CEC Entertainment's CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Apollo Global (APO)

CEC Entertainment, Inc. (CEC) Q2 2013 Results - Earnings Call Transcript August 1, 2013 4:30 PM ET

Executives

Mike Magusiak - President and CEO

Dick Frank - Executive Chairman

Tiffany Kice - Executive Vice President and CFO

Analysts

Michael Gallo - C.L. King

Will Slabaugh - Stephens Inc.

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. And later, we will conduct the question-and-answer session, instructions will be given at that time. (Operator Instructions)

As a reminder, today’s call is being recorded. I’d now like to introduce our host, President and CEO, Mr. Mike Magusiak. Please go ahead.

Mike Magusiak

Thank you. Welcome to our conference call. I'm Mike Magusiak and I'm joined by our Chairman Dick Frank and Tiffany Kice, our Executive Vice President and Chief Financial Officer.

Before we begin today's discussion, I would like to make you aware that some of the information presented today may contain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those implied in the forward-looking statements. Information regarding the company's risk factors was included in our press release and is also included in the company's filings with the SEC.

Reconciliation information related to non-GAAP financial measures discussed on this call may be found in the company's second quarter earnings release and on the company's website under Investor Information.

Tiffany will begin today’s call with an overview of our financial performance during the second quarter of 2013. I will then discuss our sales performance to-date, our strategic plan and our growth opportunities. Tiffany will then go over our business outlook for the remainder of 2013 and finally, Dick will provide concluding remarks before we open the call for Q&A. Tiffany?

Tiffany Kice

Thank you, Mike, and good afternoon everyone. Comparable store sales for the quarter increased 2.9% with April up 4.7%, May up 2.1% and June up 1.9%. We continue to believe that certain components of our strategies are gaining traction. Diluted EPS increased to $0.42 for the second quarter of 2013 as compared to $0.23 in the prior year.

I will now walk you through the details of our financial results. Total revenues increased $9.5 million or 5.2% to $191.9 million at the second quarter of 2013. The comparable store sales increased by 2.9%, contributed $5.1 million to the overall increase and 4.2 million of the increase was derived from new company owned store opening since the second quarter of 2012.

Cost of food, beverage, entertainment and merchandize as a percentage of company store sales decreased 100 basis points. We believe this decrease was primarily attributable to an approximate 20% reduction in dough usage as a result of our new thinner, more crispy pizza crust and the modification of our price and merchandize category, both implemented in March 2013 along with changes in our pricing strategy that were put in place in the fourth quarter of 2012.

These benefits were partially offset by $0.25 or 16.3% increase in the average price per pound of cheese during the second quarter of 2013. Labor expenses as a percentage of company store sales decreased 60 basis points to 28.9%. As our increase in labor costs were outpaced by our increase in sale.

In addition we experienced a decrease in workers compensation and health insurance cost during the second quarter of ‘13. These benefits were partially offset by an increase in store level sales and performance bonuses due to improved results.

Depreciation and amortization and rent expense collectively decreased 80 basis points to 20.2% in the second quarter 2013, compared to 21% in the second quarter of 2012. Primarily due to improved leverage of these cost associated with higher sales.

Advertising expense increased $2.5 million or 110 basis points as a percentage of total revenues to 5.5%. In accordance with our strategic plan, we increased our advertising spend associated with national television advertising, the production of new commercials and a new digital advertising campaign.

General and administrative expenses increased $1.3 million to $14.4 million from the prior year second quarter. The increase primarily related to an increase in operational and support center management bonuses as a result of improved sales and profit performance and other various corporate costs partially offset by a gain of the sale of our property during the quarter.

Diluted EPS was $0.42 in the second quarter of 2013, as compared to $0.23 in the same period of 2012. Diluted EPS primarily benefited from the 77.5% increase in net income. On a year-to-date basis to the end of the second quarter of 2013 we note the following.

Total revenues increased 4.2% to $447.2 million compared with store sales increased 2.2%. Net income increased to 11.3% to $40.5 million from $36.4 million. Diluted earnings per share increased $2.34 from $2.05 primarily due to the increased of net income along with the decreased in the number of weighted average diluted shares outstanding between period, and a setting diluted EPS by approximately 0.06 per share.

