CEC Entertainment Reports Financial Results for the Third Quarter of 2011; Announces 10% Increase in Cash Dividend

IRVING, Texas, Nov 03, 2011 (BUSINESS WIRE) -- CEC Entertainment, Inc. (NYSE: CEC) today announced its financial results for its third quarter ended October 2, 2011. Total revenues for the third quarter of 2011 decreased 3.5%, or $7.1 million, to $200.0 million from $207.1 million for the third quarter of 2010. Comparable store sales decreased 6.3% for the third quarter of 2011 as compared to the third quarter of 2010.

Net income for the third quarter ended October 2, 2011 decreased to $11.7 million as compared to $12.6 million for the third quarter of 2010. Diluted earnings per share for the third quarter of 2011 were $0.62 per share as compared to diluted earnings per share of $0.60 per share for the third quarter of 2010. The increase in diluted earnings per share benefited from, among other things, our repurchase of approximately 2.8 million shares of our common stock since the beginning of the third quarter of 2010.

For the nine months ended October 2, 2011, total revenues increased 1.3%, or $8.1 million, to $642.6 million as compared to $634.5 million for the nine months ended October 3, 2010. Comparable store sales decreased 1.5% for the nine months ended October 2, 2011 as compared to the nine months ended October 3, 2010. The increase in total revenues was primarily related to a weighted average net increase of seven stores, which was offset by lower comparable store sales.

Net income for the nine months ended October 2, 2011 increased 2.0%, or $1.0 million, to $52.2 million as compared to $51.2 million for the nine months ended October 3, 2010. Diluted earnings per share for the nine months ended October 2, 2011 were $2.70 per share as compared to diluted earnings per share of $2.38 per share for the nine months ended October 3, 2010. Diluted earnings per share benefited from, among other things, our repurchase of approximately 3.7 million shares of our common stock since the beginning of fiscal year 2010.

On October 28, 2011, we amended and restated our revolving credit facility which among other things extended the maturity date to October 28, 2016. Total borrowings available to us under the credit facility are $500 million and the credit facility includes an accordion feature allowing us, subject to meeting certain conditions and lender approval, to request an increase in our revolving commitment of up to $200 million in borrowings. The credit facility bears interest at LIBOR plus an applicable margin that ranges between 0.875% and 1.625%, determined based on our financial performance and debt levels, or alternatively, the highest of the (i) prime interest rate, (ii) Federal Funds rate plus 0.50%, or (iii) one month LIBOR plus 1.0%; plus an applicable margin that ranges between 0.0% and 0.625%. Based on the Company's Consolidated Leverage Ratio, as defined in the credit facility, the Company's current borrowing rate as of November 2, 2011 for Eurodollar Rate Loans is 1.62028% and the current borrowing rate for Base Rate Loans is 3.625%.

On November 1, 2011, the Company's Board of Directors approved a 10% increase in the Company's quarterly cash dividend to $0.22 per share. This cash dividend will be paid on January 5, 2012 to stockholders of record as of December 1, 2011.

Michael Magusiak, President and Chief Executive Officer, stated that, "Through the third quarter of 2011, we generated $154.7 million of operating cash flow. We utilized $68.2 million of our cash to complete 121 existing stores enhancements in the form of store expansions, major remodels, and game enhancements and open two new stores. We also used $21.5 million of cash to reduce our outstanding borrowings on our revolving credit facility, paid out $7.8 million in cash dividends, and used $55.4 million of cash to repurchase approximately 1.6 million shares of our common stock or approximately 8.1% of diluted shares outstanding as of the end of the third quarter of 2011."

Mr. Magusiak continued, "Despite the challenging economic times, our concept remains well-positioned in the marketplace and we continue our focus on enhancing long-term shareholder value by concentrating our efforts on growing our concept both domestically and internationally. Our healthy cash flow coupled with the renewal of our credit facility will enable us to continue to improve our restaurant/entertainment product and return capital to shareholders in the form of share repurchases and the payment of cash dividends which we are pleased to have increased 10%. We believe that our growth strategies combined with our share repurchase program will enhance long-term shareholder value. Finally, we are proud of our operators and support center employees who are hard at work helping to successfully implement our strategies and further develop our concept in the United States and around the world."

