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Restaurant and entertainment center operator CEC Entertainment Inc.’s earnings of 42 cents per share in the second quarter of 2013 were as much as 82.6% higher than the year-ago level. Reported earnings per share breezed past the Zacks Consensus Estimate of 33 cents per share by 27.3%. The year-over-year upside in earnings can be attributed to margin expansion.

Total revenue increased 5.2% year over year to $191.9 million in the second quarter, in line with the Zacks Consensus Estimate. Increased revenues can be attributed to higher comparable store sales (up 2.9%) and higher store base.  

The company’s total store operating costs ratio declined to 80.5% owing to a 100 bps decline in cost of food, beverage, entertainment and merchandise, a 60 bps decline in labor expenses and a 40 bps decline in both rent and depreciation.

A 20% reduction in dough usage owing to modification in product categories and changes in pricing strategy lowered food costs. The company’s cost saving initiatives like implementation of a new pricing structure, the rollout of the modified ticket categories and changes in the pizza dough offset the higher cost of cheese, which is the company’s main ingredient. Other operating expenses also decreased 20 bps. All these resulted in a 250 bps increase in restaurant margin.

Store Update

During the reported quarter, CEC opened 2 company-owned stores and closed 3. On the franchisee front, there were 3 openings and 1 closure in the quarter.

At the end of the second quarter of 2013, the company had 514 company-operated stores and 53 franchised stores. For 2013, the company expects to open 12—15 new company-owned stores and relocate 1 store.

Fiscal 2013 Outlook

CEC expects earnings per share in the range of $2.90—$3.05, up from the prior expectation of $2.80—$2.95. The improvement in guidance was due to better-than-expected second-quarter results. CEC had earlier raised its earnings per share guidance from the range of $2.70—$2.85 per share in the first quarter.

For fiscal 2013, the company reiterates its comparable sales growth guidance in the range of 1.5%–2.5%.

Our Take

After reporting year-over-year declines and missing the Zacks Consensus Estimate in the second half of 2012, CEC began the year 2013 on a high note. Carrying on the momentum of the first quarter of 2013, this restaurant operator put up a strong performance in all of its categories in the second quarter of 2013.

The consecutive raise in 2013 earnings guidance for the last two quarters also inspires optimism around the stock. The company strives to increase traffic to enhance comps and its efforts are paying off. We believe that its cost saving efforts will help to sustain its turnaround.

CEC currently retains a Zacks Rank #2 (Buy). Others players in the same industry, which look attractive at current levels include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report) all of which carry a Zacks Rank #2.
 

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