Let’s now turn to a few highlights from our cash flow statement and balance sheet. During the first six months of 2013, we have generated $92.7 million of operating cash flow, we utilized this cash by investing $32.1 million primarily in new existing stores and $4.4 million in cash dividends repurchasing $18.1 million of our common stock and reducing our outstanding borrowings on a revolving credit facility by $37.5 million.

We ended the quarter with a balance of $352 million on the company’s revolving credit facility. Our leverage ratio is 2.16 to 1 as defined in our credit facility agreement which is well within our debt covenant restriction of 3 to 1.

We repurchased 214,000 additional shares of our common stock during the second quarter of 2013 bringing our total shares repurchased to 526,000 on a year-to-date basis for an aggregate purchase price of $18.1 million.

Including our Board authorized $100 million increase to our stock repurchase plan on April 30, 2013 we have $128.9 million remaining authorized for future share repurchases to be utilized on an opportunistic basis. On July 29, 2013 our Board declared our third quarter 2013 dividend of $0.24 per share to be paid in October of 2013.

We remain committed to returning capital to shareholders, since the beginning of our fiscal 2010, here we have repurchased $189.9 million or 5.4 million shares of our common stock and we have paid $35.7 million in cash dividends for a total return of capital shareholders of $225.6 million or 40% of the $563.9 million in operating cash flow generated over the same period.

I'll now turn the call over to Mike to discuss our second quarter sales performance, as well as an update on our strategic plan and growth opportunities.

Mike Magusiak

Thanks, Tiffany. We continue to believe that we have developed a very solid sales plan to increase comparable store sales, grow our concept with both domestic and international new locations and improve our profit margins. As Tiffany noted revenue in the second quarter increase $9.5 million or 5.2% compared to the same quarter last year.

Comparable store sales increased 2.9% and contributed $5.1 million towards the revenue increase. The remaining revenue increase of $4.4 million was primarily attributable to new store development. The combination of increased revenue and the continued implementation of our profit strategies improved our operating margins by 250 basis points in the second quarter compared to the same quarter last year.

Comparable store sales during the second quarter by region are as follows. The Western was positive 3.2%, the Central was positive 3.5%, the Northeast was positive 2.9% and the Southeast was positive 1.9% for the quarter coming in at 2.9% positive.

Comparable store sales in the first half of 2013 by region are as follows. The Western was positive 1.5%, the Central was positive 3.1%, Northeast was positive 2.0% and the Southeast was positive 2.1% for the first half coming in at 2.2%.

From a comparable store sales perspective, we are encouraged that each of the regions of the country had positive comparable store sales. However, our sales do fluctuate on a month-to-month basis based on many factors some of which are external in nature. Comparable store sales in July decreased by 2.3%, as we've not materially modified any of our strategies, we believe July was negatively impacted by significant increase in G and PG movies over the short time horizon.

To provide a perspective of the potential impact of kids’ movies on sales, according to the website, Box Office Mojo, box office receipts for G and PG movies during the first four weeks of the third quarter increased $261 million to $453 million from a $192 million during the same four weeks of last year. The increase in box office receipts exceeded our total core store sales during the same time period by approximately 4.5 times.

We believe that over the short period of time, kids’ movies negatively impacted our sales but do not believe the impact will have a material impact on our fiscal year. We continue to believe that certain strategies are gaining momentum and believe that our comparable store sales in the second half of the year will reflect the successful execution of these strategies.

The main components of our plan to increase comparable store sales are, first, our marketing plan targeting both kids and moms with the objective of the increasing guest traffic. Second, the continued execution of our value proposition supported by advertising and third, an enhanced strategy of capital reinvestment in our existing locations.

Starting with marketing, as previously communicated, our marketing expenditures are expected to increase approximately $6 million to $41 million in 2013 from $35 million in 2012. The primary components of our enhanced marketing plan in the second half of the year include first, an increase in national television media advertising of approximately 40% during the second half of 2013, compared with the same time period in the prior year.

