Jul 22, 2008
Executives
Mike Magusiak - President Chris Morris - EVP and CFO Dick Frank - Chairman and CEO
Analysts
Robert Derrington - Morgan Keegan Brad Ludington - KeyBanc Capital Markets Barry Stouffer - BB&T Capital Markets Greg Ruedy - Stephens Inc Michael Gallo - CL King and Associates Paul Carpenter - Artis Capital Alex Fodor - Izara Capital Management
Operator
Welcome to CEC Entertainment teleconference call. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, July 22, 2008.
I would now like to turn the conference over to our host, Mr. Mike Magusiak, President.
Please go ahead.
Mike Magusiak
Thank you. Welcome to our conference call.
I'm Mike Magusiak, President of the company and I'm joined by Dick Frank, our Chairman and CEO, and Chris Morris, our Executive Vice President and Chief Financial Officer. Before we begin today's discussion, I would like to make you aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements.
Information on the company's risk factors was included in our press release and is also included in the company's filings with the SEC. Additionally, in today's discussion, we may refer to an adjusted EBITDA, adjusted EBITDA margins and free cash flow figures, all of which are non-GAAP financial measures.
For reconciliation of our reported results to such non-GAAP financial measures, please see the earnings release filed earlier today or the Investor Information section of the company's website. The primary objectives for today's call are first, to discuss our financial performance during the second quarter of 2008; second, to summarize the three broad components of our strategic plan to maximize long-term shareholder value, including increased comparable store sales; grow our concept with new units, and return capital to shareholders with a share repurchase plan.
Next, Chris will discuss our outlook for the business. And finally, Dick will provide some concluding remarks and then open the lines for a question-and-answer session.
Now, I'd like to turn the call over to Chris Morris, our CFO, who will review our financial performance for the second quarter.
Chris Morris
Thank you, Mike. Good afternoon, everyone.
I'd like to start by reviewing comparable store sales performance. During the second quarter, comp store sales grew 5.7%.
On a year-to-date basis through the end of Q2, comparable store sales grew 4.5%. We believe this strong performance provides evidence that our sales strategies are working.
We are particularly encouraged by the consistency of this strong performance throughout the year. During the first half of 2008, we grew comparable store sales in each of the six fiscal periods.
In addition, on a year-to-date basis, each of our five operating regions delivered positive comp store sales, ranging from 2.8% to 6.4%. In a few moments, Mike will share with you our thoughts on the main factors driving our strong sales performance.
I will now review the highlights of the second quarter P&L. During the second quarter, total revenues grew 7% to $192.5 million due to positive comp-store sales growth and an increase of four units through our weighted average unit base.
Cost of sales as a percent of company store sales increased 10 basis points, from 16.2% to 16.3%. This increase is primarily due to a $0.29 increase in the average price per pound of cheese and a $0.15 increase in the average price per pound of dough.
Such increases were partially offset by a 40 basis point reduction in pizza costs, which resulted from the enhanced cheese blend discussed in our last call and a one-half inch reduction in the size of the company's medium and large pizzas. Labor expenses, as a percent of company store sales, decreased 50 basis points from 28.9% to 28.4%, primarily due to leverage from the strong sales performance.
A 3.7% increase in the average hourly wage rate was fully offset by a 3.8% increase in revenue per hourly labor hour. Depreciation and amortization expenses increased from $17.3 million to $18.2 million.
As a percent of total company store sales, D&A expense declined 20 basis points. Rent expense increased from $15.8 million to $16.4 million.
As a percent of total company store sales, rent expense declined 30 basis points. Other company store operating expenses, as a percent of total company store sales improved 150 business points from 16% to 14.5%, primarily due to leverage on fixed and semi-fixed costs, an $856,000 gain on disposition of an asset, and a 20 basis point reduction in asset write-offs.
Advertising expenses, as a percent of total revenues, increased 10 basis points from 4% to 4.1%, related to our enhanced marketing plan. General and administrative expenses, as a percent of revenue, increased 30 basis points from 7% to 7.3%, primarily due to an increase in the company's bonus accrual, associated with the company's strong financial performance for the first half of '08.
Interest expense increased from $2.9 million to $4.1 million, representing a 50 basis point increase as a percent of total revenues. This increase is related to an increase in outstanding borrowings from the prior year, partially offset by lower interest rates.
Net income for the quarter was $11.3 million, and diluted earnings per share grew 85% from $0.26 in Q2 '07 to $0.48 in Q2 '08. On a year-to-date basis, comp store sales grew 4.5%, store operating margins improved 70 basis points, and diluted EPS grew 46% from $1.22 in '07 to $1.78 in '08.
