The Chuck is back, and it's hungry. Children's entertainment company Chuck E. Cheese (if you're unfamiliar, think Dave & Buster's (PLAY -2.39%) for the pre-K set) is coming out of the private markets to give public another go...and it's looking pretty mangy. In this week's episode of Industry Focus: Consumer Goods, analysts host Dylan Lewis and Motley Fool contributor Dan Kline go through everything we know about the company so far and explain why investors will want to give this one a hard pass.

Then the analysts look at a much more beloved rodent: Mickey Mouse, which is to say Disney (DIS -0.12%), which is to say Disney+. Find out what the newly unveiled streaming service will mean for the content giant and competitors like Netflix (NFLX 2.47%).

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

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This video was recorded on April 16, 2019.

Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Tuesday, April 16th. We're getting a little nostalgic. I'm your host, Dylan Lewis, and I've got's Dan Kline in the studio with me. Dan, what's going on?

Dan Kline: I don't know! How are you?

Lewis: Nice to have you in town!

Kline: Happy to be here! I'm going to guess you're kind of sick of me at this point. [laughs]

Lewis: Nooo, never, Dan! Usually it's a monthly cadence that we you have here at HQ. It's always a treat! I think it's so much more fun to do a show with someone in the studio.

Kline: It is.

Lewis: We have that lined up. Before we get into what will be a very fun, very rodent-focused show today, I want to check in. On Friday's show, I mentioned that Austin Morgan was going to be working toward his 2019 New Year's resolution of developing some hobbies. That turned out being a meat smoke situation this Saturday. Austin, how'd it go?

Austin Morgan: I would call it a huge success. It was very good. Very, very good! No complaints.

Lewis: How long did it take? You did brisket, right?

Morgan: I did brisket. The smallest brisket I found at Costco was 18 pounds. It was untrimmed, so I cut a lot of fat off of it. I put it in the smoker at 6:30. Took it out around 11:00. Wrapped it in foil, put it back until about 1:00. Took it out, put it in the cooler, let it rest. By about 3:30 to 4:00, right in time for the Caps game, it was awesome!

Lewis: So you got to enjoy it day-of. That's perfect, watching a sporting event.

Morgan: Oh, yeah!

Lewis: A lot of Market Foolery and Motley Fool Money listeners know that Ron Gross has some barbecue tips. Do you have any first-time smoker tips? Anything that went wrong that you would advise people to steer clear of, having done it now once?

Morgan: I would say, for something like that, we were moving the meat several times. Need some gloves. That thing is hot, and it ruins your oven mitts.

Lewis: Something to note right there! If anyone wants to see the product from Austin's first time smoking meat, they can check it out. I believe we quoted the tweet on our Twitter page @MFIndustryFocus, if anyone wants to see that.

Dan, did you do anything fun this weekend?

Kline: I traveled here. That's fun! I lost a bunch of money gambling at the MGM with fellow Industry Focus contributor Matt Frankel.

Lewis: Yes, anyone that listened on Monday -- he probably told a slightly different story because he wins money.

Kline: Well, usually, I win money. We've told a lot of stories about me waiting for him and randomly playing a slot machine and winning $1,800. That's happened a couple of times. This time, the mistake I made is, I didn't wait until he arrived. I gambled a little bit before he got there. And I was $400 in the hole in 20 minutes.

Lewis: Did you cut your losses?

Kline: I arrested my losses. To be fair, at Maryland Live the night before, I was about $260 up. So the overall isn't that terrible.

Lewis: All right, we're not talking casinos today. We are talking about two childhood staples, and that is Chuck E. Cheese and Disney. Big news from both of them. Disney might be a little bit more in people's minds. A lot of people probably forgot about Chuck E. Cheese.

Kline: [laughs] If you're not six or have a six-year-old, you probably are not aware of Chuck E. Cheese.

Lewis: Chuck E. Cheese is coming back, Dan!

Kline: It's always been here. It's coming back to the public market.

Lewis: Yes. And I think back into the mainstream consciousness. I know I personally remember being at Chuck E. Cheese as a kid, loving it, being like, "Yep, this is where I want to go for my friend's birthday." I have since forgotten about it.

Kline: I have a 15-year-old. When we were kids -- I'm older than you, as we've established on many shows -- Chuck E. Cheese was a thing until I was in about fifth grade. That's about when Atari came out and when arcades were big. But Chuck E. Cheese was the only place that had video games and a climbing maze. I would say the age of Chuck E. Cheese shrunk to maybe five years old, six years old, as the max of when kids are interested. My son's 15, and I haven't been in a Chuck E. Cheese for 10 years.