Second, an enhanced creative plan that is a combination of brand advertising and promotional advertising providing families with reasons to visit our locations. We are currently executing a national promotion called Every Kid's a Winner, in which each kid receives a peel off card as they enter our location and receive free tickets, tokens or trip in our Ticket Blaster. We also have a fourth quarter promotion it is tied to a national release of a kids’ movie. We believe that these promotions supported by increased TV and media will increase guest traffic.

The next component of our plan to increase sales is continued implementation of our value strategy. We implemented new menu boards in all company stores during October of last year. We believe that the new menu boards offer a good value for both food and entertainment including reduced price points for pizza and value deals.

We believe that our revised menu pricing provides us with a strong base to market great every day value. In addition, we implemented revised coupon offers in the third and fourth quarters of last year to provide greater flexibility to our guests with packaged deals of pizza, drinks and tokens at very affordable price points and various coupon offers for salads, sandwiches, Buffalo wings and token packages. This coupon offers are supported across our new website and in both print and digital media.

And finally, we are supporting our value initiatives with the television commercials featuring our new value deals that started airing in February of this year. The last significant component of our sales strategy is the continued reinvestment in our facilities and entertainment attractions, because of our strong commitment to reinvesting in our stores over the past few years, we are able to significantly reduce capital expenditures and our existing stores and still maintain outstanding facilities, games and rides.

The existing store capital plan for 2013 is approximately $22 million to $25 million which compares to approximately $40 million in 2012 and $65 million in 2011. We project the existing store capital plan for 2013 will impact a 165 stores including a 150 game enhancements, six major remodels and nine store expansions.

We have recently enhanced our existing store capital strategy by fully utilizing used for transferred games from existing stores in combination with new games and rides. This substantially reduces the cost of game enhancements, enables us to impact each of our stores on a more frequent basis.

Following the 165 stores that we intent to reach with capital improvements in 2013, we anticipate that we will impact approximately 250 stores in 2014 with game enhancements, major remodels and store expansions.

In addition to impacting approximately half of our stores with capital improvements in 2014, we're also committed to evolving our concept and are currently evaluating a number of new entertainment initiatives. During the second quarter, we introduced two such entertainment offerings in a location and have a third entertainment initiative targeted for implementation in the third quarter.

Our preliminary existing store capital plan for 2014 approximates $28 million which is anticipated to impact half of our store base including our new entertainment initiatives.

Profitability, in addition to developing what we believe is a strong sales plan; we have also implemented a fairly significant cost reduction program. This plan contributed to an improvement of 170 basis points in store level margins in the first half of this year. Our profitability plan includes: First, the implementation of a revised pricing structure primarily in the third and fourth quarters of last year, including reduced menu prices for certain food items, including pizza and salads which have been more than offset by increased token prices. In addition, we reduced the discounts on a number of our coupon offers.

Second, we modified our price and merchandise ticket categories from eight different categories to seven different categories resulting in an annualized cost reduction of approximately $1.2 million. The rollout of the modified ticket categories was completed in mid-March of this year.

Third, we've refined our pizza dough resulting in what we believe is an enhanced product with a crispier crust and reduced sodium content. The rollout was completed by the end of February and is projected annualized cost reduction totaling $1.2 million. The cost of sales reduction of 60 basis points as a percentage of sales in the first half of this year compared to the first half of the prior year was primarily driven by the combination of these three cost reduction initiatives and more than offset the increase in the cost of cheese of approximately 13%.

Fourth, our enhanced existing store capital expenditure plan which reduced this comparable store depreciation expense in conjunction with increased revenue is contributing to a reduction in depreciation expense as a percentage of revenue. Depreciation and amortization expense as a percentage of sales decreased 30 basis points during the first half of the year compared to the same period of last year.

In addition to the cost savings initiatives stated above, we are focused on reducing other expenses that we believe will benefit future quarters. These include the implementation of required non-slip footwear for all of our employees, the installation of energy cost efficient thermostats in approximately 200 stores and the reduction of certain birthday party costs.

Growth, now I would like to focus our discussion regarding growth of our concept to new locations both domestically and internationally. New locations are starting to meaningfully contribute to revenue growth. Total revenue increased $18.0 million or 4.2% during the first six months of 2013 compared to first six months of 2012, of which $9.1 million was primarily derived from a new store openings and the remaining $8.9 million was derived from the 2.2% increase in comparable store sales.