During the first half of the year, the business generated approximately $104 million in operating cash flow. We invested $37 million, primarily in new and existing stores, and used $161 million to repurchase 4.9 million shares of company stock.
We ended the quarter with a balance of $394.5 million on the company's revolving credit facility and a balance of $71.4 million on the company's share repurchase authorization. In October '07, we made three important announcements.
First, we secured a five-year, $550 million revolving line of credit, which at the time of the announcement increased the company's borrowing capacity by $250 million. Second, the Board of Directors increased the company's share repurchase authorization by $200 million, bringing the remaining balance under the authorization at the time of the announcement to approximately $347 million.
And finally, we announced that, after an extensive review of the company's capital structure, we plan to increase our debt position to reflect a debt-to-adjusted EBITDA ratio of 2 to 1. Since the date of these announcements, we have achieved our targeted leverage ratio of 2 to 1 and used $275 million to repurchase 8.9 million shares at an average price of $30.93, or approximately 29% of the common stock outstanding immediately prior to such repurchases.
Our EPS growth of 85% and 46% for the quarter and first half of the year, respectively, demonstrates the shareholder value derived from combining significant share repurchases with strong operating performance. Mike will now update you on strategies to drive shareholder value.
Mike Magusiak
Thanks, Chris. The three broad components of our strategic plan to increase earnings per share and maximize long-term shareholder value are summarized as follows.
First, to increase comparable store sales; second, to grow our concept with new company and franchise stores; and third, to return capital to shareholders with a share repurchase plan. The first component of our strategic plan is to increase comparable store sales.
Despite a difficult economic marketplace, our comparable store sales have remained very solid, increasing 3.6% in the first quarter, 5.7% in the second quarter, and 4.5% in the first six months of 2008. The first three weeks of the third quarter are at a positive 2.2%.
We primarily attribute our first half of the year 4.5% increase in comparable store sales growth to five specific sales initiatives. Because there are a number of initiatives positively impacting sales, we believe that this sales momentum will continue throughout 2008 and position us well for 2009.
In addition, this sales momentum is widespread, with each of our five regions producing positive comparable store sales ranging from an increase of 2.8% in the Southeast region to 6.4% in our Midwest region. The primary sales strategies that we believe are positively impacting our performance include the continued execution of a strong capital plan; a refocused strategy of increasing birthday sales; the execution of a comprehensive strategy to increase school fundraising sales; the implementation of a suggestive sales program; and finally, the enhancement of a marketing plan, including moms targeted television advertising and online media.
The first initiative to help drive comparable store sales is the continued execution of our capital plan. We continue to believe that our physical assets, including entertainment attractions, are in the best condition in the history of our company, and our capital plan will ensure that we offer our guests the best entertainment product in the marketplace.
Last year, we impacted 163 existing stores with capital expenditures totaling approximately $68 million. This year, we intend to spend approximately $52 million on existing store capital expenditures which will impact approximately 160 stores or 35% of our comparable store sales base.
The detailed breakdown of our capital plan includes 19 to 21 expansions, 14 to 18 major remodels and 120 to 130 game enhancements. We continue to believe that our capital expenditure plan not only protects our company's strong cash flow but will also be instrumental in increasing it over the long term.
Our next business strategy focuses our efforts on increasing birthday sales. During our last Earnings Call, we stated that we have historically viewed this area as the strength of our business and we have taken aggressive steps to capitalize on this opportunity.
We stated that our first quarter birthday sales increased approximately 4%. We believe that this positive birthday sales trend was attributable to our operators aggressively booking birthday reservations, executing our wait system, and our renewed commitment to confirm birthday party reservations which resulted in fewer no-shows.
In addition, we e-mailed birthday invitations with incentives to approximately 2 million kids' parents in our database, four weeks prior to their birthday. During the second quarter, we continued with our previously announced birthday initiatives and implemented a system wide rollout of a significantly improved birthday package and promoted the new birthday party with a national television campaign.
Birthday sales have accelerated in the second quarter with comparable store birthday sales increasing 13%, resulting in a year-to-date increase in comparable store birthday sales of 8%. Our next sales initiative is to increase weekday school fundraising sales.
Last year, our fundraising sales totaled approximately $5.6 million, representing 0.7% of total sales. We established a goal of increasing this revenue source by at least 10% in 2008.
During the first half of this year, our core stores' fundraising sales increased over 20%. We believe that this increase is attributable to the following; first, our ongoing advertising of school fundraisers, which continue to build guest awareness; second, contacting each fundraising group within one week after an event to rebook.
And finally, providing support materials and training to our operators to book fundraising sales. Our operator sales mentality of booking and hosting weekday school fundraisers continues to accelerate.
