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CEC Earnings & Revs Beat, View Up

Zacks Equity Research

CEC Entertainment Inc.’s (CEC) earnings of $1.90 per share in the first quarter of 2013 were 4.5% higher than the year-ago level. Without the beneficial impact of share repurchase, earnings were $1.86 per share which beat the Zacks Consensus Estimate of $1.80 per share by 3.33%. The year-over-year upside in earnings can be attributed to margin expansion.

Total revenue grew 3.4% year over year to $255.3 million in the first quarter, which beat the Zacks Consensus Estimate of $250.0 million. Increased revenues can be attributed to higher comparable store sales (up 1.6%).  As much as 37% increase in investment towards media in the first quarter and implementation of a value menu boosted comps in the quarter.
The company’s cost structure, which includes cost of food, beverage, entertainment and merchandise, decreased 50 basis points (bps) year over year to 14.7% as a percentage of company store sales, mainly due to changes in pricing strategies that were fully implemented in the fourth quarter of 2012. Also, a decrease in depreciation and amortization expense, labor expenses and other operating expenses led to a 110 bps contraction in restaurant margin to 67.8%.

Store Update

During the reported quarter, CEC opened   one company-owned store and closed none. On the franchisee front, there was no opening or closure in the quarter.

At the end of the first quarter of 2013, the company had 515 company-operated stores and 51 franchised stores. For 2013, the company expects to open 12—15 new company-owned stores and relocate one store.

Share Repurchase

The company bought back approximately 0.3 million shares of common stock during the first quarter of 2013 for about $10 million. On Apr 30, 2013, the company’s board authorized an additional $100 million for the stock repurchase plan, bringing the total to $137 million available for repurchase.

Fiscal 2013 Outlook Upped

For fiscal 2013, the company raised its comparable sales growth guidance to a range of 1.5%–2.5% from the prior expectation of 1%-2% to reflect the improving sales momentum.

CEC expects earnings per share in the range of $2.80—$2.95, up from the prior expectation of $2.70—$2.85. The improvement in guidance was due to expectation for higher comparable store sales.

Our Take

After reporting year-over-year declines and missing the Zacks Consensus Estimate for the past two quarters, CEC registered top- and bottom-line growth and margin expansion this time which we believe is the high point of CEC’s first quarter results. The raise in 2013 guidance also inspires optimism around the stock. The company continues to make efforts to increase traffic to enhance sales and comps, which are attaining fruition.

CEC currently retains a Zacks Rank #1 (Strong Buy). Others players in the same industry, which look attractive at current levels include The Wendy’s Co. (WEN), The Cheesecake Factory Inc. (CAKE) and Burger King Worldwide Inc. (BKW) While Wendy’s carries a Zacks Rank #1 (Strong Buy), Cheesecake Factory and Burger King carry a Zacks Rank #2 (Buy).

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