general, is quite sizable in the third quarter and year-to-date. But just beyond the sales leverage that would come with the nice comp numbers, where do you see opportunities to deliver margin expansion as you head into 2017? What is still left out there for you guys on the margin front?

Well, clearly, this has been an excellent year; not only the quarter, but the year, overall. We have seen very strong margin growth for the Company; 350 basis points for the quarter and I think, around 270 year-to-date in terms of adjusted EBITDA margins, so a very strong year. A lot of the fuel of this has been the e-ticket initiative, which was a big number, so -- as well as commodity deflation has been helpful. So that fuel, we are rolling over. We have indicated that we are rolling over that Q4, even more so. There is limited runway left on either of those items at this point, so that has been very helpful for us in terms of fueling the year margins.

This quarter, when we put up the 59, we had significant leverage on facility-related costs. We were also able to leverage marketing, despite the fact that we did invest in a couple of extra weeks and leverage G&A. As we move forward long-term, we had indicated that margin opportunities are tougher to come by. We have moved our margins up 1,100 basis points in the last six years, and as of the last decade, it is more like 1,300 or plus basis points. So very strong margins, a lot of movement.

It has made for a very healthy store base, made for very strong returns, it opens us up to the 200 stores that we have targeted as a brand, so we are just in a very healthy place that way, but it is harder to come by. There is not an e-ticket running around every day; we are more in the -- that was a home run for us. We are now more in the singles and doubles, looking for opportunities, we continue to do that. But our long-term guidance for our margins is really maintaining our comparable store level margins based on low single-digit comp, leveraging G&A and leveraging marketing over time.

And the new stores, as I indicated in my comments today, they tend to be less efficient from a time cost, labor and a cost of sales because they are not mature. And we have a growing base of non-comp stores; we have 22 non-comp stores in our base of stores. By the end of this year, it will be 26. That puts the pressure on our margins, and our rents in the new stores tend to be a bit higher than some of our stores that have been in the system for a long time. So we are trying to manage all of that, and -- but we think we have a very strong margin profile with the brand as it sits, and we are going to continue to look for ways to move the needle.

Thank you.

Andy Barish, Jefferies.

Yes. Hey, guys.

Hey, Andy. (multiple speakers).

Just wondering, has there been a shift in the third quarter this year, maybe -- at least debating it, that it is just a less seasonally, softer quarter with your football viewing and watching component to the business now? Is there something to kind of talk about there?

Well, I think that as we have discussed previously, one of the objectives of going after the third quarter was that it was seasonally, our slowest quarter, and that one that we saw a really good fit with viewership out-of-home being the strongest in the third quarter. So those two things dovetail quite nicely; people saw it as a logical extension for us. But to your point, it is getting to be less of a weak quarter than it was. It is still the weakest of quarter of the year for us, but you dial back a couple of years ago, we certainly were not making very much money. In fact, we were sort of flattish on an overall earnings basis in the third quarter. We compare and contrast that with making over $10 million, $0.25 per share, we have come a long way from where we were a couple of years back.

And just following up on that a little bit, I take it you did not see or could not tell any impact from the lower NFL ratings? And when were the extra weeks of advertising in the quarter, and could you quantify that for us?

You know, we have said -- l will answer the last question, first. First of all, they were -- one was, I think, in September and one was in October; I mean, they were kind of spread out throughout the quarter. We like what we saw from it, but just to be clear, it was not the driver for a 5.9% comp, what we did in those two quarters -- excuse me, those two weeks where we advertised, where we had not last year. We are going to be a little less transparent about exactly what we are doing from a marketing standpoint. We have a lot of people out there trying to copy what we are doing, and we do not think that it behooves us to be overly specific. Other than to say, we are happy with the results of that enough that we will continue to add some weeks into the fourth quarter. And I think, as Brian mentioned, we anticipate that, that may create some slight de-leverage on the marketing line in Q4.

Thank you.

Sure. Thank you, Andy.

(Operator Instructions)

Joshua Long, Piper Jaffray.

