As I've said before, restaurants are a brutal business. In fact, I'll go so far as to wager that every city in America has a "cursed corner" -- a location where restaurateurs keep trying (and failing) to make a go of their concept, but only manage to last about six months or so. And restaurants with a shtick are in even more perilous shape -- once you tire of dining amidst celebrity bric-a-brac or flatulent turtles, what's left?
And yet here we have the case of CEC Entertainment (NYSE:CEC) -- known to you and me (and your kids) as Chuck E. Cheese's. It's survived a long time in a business that chews up and spits out cute concepts, but it's not exactly setting the world on fire right now.
Perhaps Mr. Charles Cheese took his eye off the Skee-Ball because he was too busy with the exercise wheel. Or maybe the food quality in the kitchen slipped because he was out frolicking with Mickey and Mighty or the NIMH boys. Whatever the case, revenue dropped 5%, earnings dropped by a third, and earnings per share dropped by a similar amount. Given that there was an extra week in the year-ago period, the more comparable numbers are more favorable (earnings down only by $0.02, and revenue actually up), although same-store sales were still down in the quarter.
Management blamed the shortfall mostly on December performance -- things were going OK for the first two months of the quarter, but sales fell off in December and margins dropped as well. Part of the problem there apparently was travel expenses, although why travel expenses should be a big deal for restaurants really does escape me at the moment (in fairness, the company discusses that as part of the cost of opening new restaurant locations).
Perhaps it's just me, but I find restaurant turnarounds to be among the hardest investing ideas out there. After all, most restaurants could disappear and barely be remembered five years later. I'll grant that the loss of a select few would be noticed -- McDonald's (NYSE:MCD), and maybe some of the units of Darden Restaurants (NYSE:DRI) and Yum! Brands (NYSE:YUM) -- but for the most part, consumers treat them as interchangeable options.
CEC definitely has a niche and a hook -- feed your kids, let them play games, and so on. Do they still have the singing animatronic vermin? And I think I can speak for childless adults everywhere when I say that we love CEC for what it provides -- namely, a place where kids can scream their heads off and not bother us. I'm just not so sure about the stock -- at least not without seeing some positive quarterly comps again.
Order up! Click on for more Foolish thoughts on restaurants:
- A Welcome Surprise in This Box
- From the Outback to the Outhouse
- Cheesecake Factory's Delicious Results
CEC Entertainment is a Motley Fool Hidden Gems recommendation. Take the newsletter dedicated to finding the best underfollowed small-caps for a 30-day free spin.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