Business Outlook:

At this time, we are projecting comparable store sales for the fourth quarter to be in a range of down 4-5% and fiscal year 2011 diluted earnings per share to be in a range of $2.80 - $2.90. This guidance incorporates the following assumptions:

  • two additional relocated Company-owned stores in the fourth quarter, bringing the total new stores for fiscal year 2011 to 4 stores, including 3 relocations;
  • average cheddar block prices in a range of $1.75 to $1.85 per pound;
  • depreciation and amortization expense will increase approximately 1.4% from the prior year, and includes an estimated benefit of approximately $1.8 million related to our change in estimated useful lives of certain property and equipment during the fourth quarter of 2011;
  • rent expense will increase approximately 6.0% from the prior year;
  • advertising expense as a percentage of total revenue to be unchanged from the prior year;
  • annual effective income tax rate of approximately 38.8%;
  • capital expenditures to range from $85 to $90 million for fiscal year 2011;
  • our intent to repurchase Company common stock on an opportunistic basis; and
  • payment of three quarterly dividends of approximately $11.7 million.
  • In addition, the Company is estimating fiscal year 2012 comparable store sales to be flat to up 2%. This guidance considers impacting approximately 180 to 190 stores with store expansions, major remodels and game enhancements.

Third Quarter 2011 Conference Call:

The Company will host a conference call Thursday, November 3, 2011, at 3:30 p.m. Central Time to discuss its third quarter financial results and outlook for fiscal year 2011. A live webcast of the call (listen only) can be accessed through the Company's website, www.chuckecheese.com. Shortly after its conclusion, a replay of the call will be available on the website through Friday, December 23, 2011.

Non-GAAP Financial Measures:

The Company reports and discusses its operating results using financial measures consistent with accounting principles generally accepted in the United States ("GAAP"). From time to time in the course of financial presentations, earnings conference calls or otherwise, the Company may disclose certain non-GAAP financial measures such as Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") and Free Cash Flow. The non-GAAP financial measures presented in this earnings release should not be viewed as alternatives or substitutes for the Company's reported GAAP results. A reconciliation of the most directly comparable GAAP financial measure to EBITDA and Free Cash Flow is set forth in a table accompanying this release.

About CEC Entertainment, Inc.:

For more than 30 years, CEC Entertainment has served as the nationally recognized leader in family dining and entertainment and the place Where a Kid can be a Kid®. The Company and its franchisees operate a system of 556 Chuck E. Cheese's stores located in 48 states and seven foreign countries or territories. Currently, 507 locations in the United States and Canada are owned and operated by the Company. CEC Entertainment, Inc. and its franchises have the common goal of creating lifelong memories for families through fun, food, and play. Each Chuck E. Cheese's features musical and comic robotic entertainment, games, rides, and play areas, as well as a variety of dining options including pizza, sandwiches, a salad bar, and desserts. Committed to providing a fun, safe environment, Chuck E. Cheese's helps protect families through industry-leading programs such as Kid Check®.

Chuck E. Cheese's aims to promote positive, lifelong memories inside and outside of its stores. In addition to providing a fun entertainment experience for millions of families across the world, Chuck E. Cheese's has donated more than $6 million to schools and non-profit institutions through its fundraising programs. For more information, see the Company's website at www.chuckecheese.com.

Forward-Looking Statements:

Certain statements in this press release, other than historical information, may be considered "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, and are subject to various risks, uncertainties and assumptions. Statements that are not historical in nature, and which may be identified by the use of words such as "may," "should," "could," "believe," "predict," "potential," "continue," "plan," "intend," "expect," "anticipate," "future," "project," "estimate," and similar expressions (or the negative of such expressions) are forward-looking statements. Forward-looking statements are made based on management's current expectations and beliefs concerning future events and, therefore, involve a number of assumptions, risks and uncertainties, including the risk factors described in Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2011, filed on February 24, 2011. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected.

