Chuck E. Cheese Caught in the Trap

On July 24, CEC Entertainment (NYSE: CEC  ) reported that its earnings dropped 16%, to $0.26 a share, during the second quarter. Among the reasons cited for the drop are familiar culprits this earnings season: higher gas and food prices. However, a new reason was thrown in for good measure: CEC said the strong movie releases this season have affected results, with consumers seeing movies, rather than visiting the mouse and his pizza-slinging friends.

I realize the new Shrek, Spider-Man, and Pirates of the Caribbean movies were powerful draws for the kids (and adults!), but it seems like a strange excuse. Movie tickets for a family of four can cost upwards of $30, while a day at Chuck E. Cheese is likely to cost less. In my own experience, I bring three kids and spend about $25 for the afternoon. Not only does that buy a meal, it also provides hours of video games.

There's no doubt that increased gas and food prices are affecting family restaurants; CEC's same-store sales fell 1.6% during the quarter. CBRL Group (Nasdaq: CBRL  ) , with its Cracker Barrel Old Country restaurants and country stores, is due to report earnings in about a month. However, while its May same-store sales for its restaurants fell 0.4%, June's rose 1.1%. But for the same two months, gift shop comps rose 3.7% and 2.9%, respectively. McDonald's (NYSE: MCD  ) just reported that quarterly earnings rose 6% to $0.71 a share (excluding a loss from the sale of certain operations). This shows what proper execution can do, despite a difficult environment.

CEC also slashed its earnings expectations for the second half. It now expects to earn $1.96-$2.04 a share, versus its prior guidance of $2.25-$2.30. Despite the difficult environment, which one would assume is temporary, CEC announced that it will spend more than $116 million (according to my back-of-the-envelope calculations) to renovate 55 restaurants, expand 18 stores, and make 85 to 90 game expansions. That's a hefty price tag for some macroeconomic events and a temporary diversion from a strong string of movies!

Investors looking for a quick turnaround at CEC may be disappointed. It appears its problems are more company-specific than management is letting on (why else go through expensive renovations?). I think the mouse may be hiding more than cheese.

Related Foolishness:

CEC Entertainment is a formerHidden Gems selection. To see all of the current recommendations, try the newsletter free for 30 days.

Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned.


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