Lewis: I haven't seen a Chuck E. Cheese in a long time. I'd forgotten that they were still in business, to be honest. They are doing quite a bit to try to refurbish their image. I had a really, really good time researching this show because there are all these people who have put together these compilations of the Chuck E. Cheese mascot over the years. You see it go from this very crude, frankly scary mouse --

Kline: It's menacing!

Lewis: It's menacing. To something now that looks almost like a Pixar character.

Kline: I think what's important is, it was originally a suit and an animatronic character. And now, in some markets, it's still a suit, but it's largely an animated character, which makes it a little easier to take some of the edges off.

Lewis: Yeah. So, they are trying to get modern as a brand. They are trying to become a place that people want to go again. For investors, the reason we're talking about today is, they are going to be hitting the public markets, and they're doing it in an interesting way.

Kline: They're using what's called a special-purposes company. It's sort of a backdoor IPO. Basically, it's an empty shell of a company that you use to have an IPO, then the proceeds of that go into a holding company.

Lewis: Obviously, this isn't something people are super familiar with. I think it's probably more than anything a product of Chuck E. Cheese's fairly complicated history as a private company.

Kline: Yeah. It's also, if you look at the traditional metrics of how a bank takes someone through an IPO, those are companies with either a lot of upward potential or no debt. This is a case of a company that has almost as much debt as it has value, about $900 million in debt and $1.4 billion in projected value.

Lewis: You're more used to seeing this kind of thing happen when it isn't the first time the company's been out there. Typically, if something has been taken private and then is reentering the public markets, sometimes you'll see an IPO, sometimes you'll see some kind of interesting structure go on there. Some of the businesses that had a hand in Chuck E. Cheese as a private entity are going to continue to maintain some control of the business, even as it goes public.

Kline: They're going to control 51% of the business. [laughs]

Lewis: So you have to be on board with their vision of things.

Kline: Absolutely! It's a hedge fund, it's Apollo Management. That's the nervous part about this. The company that's wrung up almost $1 billion of debt on the Chuck E. Cheese brand, while updating approximately 60 of its 700 locations... [laughs] Really, if you remember Chuck E. Cheese from 1984, that's probably your Chuck E. Cheese now, with a little bit of painting and slightly less terrible pizza.

Lewis: The story that we're getting from the private equity firm and the folks that are running the PR on all this is, we are getting an updated franchise across the board, right?

Kline: Yeah. They have so much debt. Debt is about the same value as this IPO will be. It's about a billion in debt. It's about a billion for total value of the company. They're going to come out of this with the ability to borrow some money, or not pay back some money, and use some of the proceeds to update their facilities, to move to a model where instead of buying tokens, you buy an hour of time, where they put in these video screens. They took out the animatronics and replaced them with a guy in a suit. But the guy in a suit was a suit you and I could make. [laughs]

Lewis: [laughs] I don't think anyone wants to wear a suit that I'm making. But, OK, so, if you're buying into this, you're saying, "Sure, we're going to basically give you the money to pay out your debt because we're buying the long-term vision here." I think there's reason, though, to be a little skeptical of the market for this type of entertainment now. I think in some ways, this era has passed.

Kline: Because the second your kid graduates to being able to play a somewhat complicated game on an iPad vs. a very basic one that maybe kids of all ages are playing, Chuck E. Cheese with outdated video games and a playscape that's not as good as the one in most towns now... it's not the appeal it was when we were kids. Pizza? I get that kids like any pizza, but even the improved Chuck E. Cheese pizza is still not as good as most pizza. So it's a very strange proposition. It's the No. 1 birthday party place for kids ages 3 to 5.5. I'm making that up, that's not a real fact.

Lewis: That's not their official slogan.

Kline: But, it does feel like a very small niche. If I'm seven, I want to go to Dave & Buster's.

Lewis: I would love to see adult Dan try to channel seven-year-old Dan in present day. I think that's something to be seen. But, thinking about this, there are so many other things that kids are interested in now. I worry that the moment has passed for this kind of entertainment. Or, like you said, the window has gotten a little bit smaller.

There are some encouraging signs that we see in the financials here, but I worry that it is because they are about to do this, and they are picking the timing of this.

