Why Chuck E. Cheese Is Making a Comeback

CEC Entertainment (NYSE: CEC  ) , the company behind the famous Chuck E. Cheese chain, is seeing its stock soar to all-time highs. Did you think the chain was left for dead along with the 1980s video arcades? Think again! While traditional fast food restaurants are migrating away from the young child demographic, the chain with the slogan "where a kid can be a kid" is thriving in a niche that has been ditched by its larger competitors.

In the summer 2012, the lovable rat was given a makeover. CEC turned Chuck E. into a "hip, electric-guitar-playing rock star." It centered its marketing on this new image while spending millions more on televised and digital advertising. The strategy is paying off. Last quarter CEC reported an overall revenue increase of 5.2% to $191.9 million, a same-store sales increase of 2.9%, and an eye-popping 77.5% surge in net income to $7.2 million, or $0.42 per share.

Ronald McDonald no more
At the same time that CEC is stepping up its focus on the modern day child, many of its competitors are shying away from this demographic as they focus on bigger ticket items for adults. McDonald's (NYSE: MCD  ) , once most famous as the home of Ronald McDonald, has killed off its friendly clown. He's been replaced with Mighty Wings, McCafe Lattes, and Angus burgers that all target adults. It's even adding a Starbucks-like décor to its restaurants. In its latest conference call, COO Tim Fenton stated, "In the U.S., we continue to see average sales lift from our reimage restaurants approaching 67%, above the local market after one year. In 2013, we plan to reimage over 1,600 restaurants globally." While clearly this strategy is paying off for McDonald's, this reimage focus away from kids is an opportunity for Chuck E. Cheese. RIP Ronald McDonald. Long live the king mouse of cheese.

Speaking of kings
Burger King
(NYSE: BKW  ) said "off with his head" and axed its medieval and playful kid-friendly cartoon mascot back in 2011. Burger King is now more focused on refranchising its company-owned stores, improving its sales with promotional marketing aimed at adults, and expanding its adult burger menu. Its system-wide sales increased 2.8% last quarter, along with a 20.4% increase in earnings per share to $0.21. With performance like that, don't expect the mascot king to return any time soon. Sorry, kids. See you at Chuck E's place.

Maybe you don't know Jack
Fast food chain Jack in the Box (NASDAQ: JACK  ) was far ahead of the crowd by shying away from child-oriented advertising back in 1980, announcing way back then that it would stop targeting young children. If you've never heard of the chain, it probably sounds strange that a place called "Jack in the Box" is not the place where a kid can be a kid. Jack in the Box appears to be targeting the crowd with the munchies with its late night "Munchie Meal." When trying to decide where to bring your eight year old for innocent food and fun – would you go for pizza and games or a fast food joint catering to those with blood-shot eyes? Table for four at Chuck E's, please.

Popcorn over pizza
The Achilles' Heel for CEC is the movie theater during times of blockbuster movie releases. For example, July saw a surge in G and PG rated movies. Box office receipts totaled $453 million vs. $192 million last year. This competition caused a temporary 2.3% decrease in same-store sales for the month. Going forward, instead of attempting to compete directly with the movie theaters, CEC will embrace the competition. In the fourth quarter it plans a promotion directly tied to the movie "Free Birds" that should turn traffic back to the restaurants.

Look for CEC to continue to grow sales and net income as it picks up where McDonald's, Burger King, and Jack in the Box left off. Kids aren't going to stop being kids. Pay particular attention to CEC's same store sales to confirm that its marketing strategies are working. The more kids come to CEC to eat, the more it will be CEC's shareholders who are the ones that get fat. Fat in the wallet, that is.

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  • Report this Comment On October 20, 2013, at 9:49 AM, willy1514 wrote:

    Don't forget, their product isn't pizza, it's video games. Remember, it was founded by Nolan Bushnell of ATARI.

  • Report this Comment On October 20, 2013, at 2:55 PM, Easyrider73 wrote:

    Back in the 80s Chuck E Cheese was called Showbiz pizza...

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