Factors that could cause actual results to differ materially from those contemplated by forward-looking statements include, but are not limited to:

  • Changes in consumer discretionary spending and general economic conditions;
  • Our ability to successfully implement our business development strategies;
  • Costs incurred in connection with our business development strategies;
  • Negative publicity concerning food quality, health, safety and other issues;
  • Competition in both the restaurant and entertainment industries;
  • Disruptions in the financial markets affecting the availability and cost of credit and our ability to maintain adequate insurance coverage;
  • Loss of certain key personnel;
  • Increases in food, labor and other operating costs;
  • Changes in consumers' health, nutrition and dietary preferences;
  • Continued existence or occurrence of certain public health issues;
  • Disruption of our commodity distribution system;
  • Our dependence on a few global providers for the procurement of games and rides;
  • Fluctuations in our quarterly results of operations due to seasonality;
  • Adverse effects of local conditions, natural disasters and other events;
  • Risks in connection with owning and leasing real estate;
  • Our ability to adequately protect our trademarks or other proprietary rights;
  • Government regulations, litigation, product liability claims and product recalls;
  • Disruptions of our information technology systems; and
  • Conditions in foreign markets.

The forward-looking statements made in this press release relate only to events as of the date on which the statements were made. Except as may be required by law, the Company undertakes no obligation to update its forward-looking statements to reflect events and circumstances after the date on which the statements were made or to reflect the occurrence of unanticipated events.

CEC ENTERTAINMENT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share amounts)

                                 
                                 
    Three Months Ended   Nine Months Ended
    October 2,   October 3,   October 2,   October 3,
    2011   2010   2011   2010
                                 
REVENUES                                
Food and beverage sales   $ 92,394   46.2 %   $ 99,452   48.0 %   $ 304,530   47.4 %   $ 309,532   48.8 %
Entertainment and merchandise sales     105,461   52.7 %     106,747   51.5 %     333,745   51.9 %     321,996   50.8 %
                                 
Company store sales     197,855   98.9 %     206,199   99.5 %     638,275   99.3 %     631,528   99.5 %
Franchise fees and royalties     2,142   1.1 %     945   0.5 %     4,340   0.7 %     2,929   0.5 %
                                 
Total revenues     199,997   100.0 %     207,144   100.0 %     642,615   100.0 %     634,457   100.0 %
                                 
OPERATING COSTS AND EXPENSES                                

Company store operating costs:

                               
Cost of food and beverage (exclusive of items shown separately below) (1)     23,196  

25.1

%

    22,143  

22.3

%

    74,186  

24.4

%

    69,729  

22.5

%

Cost of entertainment and merchandise (exclusive of items shown separately below)(2)

   

8,004

 

7.6

%

   

8,906

 

8.3

%

   

25,515

 

7.6

%

   

26,692

 

8.3

%

Total cost of food, beverage, entertainment and merchandise(3)     31,200  

15.8

%

    31,049  

15.1

%

    99,701  

15.6

%

    96,421  

15.3

%

                                 
Labor expenses (3)     53,417   27.0 %     55,740   27.0 %     169,296   26.5 %     168,112   26.6 %
Depreciation and amortization (3)     19,939   10.1 %     19,903   9.7 %     61,597   9.7 %     59,345   9.4 %
Rent expense (3)     19,667   9.9 %     17,719   8.6 %     56,486   8.8 %     52,645   8.3 %
Other store operating expenses (3)     33,544   17.0 %     36,025   17.5 %     96,790   15.2 %     96,757   15.3 %
Total Company store operating costs (3)     157,767  

79.7

%

    160,436  

77.8

%

    483,870  

75.8

%

    473,280  

74.9

%

                                 
Advertising expense     9,575   4.8 %     9,870   4.8 %     27,491   4.3 %     27,292   4.3 %
General and administrative expenses     10,799   5.4 %     12,176   5.9 %     38,078   5.9 %     37,297   5.9 %
Asset Impairments     1,260   0.6 %     936   0.5 %     1,260   0.2 %     936   0.1 %
Total operating costs and expenses     179,401  