We've increased year-to-date comparable store fundraising sales over 20% and are very proud that our donations to schools since 2004 exceed $2 million. Our fourth existing store sales initiative is to develop a suggestive sales culture in our restaurants, focusing on cashiers and birthday hostesses.
We implemented a nationwide suggestive sale campaign for six weeks during the first quarter. Our objective was to increase sales of value meals and token value deals, which represents a great value to our guests and also represents a higher guest check.
Despite a significant increase in coupon redemptions during the first quarter, our sales trend for value meals and token deals improved. During the second quarter, we implemented a second nationwide suggestive sales campaign that has continued into the first month of the third quarter.
This suggestive sales campaign focuses on birthday sales, including food platters and birthday upgrade packages, birthday cakes and token packages. The primary focus of our nationwide suggestive sales campaign is to train our cashiers and birthday hostesses to suggestively sell targeted menu items that are an excellent value to our guests and result in an increase in our average ticket.
Our operators have overwhelmingly endorsed our suggestive sales initiative, and we are dramatically increasing sales of targeted food, birthday and token products. And finally, our last sales initiative, that we believe has positively impacted comparable store sales, is our enhanced marketing plan.
Our advertising expense increased 16% during the first half of the year to $18 million, compared to $15.5 million in the first half of 2007. Our 2008 marketing plan incorporates certain components of prior years' plans, including a strong national media campaign targeting kids and the national distribution of 16 freestanding inserts supported with cross promotion coupons and Internet coupons.
This year, we have significantly enhanced our overall media plan by marketing to moms with both television and online media advertising. In addition, we've introduced our 'Where a Kid can be a Kid' slogan and jingle, and we are promoting our new birthday package with television advertising.
It's difficult to measure the effectiveness of a marketing plan because it's only one of several factors impacting sales. Nonetheless, it's clear that birthday sales increased in the second quarter with the national advertising campaign, promoting our new birthday package.
Comparable store birthday sales accelerated from a 4% increase in the first quarter to a 13% increase in the second quarter. In addition, we believe that targeting moms with both television and online media is helping to contribute to our 4.5% year-to-date comparable store sales increase.
The second broad component of our strategic plan is to grow our concept with company and franchise stores. During the next five years, from 2008 to 2012, we project the opening of 30 to 40 company stores and 20 to 30 franchise stores.
On the company side, we opened 10 new stores last year, including three relocated stores. We also acquired one franchised store.
This year, we currently anticipate opening five to six new company stores. Our controlled growth plan enables us to focus on high quality real estate sites in primarily dense demographic areas, resulting in a high return on investment.
The 10 stores that we opened last year are projected to generate average sales volumes in excess of $2 million, compared to the company average annual sales volume of approximately $1.6 million. On the franchise development side of our business, we currently anticipate opening four to five new franchise stores this year, including a store in Dubai in the United Arab Emirates that opened in the second quarter.
This franchisee has an existing store in Jeddah, Saudi Arabia, the highest sales volume store in our system. The final component of our plan to maximize shareholder value is to execute our share repurchase plan.
We've aggressively repurchased our shares during 2007 and the first half of this year and plan to continue with a repurchase plan because of two primary factors. First, we believe that our strategic plan will continue to increase long-term comparable store sales while growing our concept with new stores that produce a high return on investment.
We believe the combination of positive comparable store sales and quality new store development will result in increased cash flow and earnings per share. The second reason that we intend to continue with our share repurchase plan is because it's highly accretive to earnings per share, as demonstrated in the second quarter of this year.
During 2007 and the first six months of this year, we have repurchased 7,887,000 shares and 4,911,000 shares, respectively. In total, we have repurchased 12,798,000 shares during the past six quarters, which is very significant, compared to 23,608,000 diluted shares outstanding at the end of the second quarter.
We've repurchased these shares because we believe our concept is well positioned for future growth based on the strategies we are implementing and because of our strong cash flow. During the past four quarters, adjusted EBITDA totaled $202.8 million.
Our share repurchase plan is very accretive to earnings per share. During the first half of this year, our diluted shares outstanding decreased 25.5% from the prior year, fueling growth in diluted earnings per share of 46.3%.
Additionally, we expect 2009 diluted earnings per share will benefit from these purchases. Chris will now review our current outlook for the business.
Chris Morris
All right, thanks, Mike. In our last conference call, our outlook for fiscal year 2008 was that diluted EPS would be in a range of $2.33 to $2.40.
Based on everything discussed today, we are increasing this guidance $0.24 to $0.25. We are now estimating fiscal year '08 diluted EPS to be in a range of $2.57 to $2.65, reflecting a 32% to 36% growth rate from the prior year, after excluding asset impairment charges from the 2007 fiscal year.
