CEC Entertainment (NYSE Euronext (NYX): CEC) operates Chuck E. Cheese, a restaurant chain known for its games and entertainment for kids. CEC's main revenue source is food and beverage sales, which account for about 63% of the company's revenue, but unlike other casual & upscale restaurants it also makes a good chunk of its revenues from gaming and entertainment. Chuck E. Cheese's sales rely strongly on birthday parties, as the company hosts over 2 million birthday parties annually at its 490 locations.
In 2008, the company has added new games and rides to try to attract more customers, and CEC's comparable store sales grew by 3.6% in Q1 2008 and an additional 5.6% in Q2 2008. CEC's new games and rides cost $125,000 to $175,000 per renovation and include new virtual reality roller coaster rides and virtual race car games for each renovated restaurant. The boost in overall sales offset these costs, leading to a 7% increase in Q2 2008 net income from Q2 2007.In addition to renovating existing stores, CEC opened 10 new locations in 2007 and plans on opening 30 to 40 new stores between 2008 and 2013, costing approximately $2.5 million to $2.7 million each.
CEC is vulnerable to increases in commodities prices, particularly commodities that affect the prices of cheese and dough which affect the cost of pizza, one of CEC's most popular menu items. The company's cost of sales increased by 3.8% in 2007 mainly due to higher prices of ingredients like cheese, which increased an average of $0.50 per pound during 2007. This increase in operating expenses outpaced CEC's 1.6% increase in sales in 2007, and the company's net income decreased 18.1% from 2006.
CEC Entertainment operates Chuck E. Cheese, the largest national chain of family entertainment and dining establishments. The restaurants are specifically positioned towards families with children ages 2 to 12. Chuck E. Cheese restaurants are particularly popular for children's birthdays, as the company hosts more than 2 million birthday parties annually. Chuck E. Cheese's are typically located in shopping centers or stand-alone buildings. Within these locations, exists a dining area, a showroom and a playroom, which together can accommodate a total of about 325 to 425 guests. The company operates 490 locations of the Chuck E. Cheese concept and franchisees operate an additional 44 establishments. Of the company owned restaurants, 476 locations are in the United States and the remaining 14 are in Canada. In 2007, company stores averaged $1.6 million in revenue per restaurant. The company's net income decreased 18.1% from 2006, when the company earned $769.2 million in revenue. CEC's 2006 revenue represented a 6.4% increase from 2005, but net income decreased 2% during 2006 because of a 7% increase in operating expenses.
The Chuck E. Cheese kitchen serves a variety of pizza, sandwiches, appetizers, a salad bar and desserts. The majority of food supplies are distributed by a single major food distributor, which stabilizes costs for the company across different geographic locations. In 2006, food and beverage sales accounted for 63.4% of CEC's revenue and 62% of its net income.
The showroom features a variety of computer-controlled robotic characters and animated props on a stage-type setting that provide musical and comic entertainment. The playroom features approximately 45 token-operated activities including arcade-style games, rides, video games and so forth. Tokens cost $0.25 each, and each game requires only one token to play. Some tokens are provided complimentary with food orders, but additional tokens may also be purchased separately. The company also sells merchandise like t-shirts or coffee mugs featuring their "spokesmouse" Chuck E. Cheese. Together, game and merchandise sales accounted for 36.5% of the company's revenue in 2006 and 38% of its net income.
CEC's revenue reached approximately $785 million in 2007, up about 8% from 2005, when revenue totaled about $726 million. In 2007 the company earned $781.7 million from company store sales and earned an additional approximate $3.7 million from franchise fees and royalties. The $781.7 million in company store sales represented a 1.6% increase from 2006 which can be mainly attributed to an increase in company-owned restaurants as the company added 10 new restaurants during 2007.
The company increased menu prices 2.2% in 2007 in order to counter the company's 1.4% decrease in comparable store sales and the 0.4% increase of cost of sales as a percentage of sales during 2007. The company attributes the decline in comparable store sales to decreased levels of dispensable income because of a weakened U.S. economy. As a result of lower levels of dispensable income, many consumers reduced the amount of their income spent on leisure and entertainment items, particularly restaurant dining. For example, a 2007 RBC Capital Markets survey indicated that 39% of respondents had reduced their frequency of dining at restaurants. Additionally, the weakened economy led people to choose cheaper forms of family entertainment like movie watching, where average admission price of a family of four was $27.52 in 2007, cheaper than CEC's average check size of $45 per family of four.
The company earned $55.9 million in net income in 2007, an 18.1% decrease from $68.3 million in 2006. Furthermore, the company's operating margin was 13.3% in 2007, a significant decrease from 15.6% in 2006. The decrease in net income is largely due to the 4.5% increase in operating expenses, including a 3.8% increase in cost of sales and a 5.7% increase in hourly wages from 2006. The increase in cost of sales during 2007 was mainly due to the $0.50 increase in the cost per pound of cheese from 2006.