Kline: In refurbished stores, the same-store sales increase has been impressive. But it isn't a long enough period to see if that holds. If I have a four-year-old and I forgot about Chuck E. Cheese, we haven't been since a birthday party last year, and I see that the local Chuck E. Cheese in the No. 3 strip mall in my town -- because that's usually where they are, cheaper real estate next to a Family Dollar and a Kohl's and a Burlington Coat Factory, that kind of plaza. I see that they just refurbed, and they have big signs out, new games. Maybe I go once. Where's the repeat visitability once the kids are older? It only kills an hour.

Lewis: Yeah. This business reminds me a lot of Dave & Buster's. One, the restaurant business is just hard. It's a difficult business to be in. You are constantly going up against your past results on comps basis. You're expected to show both same-store sales growth and expansion growth, that you're able to find new markets to show your concept off. With this, though, there's also an element of entertainment. The store footprint, what it looks like, the games that you have in there, are so important, and it seems to me, especially in the last 5 to 10 years, that's started moving so much faster. The pace of innovation with gaming has changed so much that it's hard for a franchise like this to keep up.

Kline: And those games aren't for little kids. Dave & Buster's can get me to come back by, "Play the new ridiculous immersive Batman game for free." I'll go, "All right. $20, I'll have some coconut shrimp and a drink and play some Batman." That seems like something I might do once a month if a Dave & Buster's was near me. With Chuck E. Cheese, you can't advertise to little kids. They like the free tickets. There's that aspect of, collect your tickets and get a piece of candy or something. But they're not clamoring for it the way a 13-year-old would want to go to a Dave & Buster's.

They both do a similar mix when it comes to revenue. It's about 60% for the entertainment side and about 40% for the food side. Chuck E. Cheese is trying to move that needle by bringing in beer and wine. I can see some incremental beer and wine sales. But you and I aren't going to, after work, be like, "Hey, you know what we should do? Let's go to Chuck E. Cheese for a beer!" We would get arrested.

Lewis: [laughs] Well, I look at it, and I say OK, Dave & Buster's is the best outcome for a wholly refurbished Chuck E. Cheese.

Kline: And they struggle.

Lewis: Yeah, they're struggling. The stock's down 30% this year. So, a best-in-class company in this category is having a hard time. And I'm probably in Dave & Buster's target demo. I'm in my late 20s, I don't have kids, I like to drink. All of that combines to, "Come play games and drink with your friends." I've been once and it was for a friend of a friend's kid's birthday party like two years ago.

Kline: The proposition on Dave & Buster's is, you are going to spend $30 to have a burger and fries and a couple of beers, and they'll give you some gameplay. I'm going to guess you have an Xbox or a PS4.

Lewis: I do not. I'm not a big gamer. Maybe that's partially what it is.

Kline: OK. Most people in your generation would have that. I'm going to guess that there's some beer in your fridge.

Lewis: Yes, most certainly.

Kline: Probably a Five Guys nearby.

Lewis: Yes.

Kline: So, it's not that compelling. That said, I think the one positive thing for expansion of Chuck E. Cheese, Dave & Buster's, anything like that, is the real estate terms they're going to be able to negotiate for the next 10 years are very favorable.

Lewis: Why is that?

Kline: Because malls falsely believe that these businesses draw traffic that then go to other businesses. There's actually some research that came out today that said that, in general, that's not true, that people go to those businesses. But for a mall, even just to have the spot filled and the parking lot not empty is a benefit. And malls have been very interested in bringing in things that fill up big chunks of space.

Lewis: I think you've spoken before, maybe on this show, about how the overall mall real estate inventory is a little bit bigger than the demand is at the moment.

Kline: Yeah. We've seen a near-record, and it's absolutely going to be a record this year, amount of store closures. Something like 6,000. Every Payless is going out of business. Some communities had three Payless stores. There's at least three in West Palm Beach. So what's going to go in those? You're getting a lot of interesting stuff. CBD stores. But if you're a mall and you just lost Sears, you could go to, I don't know, 24/7 Fitness and Chuck E. Cheese and fill Sears. That's got to be a lot more appealing than, "Can we turn it into condos? Can we make it office space?"

Lewis: But for investors, Dan. Let's take a step back --

Kline: Oh, run away!

Lewis: -- the mall concept. I understand. But for investors, is this something people should be remotely interested in? I look at it, and it doesn't make sense to me.

