Do investors smell a rat when it comes to CEC Entertainment's (NYSE:CEC) Chuck E. Cheese concept? A poorly received early-summer promotion found the country's leading entertainment-center chain coming up short in its June quarter and warning about expected weakness in its seasonally vital September quarter.
The company earned $14.4 million during the quarter, identical to year-ago numbers. Thanks to the company's aggressive share buyback policy, there were fewer shares outstanding this time around, which resulted in bottom-line improvement. Earnings per share rose from $0.37 to $0.40 a share. Still, that fell below the $0.44 per share that Wall Street was expecting.
The culprit was the flawed Super Chuck Summer promotion. Pitching a kid-sized pizza and eight tokens at $4.99, the company was hoping to add a new layer of attractiveness to last summer's well-received marketing effort that priced all of the arcade games for a token.
The campaign launched just as June was getting under way, and it proved to be horrendous. Less than 1% of the company's total sales came from the new kid-meal promotion. Because its marketing message was being ignored, same-store sales tanked last month after having previously held their own.
During last night's conference call, the company faulted its food-based marketing promotion. It pulled the campaign earlier this month and went back to a more traditional televised commercial that emphasized the fun and games available at your loud but local Chuck E. Cheese.
I'm sorry, but I don't think that's why the campaign failed. Sure, kids high-fiving Chuck E. and heaving a mean game of Skee-Ball or running around with a trail of redemption tickets in tow can be a cooler message than a pint-sized pizza. However, I believe the campaign was a colossal dud because the chain was sending an economical message to young kids who can't grasp the financial concept. The moment they arrive at this electronic playground, kids expect the parents to provide an infinite stream of tokens and grub. For the most part, they couldn't care less how the legal tender covers the experience.
Because the lack of a hearty summer promotion is carrying over to the current quarter -- traditionally the company's strongest -- the company is now expecting to earn between $2.24 and $2.31 per share for all of 2005. Wall Street had the company penciled in at $2.37.
Yes, it's a miss, but it will still represent CEC's tenth straight year of growing its earnings per share (EPS). That's not something to be taken lightly in what many see as a highly fickle sector. Chuck E. Cheese is five times larger than its nearest rival because it's hard to grow a kid-friendly entertainment center concept successfully. Just ask Discovery Zone, brought to you by the folks who cut their teeth anticipating consumer trends at Blockbuster (NYSE:BBI). Even Disney (NYSE:DIS), the company that knows all about kids, failed in its various family entertainment center ventures. On the grown-up side, Dave & Buster's (NYSE:DAB) has had more ups and downs than a mechanical bull.
That's why CEC is still worth watching, especially if its current weakness yields an affordable buying opportunity.
CEC Enterprise was recommended earlier this year to our Motley Fool Hidden Gems subscribers. As of yesterday's close, it was narrowly beating the market. .
Longtime Fool contributor Rick Munarriz really does go to his local Chuck E. Cheese with his two sons. He loves the fact that the few cool grown-up arcade games are also a token. He does own shares in Disney. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