For 2013, we anticipate opening 14 new stores, including one relocation. We anticipate closing approximately five stores including the relocated stores resulting in a net addition of approximately nine stores. In 2014, we anticipate opening 12 to 15 new locations including two relocations. From 2007 to 2010, we opened a total of 25 new or relocated stores. These stores averaged over $2 million in sales during 2012 and produced an average tax return on investment of slightly over 20%.

Internationally, we currently have 18 franchise stores open including 10 stores that have opened since the fourth quarter of 2010. We've increased our international prospects significantly since the beginning of 2011, signing 11 development agreements, providing our franchise partners with the rights to open a total of 64 stores. In 2012 alone, we signed seven new development agreements for development of 42 stores in Mexico, Peru, the Philippines, Trinidad, Bahrain, Saudi Arabia and United Arab Emirates. We believe that we have an outstanding international development concept as evidenced by the significant average unit volume of our stores overseas, which provides us with an excellent long-term growth vehicle with the specific growth emphasis in Latin America, Asia and Middle East and Eastern Europe.

With that, I’ll turn the call back to Tiffany to go over a business outlook for fiscal 2013.

Tiffany Kice

Thank you, Mike. Through the end of July, our comparable store sales are up 1.6%. At this time we continue to anticipate an increase in comparable store sales of 1.5% to 2.5% for the full fiscal year. We are increasing our diluted earnings per share guidance to be in a range of $2.90 to $3.05 as compared to the range of $2.80 to $2.95 given on our last call.

Incorporated into this guidance are the following assumptions for fiscal 2013. 12 to 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 prior year, rent expense to increase approximately 4% to 5% from the prior year, advertising expense to increase approximately $6 million from the prior year to support our comprehensive and multifaceted advertising plan, capital expenditures to range from approximately $75 million to $80 million and payment of four quarter dividends totaling approximately $17 million.

I will now turn the call over to Dick for some concluding remarks.

Dick Frank

Thanks, Tiffany. Financial highlights for the second quarter include a $9.5 million increase in total revenue with both comparable store sales in new company owned locations making significant contributions to the sales increased, diluted earnings per share increasing 82.6% to $0.42 for the quarter as compared to $0.23 in the prior year quarter, payment of $4.1 million in cash dividends, and lastly share repurchases totaling $8.1 million of our common stock.

Although sales and profits can fluctuate over short periods of time, we do believe the certain components of our strategies are contributing to our overall performance. Among these key strategies are the comprehensive marketing plan targeting both kids and moms. The continued executions of our value proposition supported by multimedia advertising initiatives and enhanced strategy of reinvestment in our existing locations, the growth of our brand both domestically and internationally, and lastly our ongoing commitment to returning capital to our shareholders through cash dividends and the continuation of our share repurchase program on an opportunistic basis. As Tiffany said, we continue to anticipate an increase of comparable store sales for the fiscal year of between 1.5% and 2.5%.

At this time Mike, Tiffany and I will be glad to answer any questions that you might have.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question will go to the line of Michael Gallo with C.L. King.

Michael Gallo - C.L. King

Question on the advertising, I guess if I look at the numbers, it looks like of the $6 million increase, $5.3 million of it occurred in the first half, it seemed like that coincided with an improvement in sales. I was wondering with the advertising up year-on-year in July, and my recollection was you didn't have a lot of advertising spend last July, but then also why not think about increasing the advertising in the back half of the year given that you've seen certainly a slowdown in trend and particularly looking at the two years stack, my recollection is July of last year was a fairly soft month at down 3.3%. So, probably with the thinking on, how we should think about advertising going forward?

Mike Magusiak

That's a real good question, Michael. It's a little bit deceiving, because we do have a very strong media plan, television advertising for the second half of this year. The reason that expenses went up so much in the first half of the year is that, we started a commercial earlier than originally anticipated and whenever you air that commercial, the total production cost is expensed when that commercial starts.

So what you have in the second half of the year is the significant reduction in production costs for the production of commercials, but then if you look at trip levels in dollars, in other words national media advertising on TV, we have a very strong plan in the second half of the year. Our advertising trips, the number of commercials that kids and parents will see are up about 40% in the second half of this year versus the second half of last year.

