Chuck E. Cheese Looks to Chuck It In

Now could be the right time to take the family-dining chain private

Jan 8, 2014 at 4:05PM

Although it might have tried to be quiet as a mouse in exploring the possibilities, restaurant operator CEC Entertainment (NYSE:CEC) is looking to take its 567-store Chuck E. Cheese chain private, according to Reuters. 


Skee-ball at Chuck E. Cheese. Source: Wikimedia Commons.

Like a number of other family-dining chains, CEC finds it difficult to improve weak traffic trends in the face of soft consumer-spending habits. Third-quarter earnings of $0.43 per share released at the end of October missed analyst expectations of $0.49 per share and fell short of the year-ago period's $0.45 per share. Despite lower revenues that were in line with Wall Street's forecasts, same-store sales fell 2.1% amid an 11% drop in birthday-party sales. Birthday parties typically comprise 15% to 20% of Chuck E. Cheese's comps, and increasing competition from kids' movies and entertainment options is taking a toll on operations.

Chuck E. Cheese family-dining restaurants are known for their arcade-like atmosphere with games of chance, rides, and play areas, as well as animatronic musical characters. It's a unique dining concept. Food isn't exactly gourmet, relying as the menu does on pizza and sandwiches, but families aren't expecting white-glove service and four-star fare when they go.

But the movies have been a particular source of conflict. Management noted during its quarterly conference call that G- and PG-rated movies saw a $320 million increase in revenues, up 65% from the year-ago quarter, a difficult hurdle to surmount when the restaurant's entire revenues for the period were less than $200 million.

Yet the strain highlights the problems family-dining restaurants in general have faced. Industry analysts at NPD Group say restaurant traffic remained flat throughout 2013, but only because quick-serve restaurants enjoyed an 8% jump in traffic for the 12-month period ending in September. Competing categories like casual dining, midscale, and family dining actually haven't had any gains at all over the past few years. 

Ruby Tuesday recently hired Goldman Sachs to explore a possible sale to private equity because it's languishing like CEC with comps falling sharply, while Darden Restaurants is looking to spin off or sell its Red Lobster chain for similar reasons. Last November the owner of Carl's Jr. and Hardees sold out to a P/E firm for as much as $1.75 billion.

Chuck E. Cheese has also found itself forced to cut costs in ways that can't be good for long-term growth. For example, last quarter it realized an approximate 20% reduction in dough usage by making its crust thinner. It can spin that as enhancing the taste by making it crispier, but when you need to start skimping on ingredients, it means you've baked in trouble.

Shares of the restaurant operator are getting a big bounce from the report today, up more than 13% in midday trading. With heightened interest in the space by private equity, and despite the growing inventory of concepts that are becoming available, CEC Entertainment may still find a decent premium that will prove going private is not some Mickey Mouse idea.

Cat and mouse
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information