Great, thank you for taking my questions. Wanted to see if we might be able to talk about the proprietary gains, and then I am lumping in there, also the opportunity to kind of create new upsell opportunities with the RFID bracelets and wands you mentioned. How do you think about, or how should we think about dimensionalizing that in terms of where you have been historically? And what either contribution or mix in terms of percentages of games or promotions that should be going forward? Not trying to get too into the weeds, but just seems like there is a big opportunity here with the proprietary nature and really taking that -- the next steps to just trying to put that in context of where we are coming from.

Yes, I think that either a game that we have an exclusive basis for a limited period of time, or a proprietary game, both of those can be strong for us. And both of those are attractive to us in terms of ways that we want to kind of make our capital investment marketable and we spend that over -- for a long time, really. That is one of our key objectives is we are going to buy games, we are going to refresh the midway content, we want to make sure that, that content is such that we can make that marketable capital. So once again, those proprietary and exclusive games give us that ability to advertise that kind of, only at Dave & Buster's, message.

Again, as I mentioned in my remarks, that we typically will pair that with an opportunity to come in and play some of those for free. So going forward, we are going to continue to look for those. Does every game have to be proprietary or exclusive for us to buy it? No, is the answer to that. But certainly, it would be a strong preference, and it really is the way that we are building the marketing calendar for 2017. We are building the marketing calendar around the idea that we are going to have a series of proprietary and/or exclusive games that we advertise over the course of the year.

You asked about RFID, as well. I do not want to overstate RFID. Because it is a single, as Brian described earlier; I am not talking about single-digit comp influencer, just to be clear. (laughter). It is a single in the baseball analogy, right? It is going to be additive. It is a little early to say exactly how additive, but we believe that by what we are able to measure, the people who are buying these devices are putting at least as much on their card as anybody is who is buying a Power Card. And we are getting $10 for one of these devices versus $2 for a Power Card.

So obviously, it is a good trade for us, if they are willing to do it. It is an easier way to activate the games, it is kind of cool technology. It will take us a while to figure out how many people are going to bring these back versus not bring them back, and all the rest of that. But it is something that we are going to continue to pursue, and continue to try to figure out ways to market. And again, it should be able to provide us with some incremental revenue and profitability.

That is helpful; I appreciate that. In terms of just the initial outlook on 2017 development with the expectation that skews towards newer -- larger stores in newer markets. Anything you would point to, just in terms of what the revenue dynamic of that looks like? Maybe opening up a little stronger, and then just given the newness of the new markets, or do you feel like your national brand awareness is at a point now where newer stores in newer markets might -- I guess the disparity might converge over time?

I think that we still see very nice uptick in markets where we do not have any stores. In fact, a somewhat greater honeymoon is in markets where we do not have any stores. Having said that, we are kind of in tween-er land, as well, where we are going to have a blend of large and small, and some in-between. I would say even some of the large stores that we are building, at the close to 40,000 square foot range, we are not necessarily underwriting at the top-end of the sales range. In terms of where do we think -- we think it is going to be similar to this year, where the logical number comes in somewhere like a blend between our small model and our large model.

Thank you.

Sharon Zackfia, William Blair.

Hi, good afternoon. Two questions. (multiple speakers).

Go Cubs.

Yes, go Cubs, right? That drove the comp. (laughter). Quick question on the amusement of the proprietary work you are doing there. How do you assess how much a tailgate toss helps comps or a [star] track? It would be helpful to understand what you look at to figure out what it is really doing to the business. And then secondarily, the normalization in Texas, how much did that benefit comps in the quarter?

Well, Texas is easier to answer than the former. Texas was up slightly less than the overall, so -- which was a material bounce back from where Texas was in Q1 and Q2.

Okay.

It moved from being negative comp to positive comp in the quarter, so it is helpful, but it is a small piece of the 59, really.

Well, it is not -- it is also not a part of the -- (multiple speakers).

It is essentially higher than that, so -- .

And to answer your question on the former, it is really, really, really hard to tease that stuff out, of how much incremental traffic and, or, can any single-game provide? I think we have found that we can move the needle with promotional activity that is specific to games. Now, how much of it is around, hey, I would like to go try that game, that looks interesting; that is clearly what we are trying to do. But trying to tease that out, relative to overall kind of how is the brand is doing in some of that sorts of stuff, it gets extraordinarily difficult to do.

