Chuck E. Cheese is planning an IPO in order to raise capital to modernize more of its stores. Early results of those efforts have been positive, but it's a very small sample, and competition has gotten much more intense than it was in the company's heyday. The part-restaurant/part-entertainment venue has to fight for kids as they get older with key rival Dave & Buster's (PLAY -0.71%) , which has steadily kept its stores updated.

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This video was recorded on April 16, 2019.

Dylan 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?

Dan 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somewhat complicated game on an iPad vs. a very basic one that maybe kids of all ages are playing, Chuck E. Cheese with outdated video games and a playscape that's not as good as the one in most towns's not the appeal it was when we were kids.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 five 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.