In addition, our estimates for Q3 '08 diluted EPS, is in a range of $0.56 to $0.60, and Q4 '08 diluted EPS is in a range of $0.20 to $0.22. Incorporated into this guidance are the following items, comparable store sales growth assumption of approximately 2% to 3% for the second half of fiscal year 2008.
This guidance is below our current trend, as comparable store sales are up 4.5% for the first half of '08. While we are encouraged by the results for the first half of the year, we recognize the challenges presented in today's economic environment.
Given these challenges, we remain cautious in our near term outlook for sales growth. We hope our assumptions prove conservative, given the strong financial results to date.
We're assuming the average price per pound of block cheese will be in a range of $2 to $2.10 for the last six months of '08. In addition, we have locked in dough costs for the remainder of the year at a price higher than prior year levels.
As a result of this outlook for higher commodity prices, we would typically expect cost of sales to increase approximately 40 basis points. However, the enhanced cheese blend and smaller pizzas are expected to benefit cost of sales approximately 50 basis points for a net reduction in cost of sales of approximately 10 basis points for the last six months of the year.
Labor expense as a percent of company store sales is expected to increase 50 to 70 basis points in the last half of 2008, driven primarily by minimum wage increases and favorable adjustment to health insurance reserves occurring in the second half of the prior year. We are targeting five to six new company units and four to five new franchise stores in '08.
We are estimating total capital expenditures to be in the range of $80 million to $85 million and we are assuming our effective tax rate will be between 38% to 38.5% for the remainder of the year. With that, I will now turn the call over to Dick for his concluding comments.
Dick Frank
Thanks, Chris. We are obviously pleased with the strong comparable store sales performance of 5.7% in the second quarter over the same period in the prior year.
We believe this momentum speaks directly to the health and vitality of our brand in the marketplace today and is further evidenced by the fact that each of our five regions posted positive same-store sales for the quarter. We are also encouraged by the belief that each of our strategic initiatives are working and adding to our comparable store sales performance.
As Mike shared with you, these sales strategies include a capital plan impacting approximately 160 core locations, an aggressive approach to birthday parties, reinforced with national television support; an enhanced focus on school fundraising and suggestive sales programs, all reinforced by a solid marketing plan incorporating a strong multi-media effort targeted at moms. This strong sales performance resulted in fully diluted earnings per share increasing 85% to from $0.26 in Q2 2007 to $0.48 in Q2 2008.
During the first half of the year, the financial strength of the company is evident as the business generated $104 million in operating cash flow, repurchased $161 million of its company stock and achieved its targeted level leverage ratio of debt to adjusted EBITDA of 2 to 1. Our 2008 financial performance of earnings per share growth of 85% for the quarter and 46% for the first half of the year demonstrate the compounding effect of combining significant share repurchases with strong operating performance.
Forecasting earnings for the second half of the year is difficult. We are extremely pleased with the underlying sales momentum achieved in the first half of the year, yet we remain cautious given the current economic environment.
Management remains committed to the quality and timely execution of our strategies and we look forward to continuing to update you on our progress. At this time, Mike, Chris and I will be glad to answer any questions you may have.
Operator
Thank you, sir. (Operator Instructions) Our first question is from the line of Robert Derrington with Morgan Keegan.
Please go ahead sir.
Robert Derrington - Morgan Keegan
Thank you. Dick, Mike, Chris, phenomenal numbers.
Congratulations. What I'm curious about, and I'm not sure who to direct this to.
When we look at the sales trends, obviously these look like the strongest quarterly results since I think first quarter of 2001. Can you give us some color on why it is that the trend is so strong now?
Obviously you laid out a number of things. Dick, it seems as though the business has responded to these sales initiatives unlike anything I've seen in almost a decade.
Dick Frank
Bob, I think we would agree with that. What's really encouraging to us is all of the sales initiatives seem to be working and working in concert with one another.
The other thing that I think is also at play is, as you will recall, back in the middle of 2006, we changed our strategic direction a little bit when we slowed down our new unit growth to really focus on the core. I think that, since that time, our operating people have really been able to focus on their specific stores and areas of responsibility.
We haven't had the movement from store to store that is required when you are growing your store base 30 stores to 35 stores a year. So, I think that our operators have just done a great job.
I think people are well entrenched in their locations and focused on their responsibility, and I think it's all just coming together for us. And we see that in the momentum that we have today in our same-store sales performance.
Robert Derrington - Morgan Keegan
Dick, could you kind of break down the 5.7 for me for a minute? A piece of that is, I think there's a little bit of menu pricing that you took in the first quarter.
