Back to Cheesy Gaming at CEC

CEC Entertainment (NYSE: CEC  ) , owner of the venerable Chuck E. Cheese children's restaurants, appears to be back in business after putting a stock-option investigation officially behind it. But after today's earnings release, the market isn't so sure of its prospects.

First-quarter results released after the market closed yesterday revealed modest total sales gains of 3% -- not a big surprise, given that CEC opened only one new store during the period. Same-store sales growth was even more mediocre at 0.5%, but bottom-line earnings advanced a nicer 13% thanks to expense controls and share buybacks.

The stock has been weak today -- company guidance for the full year was slightly below what analysts were projecting. Management now expects diluted earnings of $2.25-$2.30, for year-over-year growth of 10%-13%. It is also calling for 2%-2.5% comp growth and the opening of 10 new restaurants.

CEC also just filed its 10-K and other related reports last week, ending a stock-option investigation that brought only slight adjustments to past results. Looking at the financials shows that cash-flow generation remained strong last year, even though capital expenditures increased significantly.

As it stands, CEC is trading at about 17 times forward earnings expectations. I still think that's a bit high, given that growth trends have trailed off recently, but the Chuck E. Cheese concept has some of the highest net margins among its casual-dining peers. This could be due to the high proportion of game and merchandise sales, which reported close to 90% gross margins during the first quarter.

CBRL Group (Nasdaq: CBRL  ) also pursues a food and merchandising strategy with its Cracker Barrel and Old Country Store combination, but it's still not as profitable as CEC. The same goes for other pure-food peers such as Darden (NYSE: DRI  ) , Brinker (NYSE: EAT  ) , and OSI Restaurant Partners (NYSE: OSI  ) that control many of the casual-dining franchises out there today. None comes close to matching CEC's double-digit net margins; now if CEC could only get growth up to those levels.

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Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.