There are three things you need to know about Chuck E. Cheese's parent CEC Entertainment (NYSE:CEC) after Tuesday's quarterly earnings report.
- The pizza at the flagship rodent-themed kiddie arcade concept is pretty darn good.
- The policy of making all video games cost exactly one token allows sharp-thinking dads to play high-end games on the cheap while naive toddlers blow their coins on Skee-Ball and other ticket redemption games.
- CEC isn't exactly the picture of financial health at the moment.
Let's sidestep the fact that CEC is the latest company to say it's looking into the potential of inappropriately accounted stock option grants. That's become a vanity drug that even the likes of Apple (NASDAQ:AAPL) and Intuit (NASDAQ:INTU) are inhaling these days. The more pressing concern is lackluster growth at the chain, which seemed to be growing so well just a couple of years ago.
Revenue rose just 4.6% to $176.2 million during the quarter. Diluted earnings per share clocked in $0.02 higher at $0.38, but would have actually been lower if not for an aggressive share buyback that radically trimmed the number of outstanding shares.
CEC knows what it has to do. It recognizes that its concept is starting to grow as tired as an infant who has spent three hours in a ball-crawl pit. It's scaling back new unit expansion and earmarking $48 million -- twice as much as it has spent in recent years -- to refresh existing locations.
In the meantime, it's limiting new potential locations to dense metropolitan markets that have the population to respond to aggressive promotional efforts when it hits lulls, as it has now.
I can certainly vouch for the active coupon-heaving practices this summer. I'm on the mailing list and received an offer of a dozen free tokens just for updating my profile. This comes after a springtime promotion aiming to subsidize higher gas prices (which may be keeping soccer moms closer to home), hitting the retail market with coupons on boxes of Kraft (NYSE:KFT) Macaroni & Cheese, and rolling out Chuck E. Cheese's branded string cheese through Wal-Mart (NYSE:WMT).
I like it. I would rather see a company slowing down and trying new things to get its existing base on track than do what Hot Topic (NASDAQ:HOTT) did and continue its breakneck expansion despite free-falling comps.
CEC is sticking to its earlier guidance. It's still looking to earn $1.94 to $2.02 a share this year. It sees store level comps growing 2% to 3%. That prices CEC at 15 times earnings, which isn't exactly cheap for a meandering concept, but also understates the potential upside. Yes, there is upside here. If the company is able to shore up its concept and rely less on margin-challenging coupons to attract knee-high kids that kick the shins of costumed rodents, CEC may be on to something here.
CEC is one of the many active Motley Fool Hidden Gems newsletter service recommendations. Intuit and Wal-Mart are Inside Value recommendations, and Kraft is an Income Investor selection.
Longtime Fool contributor Rick Munarriz recommends going for the arcade racing games at Chuck E. Cheese's while the kids blow through their tokens pounding away at moles, crocodiles, and space aliens. He does not own shares in any of the companies in this story. He is a member of the Rule Breakers newsletter team. The Fool has a disclosure policy .