I would say this, if you -- going back historically, and looking at the comps in our business, and looking at how we have driven the amusement side, entertainment side of the business. You know, five years ago, 2012, when we first started the notion of putting games to work for us, making it marketable capital, taking delivery of games when we wanted them, not when they were necessarily available, just available and trying to put them on TV. That notion started to change the results, and we could see it by putting the capital to work. What we are doing now, feels like, to me, a natural evolution. Meaning it is even better to have a game that is exclusive to us for a limited time, so we have done a number of those. Kevin Bachus and his team have worked hard to do -- bring some of those titles. The notion of a proprietary game are permanently ours, no one else's, like Rock 'em Sock 'em or Star Trek, is just a further evolution of that strategy. And we think it is the reason why you see the kind of amusement comps we have. So to pinpoint the specific launch of a Star Trek or something like that, did it move the needle in one week, I kind of think it is broader than that.

Thank you.

Brian Vaccaro, Raymond James.

Good evening. Just a quick follow-up to start, on Andy's question around the D&B Sports impact. In the past, you have talked about some year-on-year trends during key football viewing period. Would you be willing to share how those periods performed in the third quarter?

I think Brian alluded to it. He says that -- (multiple speakers) -- I think Brian alluded to it. I mean, I do not know that we -- I think in the past, we called out a specific day is the best, like sometimes we have called out Wednesday or Sunday, or whatever. I think Brian alluded to the fact, Saturday and Sunday were really good for us in the quarter. But is that all what we are doing with respect to D&B Sports, or is it -- are there some other elements there?

Again, clearly, we were on television for the first five weeks of the NFL season with all-you-can-eat wings Thursday, Sunday, Monday. We could not figure out how to do it cost-effectively on Saturday. I think one of our competitors went out on Tuesday with all-you-can-eat wings or half-price wings, so clearly, we have some advantage. But even during those time periods, we are still seeing significant uptake and significant crossover to the amusement side of the equation.

Okay, and on that all-you-can-eat wings promotion, I understand the tweaks that you made in terms of the number of weeks and the price point versus last year. Was the attachment rate up also, despite that higher price point?

No, the attachment rate was down, and we had kind of had modeled that and expected it. The attachment rate was down.

But a net positive to sales?

Net positive to us.

Okay. All right, great. Just a couple on guidance, if I could. First, just starting on the fourth-quarter comp, specifically. Can you quantify the headwind from the Halloween shift? I guess it is just the suppressed Monday versus a normal Monday last year; is that the right way to be thinking about it?

Yes, obviously, Halloween moving off the weekend was good for us in the third quarter. We quantified 160 basis points related to the combination of a number of things, Halloween was a piece of that. Weather was also helpful to us, but it is not a -- one day on a Monday is not an overly significant day. It is one of the -- it is actually the lowest volume day we have, so having it shift over -- Halloween shift over to a Monday, it is not -- it is a negative impact, but it is not a material negative impact.

Q4 is going to be, most likely, more impacted by what happens with the Christmas holiday, and the fact that Christmas, New Year's are going to shift over to the weekend, Saturday, Sunday. And that is a headwind for us, so we will see how that all works out. Observed New Year's Day actually falls on a Monday, so that probably helps that day, but in general, Christmas shifting to the weekend is not good for us.

But you are also, I guess, lapping Hurricane Jona's impact last year, as well.

We are. Our 2.5 to 4.5, we tend to want to leave more range in the fourth quarter; that is a 2 point range in our guidance. It is a very healthy comp at 2.5 to 4.5, given the environment that is out there, and the mid-point of that range is right square on our year-to-date performance. And you know, we obviously came off a very strong Q3 number here that had little tailwind, some holiday and weather.

We shift into Q4, it is a big quarter for us. We have some big weeks coming up here around Christmas and the holidays. And you know, we are more exposed to weather volatility in the fourth quarter; it is just the way it works. We get another Jonas or two of them, there is more exposure there; hopefully, we do not. And there is the issue that I mentioned previously around the holiday calendar shifting to the weekend, in general, not good. Brian will kind of provide a little wider gap in the fourth quarter in our range here.