Michael Gallo - C.L. King

That's helpful. Second question, Mike I was wondering if you could speak at all for the consumer it seems like throughout the restaurant and entertainment category that there's been some slowdown over the last six weeks or so. It seems like you've seen certainly a slowdown in your July trends, I know you cited the movie calendar.

I was wondering if you can give us any further color on what you are seeing out of the consumer here in July, was it that you saw that just a number of people coming in was last, the coupon redemptions were up, was it a mix of food versus entertainment revenue that was changing, so anything that can give us more comfort that it really is just a movie calendar not what we see kind of broadly in terms of some slowing in the category? Thank you.

Mike Magusiak

No, thank you, Michael. I'll do my best approach at it. I think first I'll start broad and it is a little bit difficult because movies have increased so dramatically in the first four weeks of July but let me start broad and then I'll get into July. I think first of all, if I look at sales, we are positive five out of the six periods in the first half of 2013 and then I look on a region-by-region basis, in every region of our country was positive not only in the second quarter of this year but also on a year-to-date basis and so then you look at each region’s positive.

The worst region that we've had so far this year through six periods is positive 1.5% on with the best region being positive 3.1%. I mean inside look at July and we have made no significant modifications for our strategy and also believe that we have a strong promotion going on currently and which is Every Kid’s a Winner. We consistently hear from our operators that kids are excited to say come into our door, that they know they are going to win some tickets or tokens or a trip in the Ticket Blaster and then as I said earlier, we have a very significant increase in our advertising spend starting in July and for the rest of the year.

So then you look at it that the reality is, our sales are volatile over a short period of time but they have really been consistent across the nation through the first half of the year and then we look at movies and the movies and this is just G and PG movies and Tiffany has dollars by movie. She can give you those but in total, G and PG movies increased $261 million and that was the increase in movie receipts, well that increase represents 4.5 times our total core sales in July. So even if you had a small percentage of those movie goers that who have gone to Chuck E. Cheese, it would had a fairly significant impact on our comps.

So that’s what we see when we look at the movies, so it’s hard to tie in what you may be seeing in other restaurant companies, I think that we have a very solid plan the second half of the year. We’ve had a good first half of the year and maybe there are some consumer slowdown but when we look at it the one factor that we’ve looked at more any other is the external factor of movies. So that’s the best I can do to try to explain that for you Michael.

Operator

(Operator Instructions). Next we go to the line of Will Slabaugh with Stephens Inc. Please go ahead.

Will Slabaugh - Stephens Inc.

Yes thanks guys. I wanted to follow up on the July question if I could. Didn’t know if you notice anything unusual with weather, any in-break of the regions in July, I didn’t know if have in front of you as far as if there were any geographic areas that were weaker or shorter than the others and does make sense if the movies would impact us, I am wondering if there is anything else that would make it parse out?

Mike Magusiak

I’ll give it to you by region in July, the Northeast was negative 1.2%, the Southeast was negative 1.1%, the Central was negative 8.1% and the West was positive 1.8%.

Will Slabaugh - Stephens Inc.

Got it. That’s helpful. And one question I had about the guidance, you know for the first half of the year, you have been pull up some pretty nice leverage on our labor line and other restaurant expense lines. And as a walk to my model it looks like you will likely be able to hit that guide on a lower comp than what you are guiding. So I am just wondering if there are some other costs that I should be thinking about there, such as cheese that you call out, or if there is just maybe some conservatism in your guide concerning what you’ve seen so far in July?

Tiffany Kice

Will, it’s Tiffany. At this point really the guidance that we have given you is our best estimate and what we think that the fiscal year is going to be with the comp range of 15 to 25, I don’t think there is anything that we have in kind of outlined in the line items that you should probably be thinking about.

Operator

Thank you. And at this time there are no further questions, please continue.

Mike Magusiak

We appreciate your participation in our conference call. And if you have any further questions, please feel free to call Tiffany, Dick or myself. Thank you very much.

Operator

Ladies and gentlemen, that will conclude our conference for today. We thank you for your participations and for using AT&T Executive Teleconference. You may now disconnect.

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