Kline: No. It's not a destination for long enough. There is a very small window where you might consider Chuck E. Cheese in your quarterly rotation for things to do with your child. It's relatively inexpensive. No sixth graders are going to Chuck E. Cheese unless they're being dragged to a birthday party. You're fighting very hard for a low-spending audience. Exactly how much pizza does a four-year-old eat? Yeah, Mom and Dad are going to have a beer. But when you have a four-year-old, you can't get drunk. That's one of those implied parenting contract things.

Lewis: Yes, there is no guidebook to parenting, but there are some unwritten rules.

Kline: I really don't like this business. It feels to me like this is a death rattle kind of thing, like how do we get some of our money out. I don't want to be the company that pays a hedge fund for its mistakes.

Lewis: Yeah. Makes sense to me.

Lewis: I teased up that this is going to be a very rodent-focused show. We're talking Disney in this second segment here, Dan. This is a check-in on a conversation that we had back in January. We finally have some details on the Disney+ offering that a lot of people have been waiting for.

Kline: I'm so excited about this!

Lewis: You're personally excited.

Kline: We've talked about on this show, me and you and various other hosts, about how many streaming services I have. The answer is roughly all of them except, like, I don't have the MLB package and things like that. But I've got like 13 or 14 different streaming services, partly for my job, partly because I'm not good with money in some situations.

Lewis: You enjoy it, right?

Kline: Yeah, and I do watch a lot of stuff. I was steeled against Disney+. There was a part of me going, "All right, I'm a big Star Wars fan, but it's only two Star Wars shows. I like all the Marvel movies...wait a minute, it's going to be six Marvel shows?" The offering of content if you're a family is super Disney, everything Disney ever eventually, once the rights clear up. New shows from Marvel, new Pixar content. Really, something for everybody. All the Fox content. The Simpsons' new home will be Disney+. And they're charging $6.99 a month for it, which is roughly half the price of Netflix.

Lewis: Yeah, I think that's a masterstroke move. I have to give you and I a little credit here. When we talked about it back in early 2019, we did say, "I'm expecting this to go up at about $7 or $8 a month." Looks like we got that one right.

I think if you're looking to have multiple streaming subscriptions to pay $11 or $12 a month, maybe $13 a month for Netflix, and then be able to tack this on and only be paying about $20, that feels pretty reasonable.

Kline: They're going to take share from Hulu, which is their product, which is interesting. They're going to counteract that by offering you Hulu Live, Disney+, ESPN+, at a bundle price. They haven't said what that bundle price is. But they did acknowledge that they intend to do that.

Lewis: When is this actually going to launch, Dan? When are people going to be able to start using it?

Kline: Oh, you have to ask that? November?

Lewis: I think sometime in the early fall, maybe November 12th, something like that.

Kline: That sounds right. It's going to be a blockbuster launch. They're not rolling out with all this content at once. But honestly, they're going to launch with The Mandalorian, which is the Jon Favreau Star Wars show. That alone might have got me to buy the first couple of months. And if you're a movie fan, they will eventually have all the Avengers movies, all the Pixar movies. It's a huge wealth of content. We said this on the other show. They're the only people who could do this. Nobody else could launch an immediate Netflix competitor.

Lewis: Yeah, and the pricing is smart. I think what people need to keep in mind with this is, the stock went up 10% after they announced these details on their investor day. This is all-time highs for Disney, which is great because as a Disney shareholder, I've looked at it for a while and been like, "There's something wonderful here, but we've been just swimming along and there hasn't really been great gains." Even with this great news, even with this stock pop, this is not going to be something that immediately changes the books for Disney.

Kline: No. It's a huge investment. They forecast 60 to 90 million subscribers by 2025. That's a huge number. You have to assume the price will go up because everyone else will go up. Probably every time Netflix raises $1, Disney will go up by $0.75.

Lewis: We're getting close to an annual cadence on that.

Kline: Yeah. At some point, I think there's going to be a value loss. Maybe it's $15, maybe $19. I don't know what the number is. But we've talked about, you can shut Netflix off. Right now, you lose some of your saved stuff. But you could be like, "I'm going to just watch Disney for the next three months." And some people do binge watch TV that way. I tend to be more, I watch traditional, episodically. I don't want to watch four episodes of the same show in a night most of the time. That method maybe doesn't work for me. But for your generation, that's used to bingeing, I think Netflix is going to push people to say, I'm going to shut my account off for three months.

