CEC Entertainment Reports Second Quarter Results

Comparable Store Sales Increase 2.9%

IRVING, TEXAS - (BUSINESS WIRE) - Aug. 1, 2013 - CEC Entertainment, Inc. (NYSE: CEC) today announced its financial results for its second quarter ended June 30, 2013. Total revenues for the second quarter of 2013 increased 5.2%, or $9.5 million, to $191.9 million from $182.4 million for the second quarter of 2012. The increase primarily related to a 2.9% increase in comparable store sales, as well as additional revenues generated from new store development.

Net income for the second quarter ended June 30, 2013 increased 77.5%, or $3.1 million, to $7.2 million as compared to $4.1 million for the second quarter of 2012. Diluted earnings per share increased to $0.42 per share for the second quarter of 2013 from $0.23 per share for the second quarter of 2012.

For the first six months of 2013, total revenues increased 4.2%, or $18.0 million, to $447.2 million as compared to $429.2 million for the first six months of 2012. The increase in total revenues was primarily related to a 2.2% increase in comparable store sales, as well as additional revenues generated from new store development.

Net income for the first six months of 2013 increased 11.3%, or $4.1 million, to $40.5 million as compared to $36.4 million for the first six months of 2012. Diluted earnings per share for the first six months of 2013 increased to $2.34 per share as compared to diluted earnings per share of $2.05 for the first six months of 2012. Diluted earnings per share for the first six months of 2013 benefitted approximately $0.06 from our repurchase of approximately one million shares of our common stock since the beginning of the 2012 fiscal year.

On July 29, 2013, the Company’s Board of Directors declared a cash dividend of $0.24 per share. This cash dividend is scheduled to be paid on October 3, 2013 to stockholders of record as of September 5, 2013.

Michael Magusiak, President and Chief Executive Officer, stated, “Our management team is pleased with the revenue and profit results of the second quarter and first half of 2013. Revenue in the second quarter increased 5.2%, driven by our 2.9% growth in comparable store sales and new store development. The combination of increased revenue and the implementation of our profit strategies improved our store level operating margins by 250 basis points.”

Magusiak added, “We believe that we have developed a solid plan to increase comparable store sales, grow our concept with both domestic and international new locations and improve our profitability. Our team is focused and dedicated to executing and continuously improving our strategy.”

Business Outlook

Through the end of July, our comparable store sales have increased 1.6%. We continue to project comparable store sales of 1.5% to 2.5% for fiscal 2013, and we are increasing our diluted earnings per share guidance to be in a range of $2.90 to $3.05, including the following assumptions:

  • 12-15 new Company-owned stores, including one store relocation;
  • Average cheese block prices in the range of $1.75 to $1.85 per pound;
  • Depreciation and amortization to remain relatively flat with the prior year;
  • Rent expense to increase approximately 4-5% from the prior year;
  • Advertising expense to increase approximately $6 million from the prior year;
  • Capital expenditures to range from approximately $75 to $80 million; and
  • Payment of four quarterly dividends totaling approximately $17 million.

Second Quarter 2013 Conference Call

The Company will host a conference call Thursday, August 1, 2013, at 3:30 p.m. Central Time to discuss its second quarter 2013 financial results and business outlook. 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 for a minimum of 60 days.

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 567 Chuck E. Cheese’s stores located in 47 states and nine foreign countries and territories. Currently, 514 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 pizzas, sandwiches, wings, appetizers, 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 $10 million to schools and non-profit institutions through its fundraising programs. For more information, see the Company's website at www.chuckecheese.com.

Cautionary Statement Regarding 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 Part I, Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2012, filed with the Securities and Exchange Commission (“SEC”) on February 21, 2013. 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:

  • Our ability to successfully implement our strategic plan;
  • Competition in both the restaurant and entertainment industries;
  • Changes in consumer discretionary spending;
  • Impacts on our business and financial results from economic uncertainty in the U.S. and Canada;
  • Negative publicity concerning food quality, health, general safety and other issues;
  • Increases in food, labor and other operating costs;
  • Unanticipated costs and delays in implementing our strategic plan;
  • Government regulations, including health care reform;
  • Existence or occurrence of certain public health issues;
  • Changes in consumers’ health, nutrition and dietary preferences;
  • Any disruption of our commodity distribution system, which currently utilizes a single distributor for most of our products and supplies;
  • Product liability claims and product recalls;
  • Inadequate insurance coverage;
  • Disruptions of our information technology systems and technologies;
  • Litigation risks;
  • Our dependence on a limited number of suppliers for our games, rides, redemption prizes and merchandise;
  • Adverse effects of local conditions, natural disasters and other events;
  • Increases in our leverage;
  • Loss of certain key personnel;
  • Fluctuations in our quarterly results of operations due to seasonality;
  • Our ability to adequately protect our trademarks or other proprietary rights;
  • Risks in connection with owning and leasing real estate; 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 in this press release. 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.
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(in thousands, except per share information)
               
