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. 

Chuck

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
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