89.7

%

    183,418  

88.5

%

    550,699  

85.7

%

    538,805  

84.9

%

Operating income     20,596   10.3 %     23,726   11.5 %     91,916   14.3 %     95,652   15.1 %
Interest expense     1,581   0.8 %     2,951   1.4 %     6,621   1.0 %     9,063   1.4 %
                                                 
Income before income taxes     19,015   9.5 %     20,775   10.0 %     85,295   13.3 %     86,589   13.6 %
                                 
Income taxes     7,365   3.7 %     8,194   4.0 %     33,061   5.1 %     35,368   5.6 %
Net income   $ 11,650   5.8 %   $ 12,581   6.1 %  

$

52,234

  8.1 %  

$

51,221

  8.1 %
                                 

Earnings per share:

                               
Basic   $ 0.62       $ 0.60       $ 2.70       $ 2.38    
Diluted   $ 0.62       $ 0.60       $ 2.70       $ 2.38    
                                 

Weighted average common shares outstanding:

                               
Basic    

18,747

       

20,844

        19,339         21,488    
Diluted     18,799         20,877         19,379         21,525    

___________________
Percentages are expressed as a percent of total revenues (except as otherwise noted).
(1) Percent amount expressed as a percentage of food and beverage sales.
(2) Percent amount expressed as a percentage of entertainment and merchandise sales.
(3) Percentage amount expressed as a percentage of Company store sales.
(Note - Due to rounding, percentages presented in the table above may not add. The percentage amounts for the components of cost of food and beverage, and the cost of entertainment and merchandise do not sum due to the fact that cost of food and beverage and cost of entertainment and merchandise are expressed as a percentage of related food and beverage and entertainment and merchandise sales, as opposed to total Company store sales.)

 
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
         
    October 2,   January 2,
    2011   2011
ASSETS   (in thousands)
         
Current assets:        
Cash and cash equivalents   $ 18,877   $ 19,269
Other current assets     59,210     68,084
Total current assets     78,087     87,353
Property and equipment, net     678,644     683,192
Other noncurrent assets     7,060     7,484
         
Total assets   $ 763,791   $ 778,029
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
Current liabilities:        
Capital lease obligations, current portion   $ 936   $ 936
Other current liabilities     84,346     88,138
Total current liabilities     85,282     89,074
Capital lease obligations, less current portion     10,124     10,326
Revolving credit facility borrowings     355,500     377,000
Other noncurrent liabilities     164,964     143,567
Total liabilities     615,870     619,967
         
Stockholders' equity     147,921     158,062
         
Total liabilities and stockholders' equity   $ 763,791   $ 778,029
 
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
         
    Nine Months Ended
    October 2,   October 3,
    2011   2010
    (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net income   $ 52,234     $ 51,221  
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation and amortization     62,101       60,013  
Deferred income taxes     23,447       (2,220 )
Stock-based compensation expense     5,479       5,511  
Other adjustments     1,706       1,800  
Changes in operating assets and liabilities:        
Operating assets     3,938       5,966  
Operating liabilities     5,844       15,499  
Net cash provided by operating activities     154,749       137,790  
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment     (68,166 )     (70,685 )
Other investing activities     (178 )     (2,451 )
Net cash used in investing activities     (68,344 )     (73,136 )
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Net proceeds from (repayments on) revolving credit facility     (21,500 )     2,200  
Exercise of stock options     632       4,737  
Dividend payments     (7,787 )     --  
Payment of taxes for returned restricted shares     (2,749 )     (2,757 )
Treasury stock acquired     (55,445 )     (67,441 )
Other financing activities     116       (35 )
Net cash used in financing activities     (86,733 )     (63,296 )
         
Effect of foreign exchange rate changes on cash and cash equivalents     (64 )     14  
         
Change in cash and cash equivalents     (392 )     1,372  
         
Cash and cash equivalents at beginning of period     19,269       17,361  
         
Cash and cash equivalents at end of period   $ 18,877     $ 18,733  
                 

CEC ENTERTAINMENT, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(Unaudited)

