CEC Entertainment Inc. (CEC) reported earnings of 45 cents per share in the third quarter of 2012, which lagged the Zacks Consensus Estimate of 50 cents. Reported earnings were also below the prior-year earnings of 62 cents per share. The year-over-year decrease in the number of weighted average diluted shares outstanding could not hinder the downfall.
Total revenue also tumbled 1.7% year over year to $196.6 million in the third quarter, which fell shy of the Zacks Consensus Estimate of $198.0 million. The drop in revenue was due to lower comparable store sales (down 2.3%), offset somewhat by incremental revenues from six new stores entering the system, since the end of the third quarter of 2011. Sales at company-operated restaurants dipped 1.2% to $195.6 million, while franchise fees and royalties plummeted 57.0% to $0.9 million.
The company’s cost structure which includes cost of food, beverage, entertainment and merchandise, decreased 30 basis points (bps) year over year to 15.5% as a percentage of company store sales. Depreciation and amortization expense, as a percentage of company-store sales expanded 10 bps to 10.2%.
Labor expenses crept up 120 bps to 28.2% during the quarter as a result of rise in labor hours and an increase in average hourly wage rates. Store rent expenses and other operating expenses both increased 10 bps each to a respective 10.0% and 17.1%.
Total operating costs and expenses increased 290 bps, which dragged the operating margin down to 7.4% from 10.3%.
Store Update
During the reporting quarter, CEC which operates and franchises family dining and entertainment centers, opened two company-owned stores and closed one. On the franchisee front, there was only one opening in the quarter.
The company currently operates 511 company-operated stores and 51 franchised stores.
Liquidity
At quarter end, CEC’s cash and cash equivalents were $18.7 million, while shareholders’ equity stood at $146.4 million.
Outlook
The eventual impact of super-storm Sandy has not yet been incorporated into the company’s accounts; hence it did not provide any guidance for the fourth quarter of 2012.
However, CEC issued the guidance for fiscal 2013. For fiscal 2013, the company expects comparable sales growth to remain in the range of 2%–3%. CEC expects diluted earnings per share in the range of $2.80—$3.00 per share.
Our Take
The key takeaways from CEC’s third quarter earnings were continued underperformance on top- and bottom- lines and margins pressure. The suspension of fourth-quarter 2012 guidance to include the impact of super-storm Sandy also limits visibility for the coming months. Although the company continues to make efforts to increase traffic to enhance sales and comps, its initiatives are yet to be fruitful.
However, management remains keen on international exposure. In the back drop of an uncertain economic scenario, unit expansion in both domestic and international markets and improving returns to shareholders are favorable for the stock.
CEC, which competes with Cosi Inc. (COSI), currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.
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