Since 2005 CEC has made significant renovations to its existing restaurants and has followed an aggressive plan to add about 8 to 10 new locations per year. Renovations to existing locations are focused on the playroom, where the company classifies three types of initiatives including major remodels, store expansions and new game additions. The renovation efforts seek to maintain relevance among CEC's core 2 to 12 demographic.
CEC also focuses on aggressive new store development, as it added 10 new locations during 2007. In 2008, CEC plans to complete 6 to 7 new stores, costing an average of $2.6 million per store. The new stores are spread fairly evenly nationwide, with one store each to open in California, Oregon, Washington, Florida, Arkansas and Mississippi. The company believes that new locations will be crucial to future success as new restaurants are predicted to average an annual revenue of $2 million, a 25% increase over the comparable store company average of $1.6 million. The company predicts it will open between 30 and 40 new locations between 2008 and 2013.
The company's expansion and renovation initiatives have helped revitalize CEC's image and maintain strong sales. The company attributed its 3.6% increase in comparable store sales in Q1 2008 and additional 5.7% increase during Q2 2008 to new store development and its renovations at existing locations. Furthermore, revenue increased 7% from Q2 2007 to $192.5 million in Q2 2008 and net income increased 33% to $11.3 million in Q2 2008.
During 2007 and 2008, wheat prices and dairy prices increased significantly, with wheat prices more than doubling in price during 2007 and reaching a record $24 per bushel in February of 2008. Dairy prices also reached record highs in 2007, averaging $19.13 per 100 pounds of milk or cwt, more than $6.00 higher than prices in 2006 These higher costs of commodities caused the prices of both dough and cheese, essential ingredients for CEC's menu, to increase significantly. For example, the average price of a pound of cheese increased by $0.50 during 2007. As a result of higher costs of ingredients, CEC's cost of sales increased by 3.8% in 2007, outpacing its 1.6% increase in company sales and contributing to the company's 18.1% decrease in net income. Higher ingredient expenses also contributed to the company's 2.3% decrease in operating margin in 2007. In response to increases in commodity prices, CEC raised menu prices 2.2% during 2007 and plans to reduce cheese and dough usage in 2008..
The subprime lending crisis during 2007 severely weakened the U.S. economy, resulting in lower levels of disposable income for consumers. Decreased amounts of disposable income led to reduced restaurant traffic and sales nationwide as restaurant dining is often more expensive than dining at home. The Technomic 2007 Restaurant Industry Study recorded a 1% decrease in restaurant sales growth in 2007 and attributed poor economic conditions as the cause for restaurants to reduce funding for expansion by an average of 1.4% during 2007 Furthermore, the National Restaurant Association rated the restaurant industry a 99.0 in November 2007 because of decreases in comparable restaurant sales, its lowest score since June 2003. The company attributes its 1.4% decrease in comparable store sales in 2007 mainly to this decrease in disposable income. The company also believes that many consumers began substituting for cheaper forms of family entertainment, particularly family movies in 2007. Slower sales have also contributed to CEC's reduced plans for expansion, as the company plans on 6 to 7 new locations in 2008, compared to 10 in 2007, 14 in 2006, 25 in 2005.
CEC competes in both the restaurant and the entertainment industry, but is the only publicly traded company that serves the family dining-entertainment niche. Many competitors offer family dining-entertainment services, but operate primarily on a local or regional basis. Examples of private direct competition include:
Indirectly, CEC competes with many forms of family dining and entertainment. CEC's primary restaurant competition are restaurants that offer casual dining like DineEquity, Inc.(DIN) restaurants, including IHOP and Applebee's. CEC however identifies its main competition as the entertainment category, particularly family movies, including rental establishments like Blockbuster (BBI) or theatres like Regal Entertainment Group (RGC). The company believes that particularly due to decreases in family disposable income, family movies have become a much more affordable option for family entertainment as the average cost of movie tickets for a family of four is approximately $17.50 cheaper than an outing at Chuck E. Cheese. For example, CEC blamed strong box office sales, primarily associated with the popularity of "Shrek 3", "Spiderman 3" and "Pirates of the Caribbean 3" for its 1.6% drop in comparable store sales during Q2 2007. During Q2 2007, box office sales increased approximately 55% from Q2 2006 to $1.24 billion, while CEC's sales during the quarter declined about 8% from Q2 2006.
|Company||Revenue 2007 (Millions)||Total Number of Company-owned Locations||Operating Margin||Net Income (millions)|
|CEC Entertainment (CEC)||$785.32||490||13.31%||$55.92|
|Regal Entertainment Group (RGC)||$2,660||525||12.26%||$336|