Net Income to EBITDA:

The following tables set forth a reconciliation of net income to EBITDA and EBITDA expressed as a percentage of total revenues for the periods shown:

    2010   2009   2008   2007   2006
    (in thousands)
                     
Total revenues   $ 817,248     $ 818,346     $ 814,509     $ 785,322     $ 772,553  
                     
Net income   $ 54,034     $ 61,194     $ 56,494     $ 55,921     $ 68,257  
Add:                    
Income taxes     38,726       37,754       34,137       35,453       43,120  
Interest expense     12,142       12,017       17,389       13,170       9,508  
Depreciation and amortization     80,679       78,071       75,445       71,919       65,392  
EBITDA   $ 185,581     $ 189,036     $ 183,465     $ 176,463     $ 186,277  
                     
EBITDA as a percent of total revenues     22.7 %     23.1 %     22.5 %     22.5 %     24.1 %
                                         
         
    Three Months Ended   Nine Months Ended
    October 2,   October 3,   October 2,   October 3,
    2011   2010   2011   2010
    (in thousands)
Total revenues   $ 199,997     $ 207,144     $ 642,615     $ 634,457  
                                 

Net Income

  $ 11,650     $ 12,581     $ 52,234     $ 51,221  
                 
Add:                                
Income taxes     7,365       8,194       33,061       35,368  
Interest expense     1,581       2,951       6,621       9,063  
Depreciation and amortization     20,123       20,145       62,101       60,013  
                 
EBITDA   $ 40,719     $ 43,871     $ 154,017     $ 155,665  
                                 

EBITDA as a percent of total revenues

   

20.4

%

   

21.2

%

   

24.0

%

   

24.5

%

The Company believes that EBITDA provides useful information to the Company, investors and other interested parties about the Company's operating performance, its capacity to incur and service debt, fund capital expenditures and other corporate uses.

EBITDA, a non-GAAP financial measure, is defined by the Company as net income before income taxes, interest expense, and depreciation and amortization. The non-GAAP financial measure presented in the table above should not be viewed as an alternative or substitute for the Company's reported GAAP results. EBITDA as defined herein may differ from similarly titled measures presented by other companies.

Free Cash Flow:

The following table sets forth a reconciliation of cash provided by operating activities to Free Cash Flow for the periods shown:

    Nine Months Ended
    October 2,   October 3,
    2011   2010
    (Unaudited and in thousands)
         
Cash provided by operating activities   $ 154,749   $ 137,790
Less:        
Capital expenditures     68,166     70,685
Dividend payments     7,787     -
Free Cash Flow   $ 78,796   $ 67,105
             

Free Cash Flow, a non-GAAP financial measure, is defined by the Company as cash provided by operating activities less capital expenditures.

The Company believes that Free Cash Flow provides useful information to the Company, investors and other interested parties about the amount of cash generated by the business that, after the acquisition of property and equipment, can be used for other strategic opportunities, including servicing debt, funding additional capital expenditures and making investments in the business. It should not be inferred that the entire Free Cash Flow amount is available for discretionary expenditures. The non-GAAP financial measure presented in the table above should not be viewed as an alternative or substitute for the Company's reported GAAP results. Free Cash Flow as defined herein may differ from similarly titled measures presented by other companies.

Store Count Information:

    Three Months Ended   Nine Months Ended
    October 2,   October 3,   October 2,   October 3,
    2011   2010   2011   2010
                 
Number of Company-owned stores:                
Beginning of period   507   498     507     497  
New(1)   -   1     2     1  
Acquired from franchisees   -   2     -     3  
Closed(1)   -   (1 )   (2 )   (1 )
End of period   507   500     507     500  
                 
Number of franchised stores:                
Beginning of period   48   48     47     48  
New   1   -     3     1  
Acquired by the Company   -   (2 )   -     (3 )
Closed   -   -     (1 )   -  
End of period   49   46     49     46  

___________________
(1) The nine months ended October 2, 2011 includes the closing and opening of one relocated store.

SOURCE: CEC Entertainment, Inc.

###

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