Plus, you also had platters, plus you also had obviously birthday sales increases. Are any of those especially working beyond the menu pricing?
Dick Frank
I think, too, as Mike said in his comments, I think we believe that all of them are working. The menu pricing, on an annualized basis or in the quarter, is running about 1.8%.
Robert Derrington - Morgan Keegan
Okay.
Dick Frank
So the rest of it is either a result of an increase in average check or increased traffic.
Robert Derrington - Morgan Keegan
Okay. Listen, I will get back in the queue, but again, congrats on terrific numbers.
Operator
Brad Ludington - KeyBanc Capital Markets
I have to apologize. I got disconnected at the beginning of the call, and when I got back on, it sounded like you were saying there was something like a 40% cut in pizza costs, but I didn't hear what that was attributed to.
Did you explain that any further than that?
Chris Morris
This is Chris. I will start off, and I will turn it over to Mike.
I was explaining the fluctuation in our cost of sales year-over-year. Basically what I cited is that cost of sales benefited 40 basis points from a reduction in pizza costs related to our enhanced cheese blend, as well as a half-inch reduction in the size of the company's medium and large pizzas.
Brad Ludington - KeyBanc Capital Markets
Okay, that's what I missed, was the half-inch reduction. Okay.
Then moving onto the remodels and game enhancements and all of that, what did you say your CapEx number for that was this year, for the 160 stores?
Chris Morris
$52 million.
Brad Ludington - KeyBanc Capital Markets
52 million?
Chris Morris
Yes.
Brad Ludington - KeyBanc Capital Markets
And beyond that, trying to breakdown same-store sales, is there a number that you can quantify that came from these remodels, game enhancement expansions versus just the more refined marketing program and suggestive selling program?
Chris Morris
Yes, let me take a stab at that and let me just step back for a moment and go through and dissect our comp store sales performance from our perspective. As we cited, in the second quarter, total comp store sales were up 5.7.
If we first start with the breakdown between check and traffic and as we've mentioned several times in the past, it can be difficult for us to know with certainty what that breakdown is. It's not as easy for us as it maybe for a casual diner that actually has a dining room and actually counts seat counts and etcetera.
But our best estimate is that our average guest check increased 3% in the second quarter and then traffic increased 2.7%. So let's dig into the price increase for a moment for the average guest check increase.
We mentioned that our menu price increases were up 1.8%, and we do believe that we've been able to pass-through most if not all of that menu price increase. There are two other items impacting our check in the second quarter, and both of them are directly related to the initiatives that we've implemented this year.
First, birthday parties. On birthday parties, we've changed our package around.
We used to include a birthday cake in our birthday package. We pulled that cake out, replaced the cake with other items that customers will value perhaps more than the cake.
And then, we've trained our operating personnel to up-sell our guests on the cake. And that's just been a big success for us, and it is driving check.
Secondly, as Mike mentioned when he was outlining the suggestive sales program, we've introduced food platters across our system, and then we've trained our employees to promote food platters specifically for birthday parties, because we think that product will work really well on birthday parties. That is also driving check.
So if we just look at birthday transactions, we are seeing a significant increase in our average guest check. And that's contributing to 0.8% of that 3% that I mentioned earlier, so we have menu prices up 1.8%, birthday transactions are contributing 0.8%, and then just food platters sales for other transactions, transactions other than a birthday party, are growing our check approximately 0.5% at the company level.
So those are the three components of check. Then past that, it's just traffic.
The traffic growth of 2.7%, we believe that's just a combination of not only capital initiatives but our marketing efforts and all of our other initiatives that we've implemented.
Brad Ludington - Keybanc Capital Markets
Okay, well, thank you very much.
Operator
Our next question is from the line of Robert Derrington with Morgan Keegan. Please go ahead.
Robert Derrington - Morgan Keegan
Back again. Hey Chris, when you ran through the discussion on labor cost earlier, I missed, if you could kind of rehash that.
Originally, I think labor costs were expected to be up, was it 70 basis points to 80 basis points?
Chris Morris
That's correct.
Robert Derrington -Morgan Keegan
I mean, is that the guidance still?
Chris Morris
No, the guidance -- for the first six months, we've held the line on labor.
Robert Derrington -Morgan Keegan
Right.
Chris Morris
But the prior year. Then from this point forward for the second half of the year, we are expecting labor expenses to exceed prior year by 50 to 70 basis points for the last half.
But you are absolutely right, Bob. Early on in the year, we were expecting more labor pressure this year than what we are actually seeing.
Robert Derrington -Morgan Keegan
Is it principally reflecting the leverage based on the better-than-expected sales?
Chris Morris
That's a big part of it; that's a big part of it, but I also will tell you that labor performance at the store level has been exceptional this year.