        Three Months Ended     Six Months Ended
        June 30,     July 1,     June 30,     July 1,
        2013     2012     2013     2012
                                       
REVENUES:                                                  
Food and beverage sales       $ 86,517     45.1 %     $ 84,882    

46.5

%

    $ 202,318     45.2 %     $ 200,784     46.8 %
Entertainment and merchandise sales         103,926     54.1 %       96,274     52.8 %       242,328     54.2 %       225,798     52.6 %
Total Company store sales         190,443     99.2 %       181,156     99.3 %       444,646     99.4 %       426,582     99.4 %
Franchise fees and royalties         1,501     0.8 %       1,259     0.7 %       2,601     0.6 %       2,591     0.6 %
Total revenues         191,944     100.0 %       182,415     100.0 %       447,247     100.0 %       429,173     100.0 %
                                                   
OPERATING COSTS AND EXPENSES:                                                  

Company store operating costs:

                                                 

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

     

 

20,926

   

24.2

%

     

21,025

   

24.8

%

     

48,965

   

24.2

%

     

49,236

   

24.5

%

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

       

6,948

   

6.7

%

     

7,170

   

7.4

%

     

16,280

   

6.7

%

     

16,145

   

7.2

%

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

        27,874    

14.6

%

     

28,195

   

15.6

%

      65,245    

14.7

%

      65,381    

15.3

%

Labor expenses(3)         55,085     28.9 %       53,385     29.5 %       117,940     26.5 %       115,053     27.0 %
Depreciation and amortization(3)         19,207     10.1 %       19,091     10.5 %       39,063     8.8 %       38,830     9.1 %
Rent expense (3)         19,217     10.1 %       18,957     10.5 %       38,976     8.8 %       37,915     8.9 %
Other store operating expenses(3)         31,872     16.7 %       30,702     16.9 %       64,374     14.5 %       62,266     14.6 %
Total Company store operating costs(3)         153,255    

80.5

%

      150,330    

83.0

%

      325,598    

73.2

%

      319,445    

74.9

%

Other costs and expenses:

                                                 
Advertising expense         10,618     5.5 %       8,106     4.4 %       22,316     5.0 %       16,981     4.0 %
General and administrative expenses         14,380     7.5 %       13,062     7.2 %       29,421     6.6 %       26,704     6.2 %
Asset impairments         226     0.1 %       2,374     1.3 %       226     0.1 %       2,723     0.6 %
Total operating costs and expenses         178,479    

93.0

%

      173,872    

95.3

%

      377,561    

84.4

%

      365,853    

85.2

%

Operating income         13,465     7.0 %       8,543     4.7 %       69,686     15.6 %       63,320     14.8 %
Interest expense         2,039     1.1 %       2,083     1.1 %       4,231     0.9 %       4,054     0.9 %
Income before income taxes         11,426     6.0 %       6,460     3.5 %       65,455     14.6 %       59,266     13.8 %
Income taxes         4,187     2.2 %       2,381     1.3 %       24,959     5.6 %       22,883     5.3 %
Net income       $ 7,239     3.8 %     $ 4,079     2.2 %     $ 40,496     9.1 %     $ 36,383     8.5 %

Earnings per share:

                                                 
Basic       $ 0.42           $ 0.23           $ 2.35           $ 2.06      
Diluted       $ 0.42           $ 0.23           $ 2.34           $ 2.05      

Weighted average common shares outstanding:

                                                 
Basic         17,057             17,599             17,211             17,692      
Diluted         17,138             17,640             17,295             17,745      
Cash dividends declared per share       $ 0.24           $ 0.22           $ 0.48           $ 0.44      
                                                           

_______________

 
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 sum to total. The percentage amounts for the components of cost of food and beverage and the cost of entertainment and merchandise may not sum to total 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 sales and entertainment and merchandise sales, as opposed to total Company store sales.)