Sure, sure, makes sense. And sticking with the fourth-quarter, if we could, seems your implied margin guidance -- or your implied EBITDA guidance, excuse me, for the fourth quarter, seems to imply store margin contraction. And excluding the impact of differentials and comp trends, obviously, I am just trying to understand what might be driving that? Is there anything in the fourth quarter that was unusually favorable last year that we should be mindful of? Is there something maybe changing in terms of the weight on your model related to non-comp? Any color on that you might be able to provide would be helpful.

Yes, I have mentioned we are close to 270 basis points of adjusted EBITDA margin improvement year-to-date. 150 basis points of that was P&L driven, and the gross margin and labor and benefit. We do, as I mentioned, we are going to roll over 100 basis points of that good news in the fourth quarter, so we actually do not have that fuel on the gross margin line going into the fourth quarter.

And labor, we expect some pressure in labor from wage inflation at around 5% in the fourth quarter. And you mentioned it, Josh, the impact of non-comp stores, new stores that are not mature and tend to be inefficient, particularly when they open, is going to put -- we expect to put some pressure on our margin in the fourth quarter. And going forward, we are going to open four stores -- three large stores, four stores in the fourth quarter and two that we opened in the third quarter. So we have a growing class of non-comp stores that -- as I said, we are really excited about the return. They are strong, and that is all good news, but they do put some pressure on the margin profile of the Company.

All right, understood. And then just a last -- (multiple speakers).

I forgot to mention marketing. Marketing is a switch. We have leverage marketing on a year-to-date basis. While we are not going to say how many dollars we are going to spend, and how many weeks. We are going to try to kind of back away from providing our entire marketing strategy for all that you are about to see. We expect it to move from a leveraging line to a de-leveraging line, as we look to promote some of our new game capital.

All right, that is very helpful. Last one, on your 2017 guidance, does that include the benefit of the extra week?

No. We intend for that guidance to be interpreted, we expect to be at low double digits for those metrics I mentioned. Sales, EBITDA, net income, excluding the impact of the 53rd week, and we will share what we expect that impact to be, probably on our year-end call in March.

All right, very helpful. Thank you.

You bet.

Thanks, Brian.

(Operator Instructions)

Andrew Strelzik, BMO Capital Markets.

Hello, good evening. So just following up on you just went through some of the margin impacts to the fourth quarter. If I look at 2017 guidance, your revenues are above your normal plan, your EBITDA growth is not, it is more in-line with the normal plan. Is it safe to assume that the same kind of dynamics are going to limit the margin expansion in 2017, or is there something else high level that we should be aware of?

I would interpret it that way. That low double-digit sales growth implies low double-digit EBITDA growth, and they are directionally similar numbers, and not a whole lot of margin expansion.

Okay, and secondarily, as we are going into the holidays here, obviously, there was a big change in the trajectory of your special events business. Do you feel -- what was really the big driver of that? Do you feel like we have stabilized and started to re-accelerate there, as we think about how that impacts the fourth quarter, which is obviously more impactful than some of the other quarters for the special events business? What is really the big driver there?

Well, a couple of things. If you recall, we did make a switch there of changing where that group was reporting, really, to put it under marketing. And we made that switch at the very end of last year, so that as we moved into this year -- moved from sort of being directed by the operating team to being directed by the marketing team. I think it has taken some number of months to really make some of the shifts and changes that they wanted to make, and have those catch hold.

Having said all that, it is the law of small numbers. It is a relatively tiny quarter in terms of absolute dollars, so without a dramatic increase in the dollar amount, you can have a pretty big improvement in the percentage performance. Now having said that, we feel good about special events for the fourth quarter, what we are going to do, but there is a lot of it still in front of us to go.

Okay, and then I guess the last one for me, you made the commentary about the flexibility on the balance sheet. Have you started to think about what the right longer-term leverage profile is for the business? Is that something that you might be looking to execute on in the intermediate term here, or is that kind of just longer-term optionality that you are thinking about?

I think that we continue to think about and -- (technical difficulty) -- we are not really prepared to really come out with anything specific at this time.

Okay, great. Thank you very much.

Thank you.

That concludes today's question and answer session. At this time, I will turn the call back to Mr. Steve King for any final remarks.

Okay, well, thank you for listening in today. We look forward to sharing our 2016 year end results, and as we mentioned, comprehensive 2017 guidance on our fourth-quarter call, which will occur in late March. Good night.

This does conclude today's conference. Thank you for your participation. You may now disconnect.