CEC Entertainment, Inc. (NYSE:CEC)
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The Company is engaged in the family restaurant/entertainment center business.
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The Company is engaged in the family restaurant/entertainment center business.
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CEC Entertainment develops, operates, and franchises family restaurant/entertainment centers under the name "Chuck E. Cheese's." The company operates 477 owned-units and 45 franchised units located in 48 U.S. states and 4 countries. The centers offer a fun, family-oriented atmosphere featuring musical and comic entertainment by life-size computer-controlled robotic characters, family oriented arcade games, a toddler play area, and token-operated rides and arcade-style activities. Menu offerings include pizza, sandwiches, a salad bar, appetizers and desserts.
The management's plan for slower unit growth, increased ongoing remodels and more focused operations currently appears to be working as the company reported positive growth in recent quarter. The company is reducing its new store openings, mainly to focus on higher sales and return on investment from its existing stores. Beginning in 2007, the company plans to open approximately 8 to 12 new stores per year in densely populated areas and in its best performing geographic markets. The company is also paying attention on increasing the value to its guests with improved offers and increased distribution of coupons, cross-promotions and direct e-marketing.
The above strategy will help the company to reduce its capital expenditure which will lead to increased free cash flows, which will help them reward the shareholders by share repurchases. The company’s strong business model with EBITDA margins averaging 25% plus over the past five years and an increased focus on remodels should drive same store sales improvement over the next few quarters. Looking at the positive trends shown by the company in the recent quarters it is expected that it will outperform in the future.
The strategy of slowing down the unit growth to focus more on improving store-level returns, is working in favor of CEC. The company reported fourth consecutive quarter of positive same store sales with a revenue increase of 6.6% for the fiscal year 2006. The company develops, operates, and franchises family restaurant/entertainment centers under the name "Chuck E. Cheese's."The company is working on a major remodel program according to which 55 major remodels are expected to be completed in 2007. This remodeling program is expected to serve as the major catalyst to boost the sales as the remodeled restaurants have produced an average of 9% sales increase in the first year and an additional 3.5% sales lift in the second year. The company’s aggressive marketing plans are also starting to reap fruits as it has begun to build interest with consumers.Company’s plan to slow new unit development, invest in its existing base of Chuck E. Cheese's, thereby improving operating performance and ultimately shareholder value is expected to gain more confidence of its share holders in the coming future. Moreover the increased marketing of its Chuck E Cheese's brand and selective new unit growth provides a considerable operating leverage to the company adding upside potential to profitability. Additionally the company's strong free cash flow and aggressive ongoing share repurchase program provide some downside support for the shares and they are expected to gain upward momentum in the coming months.