Robert Derrington -Morgan Keegan
Interesting. Well, that's great.
Obviously, you've got your managers focused on that line. Anything other within the other expense line?
The fact that it was down about 150 basis points. Was there a gain somewhere in there, Chris?
Chris Morris
There was; there was a gain of approximately $800,000.
Robert Derrington -Morgan Keegan
Can you give me a little color on that?
Chris Morris
Sure. Back in 2007, we closed our TJ Hartford's store and we took a charge when we closed that store.
Fortunately, we actually owned the dirt, so we were able to sell the property for a gain here in the second quarter.
Robert Derrington -Morgan Keegan
Okay, so that credit came through that other operating expense line?
Chris Morris
That's correct.
Robert Derrington -Morgan Keegan
Okay, I got you. Okay, very good.
Thank you.
Operator
Our next question is from the line of Barry Stouffer with BB&T Capital Markets. Please go ahead.
Barry Stouffer - BB&T Capital Markets
Good afternoon, gentlemen. What's the current average interest rate on your borrowings?
Chris Morris
It's slightly below 4%, 3.95%. The way that breaks down -- our incremental borrowing rate right now is 3.6%, and then you might have noticed, during the second quarter, we implemented or we executed a $150 million, three-year interest rate swap.
We effectively have locked in rates over that three year time period at a 4.6% rate.
Barry Stouffer - BB&T Capital Markets
Okay. Can you tell us, what percent of sales were birthday parties in the second quarter?
Chris Morris
It's roughly 12%.
Barry Stouffer - BB&T Capital Markets
Okay. And then any comment on why sales trends would be slower so far in the third quarter, anything unusual with respect to weather versus the prior year, or kids movies?
Mike Magusiak
No. You know, it's such a short period of time, if you go back to the last earnings release, the first three weeks of the second quarter were actually slightly negative because of spring breaks.
When you look at such a short period of time, there are a lot of things that can impact that, such as the Fourth of July falling on a Friday this year that we know it impacted negatively Friday and Saturday of this year. Last year, it fell on a Wednesday, which is not as heavy a day.
But when you look at a three-week period in our business, it can move. I would say that, from my perspective, the best indication of our performance year-to-date is year-to-date through the first six months.
Barry Stouffer - BB&T Capital Markets
Okay. And then can you share what the rationale was for reducing the pizza size for the medium pizza?
Mike Magusiak
Yes. First of all, we are very proud of our pizza product.
We use the highest ingredients; we feel great about our product. About a year or so ago, we started testing that in Canada, had unbelievable success in Canada.
We made a slight modification to our large and medium pizza; we reduced the large from 15 inches to 14.5, and our medium from 13 to 12.5, and we still used actually the same serving tray because that half an inch is so miniscule and with all of the cost pressures, we made that change and we feel that we are right in line with the marketplace and feel great about our pizza products.
Barry Stouffer - BB&T Capital Markets
Okay, thank you. That's all I had.
Operator
Our next question is from the line of Greg Ruedy with Stephens Inc.
Greg Ruedy - Stephens Inc
Good afternoon. If my math is right, I have the repurchases in the second quarter at about $36.50 per share.
You have room left on your revolver and you've hit your 2-to-1 debt to adjusted EBITDA target. So, how should we think about your appetite for repurchases going forward, and do you revisit sort of the way the capital structure is?
Chris Morris
Greg, this is Chris. The first thing I will tell you is, as you know, we don't comment on when we are going to be in the market and when we are not, what we are thinking about doing with respect to buying back stock.
I will also tell you that we are very committed to completing the remaining balance of our share repurchase authorization. When we make a decision to be in the market, we do so based on where the stock price is, relative to our valuation, as well as many other factors.
So, we just don't comment when we are going -- what we are planning on doing.
Greg Ruedy - Stephens Inc
Okay. And then with you hitting that 2-to-1 target, any thoughts to take up the amount of leverage?
Mike Magusiak
The 2-to-1 target is, our perspective is, that's more of a longer-term targeted leverage ratio. Long run, we are going to manage the business to debt to EBITDA of around 2-to-1.There may be times where we are slightly above 2-to-1; there may be times where we are slightly below.
It all depends on the particular circumstances in front of us. But I think we will continue to repurchase our shares on an opportunistic basis, but I would not look for us to adjust our long-term targeted leverage ratio.
Greg Ruedy - Stephens Inc
Okay. On the couponing, can you quantify the sales mix from coupon redemptions in the quarter?
Chris Morris
What we typically quantify there is the year-over-year increase. And starting last year, we did see a fairly significant increase in our sales mix from coupons.