                   
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
                   
            June 30,     December 30,
            2013     2012
ASSETS                  
                   
Current assets:                  
Cash and cash equivalents           $ 20,195     $ 19,636
Other current assets             58,446       66,423
Total current assets             78,641       86,059
Property and equipment, net             691,812       703,956
Other noncurrent assets             12,612       11,791
                   
Total assets           $ 783,065     $ 801,806
                   
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
                   
Current liabilities:                  
Capital lease obligations, current portion           $ 1,003     $ 1,060
Other current liabilities             87,527       82,080
Total current liabilities             88,530       83,140
Capital lease obligations, less current portion             20,893       21,656
Revolving credit facility borrowings             352,000       389,500
Other noncurrent liabilities             163,484       164,236
Total liabilities             624,907       658,532
                   
Stockholders’ equity             158,158       143,274
                   
Total liabilities and stockholders’ equity           $ 783,065     $ 801,806
                       
         
CEC ENTERTAINMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
         
        Six Months Ended
        June 30,     July 1,
        2013     2012
               
CASH FLOWS FROM OPERATING ACTIVITIES:              
Net income       $ 40,496       $ 36,383  
Adjustments to reconcile net income to net cash provided by operating activities:              
Depreciation and amortization         39,429         39,208  
Deferred income taxes         (1,552 )       (403 )
Stock-based compensation expense         4,225         3,705  
Other adjustments         (1,036 )       3,008  
Changes in operating assets and liabilities:              
Operating assets         1,175         (5,797 )
Operating liabilities         9,955         3,683  
Net cash provided by operating activities         92,692         79,787  
               
CASH FLOWS FROM INVESTING ACTIVITIES:              
Purchases of property and equipment         (32,080 )       (50,345 )
Other investing activities         2,730         270  
Net cash used in investing activities         (29,350 )       (50,075 )
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Net repayments on revolving credit facility         (37,500 )       (6,200 )
Dividends paid         (4,372 )       (8,016 )
Restricted stock returned for payment of taxes         (2,163 )       (2,612 )
Purchases of treasury stock         (18,112 )       (14,353 )
Other financing activities         (275 )       229  
Net cash used in financing activities         (62,422 )       (30,952 )
               
Effect of foreign exchange rate changes on cash         (361 )       3  
               
Change in cash and cash equivalents         559         (1,237 )
               
Cash and cash equivalents at beginning of period         19,636         18,673  
               
Cash and cash equivalents at end of period       $ 20,195       $ 17,436  
               

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

Net Income to EBITDA:

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

        Three Months Ended     Six Months Ended
        June 30,     July 1,     June 30,     July 1,
        2013     2012     2013     2012

 

      (in thousands, except percentages)
         

Total revenues

      $ 191,944       $ 182,415       $ 447,247       $ 429,173  
                                           

Net income

      $ 7,239       $ 4,079       $ 40,496       $ 36,383  
Add:                          
Interest expense         2,039         2,083         4,231         4,054  
Income taxes         4,187         2,381         24,959         22,883  
Depreciation and amortization         19,412         19,272         39,429         39,208  

EBITDA

      $ 32,877       $ 27,815       $ 109,115       $ 102,528  
                                           

EBITDA as a percent of total revenues

       

17.1

%

     

15.2

%

     

24.4

%

     

23.9

%

                           

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 interest expense, income taxes 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.

CEC ENTERTAINMENT, INC.
FREE CASH FLOW AND STORE COUNT INFORMATION
(Unaudited)

Free Cash Flow:

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

        Six Months Ended
        June 30,     July 1,
        2013     2012
        (in thousands)
               
Cash provided by operating activities       $ 92,692     $ 79,787
Less:              
Capital expenditures and franchise acquisitions         32,080       50,345
Dividend payments        

4,372

      8,016
Free Cash Flow       $ 56,240     $ 21,426
               

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

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, franchise acquisitions and payment of dividends, 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  

 

Six Months Ended

        June 30,     July 1,     June 30,    

July 1,

        2013     2012     2013     2012
                           

Number of Company-owned stores:

                         
Beginning of period       515       508       514       507  
New(1)       2       5       3       5  
Acquired from franchisees       -       -       -       1  
Closed(1)       (3 )     (3 )     (3 )     (3 )
End of period       514       510       514       510  
                           

Number of franchised stores:

                         
Beginning of period       51       50       51       49  
New(2)       3       -       3       2  
Acquired by the Company       -       -       -       (1 )
Closed(2)       (1 )     -       (1 )     -  
End of period       53       50       53       50  
___________________

(1)

  For the three and six months ended July 1, 2012, the number of new and closed Company-owned stores include two stores that were relocated.

(2)

  For the three and six months ended June 30, 2013, the number of new and closed franchised stores included one store that was relocated.

Source: CEC Entertainment, Inc.

Contact:

CEC Entertainment, Inc.
Tiffany B. Kice
972-258-4525
Executive Vice President
Chief Financial Officer

###

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