Lewis: I know there are some people that do the streaming rotation. They have one for three or four months of the year. Then they switch over and have another one for another couple of months. They do this like A, B, C, D, rinse, repeat so that they can watch all the shows that are new on the platform. I'm not one of those people. But I also only have a Netflix subscription. Maybe that's part of it.

Kline: It's something I feel like I should do. And anytime I've ever thought about it, I'm in a three-person household, I have a wife and a child. So I'll say like, "I'm not watching Netflix this month," but my wife will be eight episodes into something. So it doesn't always work. But with a little bit of planning, I think the pricing is going to get high.

Lewis: Yeah, it's a little tougher to do that when you have that many stakeholders. As someone who is just me making those subscription decisions, a little bit simpler.

If we're putting some numbers to what this might look like for Disney, you mentioned that 60 to 90 [million] subscribers by the end of 2024. I think the company estimates that about a third of that is going to be the United States. If you have, we'll say the midpoint here, 70 million or 75 million people paying what would right now be $70 per year, it'll probably be higher down the road, that's just about $5 billion in revenue on an annual basis, which would be an 8% lift on 2018 sales. But, it's coming in 2024.

Kline: That may not cover expenses.

Lewis: Yeah, that's just gross. We're just looking purely gross at this.

Kline: I think realistically, if Netflix is spending $6 to 8 billion on content, Disney doesn't have to spend that much because it's producing content in other formats that can go to this platform.

Lewis: That's their huge competitive advantage, right? Everything immediately can be ported over.

Kline: Yeah, it's why Netflix should buy CBS or something like that. I'll throw it out there, I actually think that's going to happen at some point.

Lewis: So, this is great news for Disney investors, mostly because we're starting to see some enthusiasm around the stock and it has languished for quite some time. Is there anything else in the reporting that you've seen on this story that you think needs to be thrown out?

Kline: I'm not a Disney shareholder, but I really believe in Disney. As a Disney aficionado, I think what's really important is, this is them controlling their own destiny. The easy money is licensing your content. That's the safe play. Disney has been famous for the safe play. If you look at the theme parks, they did not invest until Universal started investing in the Harry Potter properties and really stepping that up. This is Disney saying, "We're going to spend a lot of money over a long period of time and eventually come out of it with something that adds to our bottom line." The reality is, this is about Hulu and the pivot away from cable as much as it is anything else. They control ABC, they own a bunch of cable networks, there is a bundle they can give you where you cut the cord, and Disney makes more money rather than less.

Lewis: Is there a future where you see Disney+ being incorporated with some of the other properties that people are pretty interested in getting from Disney, namely ESPN?

Kline: Yeah. Well, ESPN+ and ESPN are different. ESPN has cable contracts that preclude it from being sold as a one-off. I expect, as numbers start to fall in cable, and they've been dropping at an increasing rate, Disney is going to start asking out of those deals, or asking for exceptions, sort of like the Sling deal, where they can sell a certain amount of stand-alone ESPN through Sling and now through other services. They've never said what the cap is, but there is a cap on how many ESPN subscriptions can be sold that way. So, yeah, I think they're going to figure out how to make the most money out of everything. The cable company at half the size -- wherever cable bottoms out, there'll be some market for cable, they're not going to have the leverage to say to Disney, "We're 98% of your business. We're paying you $8 for ESPN." And cable in return is going to get ESPN-free cable bundles, which is something they're not allowed to offer now.

Lewis: Yeah. My big takeaway is, good thing for Disney here. As the consumer looking out at all this, streaming is going to start to look a lot more like cable. It is its version of a la carte, but you're still paying for all these different things.

Kline: You might pay more. We've talked about this before, you're going to have less choice. There are going to be channels that go away. Disney owns Freeform. Freeform produces some really interesting content. That content could be just part of this service. I'm not sure you need to pay for all the ancillary programming it takes to fill out a 14-hour-day cable schedule just because you have a handful of good shows on Freeform. Those can probably just stream on Disney+.

Lewis: That's the way things go, Dan.

Kline: Works for me!

Lewis: Thanks for hopping on today's show!

Kline: I don't want to run into Chuck E. Cheese in a back alley.

Lewis: We'll try to avoid that happening. Listeners, that does it for this episode of Industry Focus. If you have any questions or you want to reach out and say hey, you can shoot us an email over at [email protected], or you can tweet us @MFIndustryFocus. If you want more of our stuff, subscribe on iTunes or check out videos from the podcast over on YouTube. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass! For Dan Kline, I'm Dylan Lewis. Thanks for listening and Fool on!