In fact, I believe, in the first quarter, we cited that there was a 5% increase. In the second quarter that started to taper down; the increase was only 3% year-over-year.
And we are expecting for the last six months of the year, to be very little difference this year compared to the prior year. And that's simply due to a year ago, the lack in the anniversary of when we started distributing electronic coupons in a fairly meaningful way.
Greg Ruedy - Stephens Inc
Okay, that's helpful. Thanks so much.
Chris Morris
Sure.
Operator
Our next question is from the line of Michael Gallo with CL King and Associates. Please go ahead.
Michael Gallo - CL King and Associates
Hi, good afternoon and congratulations on another terrific quarter. A question I guess for Mike, Mike I was wondering if you are seeing any quantifiable trade-down benefit, perhaps more families staying locally and doing things with the kids and curtailing longer vacations.
Anything anecdotally there that you think you are picking up on the trade-down set?
Mike Magusiak
We've talked about that as a management team, and we may be benefiting from that. What I would tell you, though, is when we look at each of our strategies; we see meaningful sales increases from each of the strategies.
So, if I look at year-to-date comparable store sales, the primary driver of that, from my perspective, is the execution of our strategies. Then when you take all of the other factors, gas prices, people maybe staying around.
It's my opinion that, if the economy was better, our actual performance would be better. So, it's tough to dig out one specific item, but if I look at the sales the first half of the year, it's primarily driven by our strategies.
Michael Gallo - CL King and Associates
Okay, great. And then just a second question, I want to just dig in again on the remodels.
I know for a few quarters, the comp trends on the remodeled units had kind of come back together with some of the non-remodeled units. I was wondering, with such a strong comp this quarter, whether you started to see those remodeled units or that gap start to widen out again.
Mike Magusiak
If you look at expansions, major remodels and game enhancements, we've had strength the entire year. I think that those are attributable to the product in the marketplace.
And then we've got great marketing plan advertising to moms on the television and online media. There's no doubt that our capital is helping drive comparable store sales, but the suggestive sales and the birthdays, the media plan is not only driving the capital side of our business, but literally all of the stores in our system.
Michael Gallo - CL King and Associates
Okay, great. That's helpful.
And then just a final question, you mentioned, I think in your prepared remarks, that your marketing spend was up 16% in the first half of the year. I think you previously were targeting a 10% increase on a full year.
Is that still what you are targeting? That would suggest some flattening out in terms of the year-over-year increase in marketing spend in the second half.
Thank you.
Chris Morris
Yes, we continue to look at marketing to drive sales. We've got a good marketing plan in the second half of the year.
Our point levels are up about 5%. We continue to advertise, throughout the second half of the year, birthday parties which we know that marketing has driven birthday parties here in the second quarter.
Michael Gallo - CL King and Associates
Okay, thanks a lot and congratulations again on a terrific quarter.
Chris Morris
You are welcome.
Operator
Our next question is from the line of [Paul Carpenter with Artis Capital]. Please go ahead
Paul Carpenter - Artis Capital
Thank you. I have a couple of questions.
I have what I'll call an income statement question and then a question about the balance sheet. The income statement question, I was wondering if there are any other items like that $800,000 gain and other operating expenses.
Because the results I get and you seem to be leading a pretty charmed life in terms of other folks having to face an economic slowdown and falling discretionary consumer spending, higher utility costs, etcetera. That just doesn't seem to be flowing through your income statement at all.
You are getting better sales on, frankly, what you expect to be reduced CapEx. This year, you are getting growth for free, somewhat, so I was wondering if you could walk me through if there's anything else in there.
Are you facing higher utility costs? And how long do you think that can continue?
Chris Morris
Well, the short answer is no, there are no other unusual items in other operating expenses. I think what you are seeing in the second quarter is what's highlighting.
Our comp store sales performance is highlighting the operating leverage in the business and where we tend to get leverage when sales are strong, is in the other operating expense line and that's primarily because the costs in that line are predominantly fixed costs at the store level. So the items, it's simply leverage on those high sales dollars and then it's a gain and then there is a 20 basis point pick-up in asset write-offs.
Paul Carpenter - Artis Capital
Okay. The other reason I asked the question was really based on something you said earlier in the call.
You said, you would make your decisions to be in the market purchasing stock based on where the stock price is relative to your valuation, which I assume means what you think is good value repurchasing the stock. Granted, you were under-levered before and the business needs to be levered to some degree to have an efficient capital structure.
The question I have for you is, by levering up to buy back stock in the last couple of years, it looks like the management team really sold out of a very large portion of their option holdings, something like I think 60% or so, or maybe more than that. I think you changed the disclosure from year-to-year, so we couldn't see this year how much you had relative to last year, but if I recall, you had something like 5 million or 6 million option shares and then last year management sold on awful lot, getting it down to something in the 2 million.
So, how do you reconcile that for a shareholder? How do you reconcile the fact that you saw it prudent to lever up and increase, somewhat the risk of the business but it's really the shareholders who are left with the debt because management has cashed out of a large portion of their stock?
Mike Magusiak
Yeah, those numbers that you are stating are not correct. First of all, if you look at management, we have options that have a five year life and the executives, the vast majority of any options were options that were expiring at the end of this year.
So we held those options for about 4.5 years. And then the other thing about, if you look at not only the second quarter but the first half of this year, we produced an awful lot of free cash flow and we buy back our shares to drive long term shareholder value.
So, I'm not sure where you're getting your numbers, but if you look to the filings, your 60% is nowhere near accurate. The vast majority of those options were held for over four years, that we're expiring this year.
Paul Carpenter - Artis Capital
I've got the filings in front of me, and I would appreciate just a little more clarity. I'm looking at 2004, '05, '06, 5.6 million, 5.1 million, 5.4 million and then at the end of the year last year, you're down to 2.8 million, which includes [period] outstanding, not just exercisable.
So are you only awarded options once every five years? Is that what you are saying?
They are not awarded on an ongoing basis?
Mike Magusiak
Yes, a couple things is both Dick and myself purchased a number of options over the last couple of years and I think your numbers are impacted, I would have to look at specifically what you have in front of you but over.
Paul Carpenter - Artis Capital
It's just the 10-K for both, for last year and this year.
Mike Magusiak
We've been awarded restricted shares, not options. So, what you're seeing is less dilution from options, because those options are expiring and now we've been issuing restricted shares over the last, is it three years, Chris?
Chris Morris
Right, starting in 2006. One comment I will make, just to address a comment you made earlier with respect to leveraging risk in the business, we are very comfortable with our leverage ratio of 2 to1.
We don't believe the added leverage as being unnecessary risk, or introducing significant financial risk to the organization and we base that belief on long standing EBITDA margins. Over the last five years, our adjusted EBITDA margins have consistently been in the 25% range.
In fact, over the last four quarters, our EBITDA exceeds $200 million. So we feel very comfortable with the amount of debt that we have and we think that, for the reasons you cited earlier, it's a very efficient capital structure, given the strategies that we have laid out over the near term.
Dick Frank
It's a great point, Chris.
Paul Carpenter - Artis Capital
Thank you for answering the questions.
Mike Magusiak
Are there any other questions?
Operator
(Operator Instructions) Our next question is from the line of Alex [Ford] with Izara Capital Management. please go ahead.
Alex Fodor - Izara Capital Management
Hi, it's actually Alex Fodor from Izara Capital Management. How are you?
Mike Magusiak
Good, how about yourself?
Alex Fodor - Izara Capital Management
Good, thanks. Congratulations on the performance, great comps, 5.7% seems pretty, I guess unique in this environment.
I was curious, regarding the birthday parties, you've thrown out a bunch of different numbers. What was it as a percent of sales this quarter?
I missed that.
Chris Morris
Sales from transactions involving a birthday party represent approximately 12% of total revenues.
Alex Fodor - Izara Capital Management
Okay, and what was of a year ago?
Chris Morris
Well, what we've said is comp store sales performance, comp store birthday sales have increased 8%.
Alex Fodor - Izara Capital Management
That's the year-to-date, right? I thought it was up 13% for this quarter.
Mike Magusiak
That's exactly correct.
Chris Morris
Yes, year-to-date.
Alex Fodor - Izara Capital Management
Okay. So I guess what I'm trying to ask you is the second quarter of last year as a percentage of your total sales, what were birthday party transactions?
Chris Morris
Approximately 11%.
Alex Fodor - Izara Capital Management
11%? Okay, great.
Thanks.
Mike Magusiak
You're welcome.
Operator
Our next question is from the line of Brad Ludington with KeyBanc Capital Markets. Please go ahead.
Brad Ludington - KeyBanc Capital Markets
Just, I came back to confirm that I got one thing right. On the same-store sales for the first three weeks of the third quarter, you did say 2.2%, not 3.2%, correct?
Mike Magusiak
That's correct.
Brad Ludington - KeyBanc Capital Markets
Okay, thank you very much.
Mike Magusiak
You're welcome.
Operator
(Operator Instructions) I show that there are no further questions at this time. Please continue.
Mike Magusiak
We appreciate your time and support. If you have any additional questions, please feel free to contact Dick, Chris or myself.
Thank you. Good-bye.
Operator
Ladies and gentlemen, that concludes our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.
You may now disconnect.