CEC Tops Estimate, Hikes Dividend

Texas-based CEC Entertainment Inc. ( CEC - Snapshot Report ) reported earnings of 62 cents per share in the third quarter of 2011, ahead of the Zacks Consensus Estimate of 57 cents. Reported earnings also beat the prior-year quarter earnings of 60 cents.

However, total revenue tumbled 3.5% year over year to $200.0 million, primarily due to lower comparable store sales (down 6.3%). Sales at company-operated restaurants dipped 4.0% to $197.9 million, partially offset by a 126.7% surge in franchise fees and royalties to $2.1 million.

Turning to the cost structure, cost of food and beverageentertainment and merchandise as a percentage of company store sales, spiked 70 basis points (bps) to 15.8% driven by higher cheese costs. Labor expense, as a percentage of company-store sales, remained flat at 27% during the quarter as a slight hike in the average hourly wage rate was offset by decrease in store level performance.

Depreciation and amortization expense as a percentage of company-store sales increased 40 bps to 10.1% on the back of the ongoing capital investment initiatives at existing stores and new store development. Store rent expense upped 130 bps to 9.9% attributed to a rise in leased stores, arising from new store development. However, other store operating expenses decreased 50 bps to 17% As a consequence, operating income declined 120 bps year over year to 10.3%.

Store Update

At quarter end, CEC opened one franchised stores and ended the quarter with 507 company-operated stores and 49 franchised stores.

Financials

At quarter end, CEC’s cash and cash equivalents were $18.9 million, while shareholders’ equity stood at $147.9 million. Total borrowing currently available under the credit facility are $500 million.

Consistent with its strategy of enhancing shareholder’s value, CEC approved a 10% hike in quarterly dividend to 22 cents per share during the quarter, implying an annual dividend of 88 cents.

For 2011, the company expects capital expenditure in the range of $85.0 million to $90.0 million.

Outlook

For fiscal 2011, CEC expects earnings per share in the range of $2.80 to $2.90, as compared with its previous expectation of $2.75 to $2.95.

For the fourth quarter of 2011, the company expects comps to be down 4% to 5%.

Our Take

We expect estimates to go down in the coming days, given the weak same-store sales for the fourth quarter of 2011 due to faltering consumer confidence. Additionally, increased competition from certain PG-13 movies this year also marred the results. However, in the back drop of this uncertain economic scenario, unit expansion in both domestic and international markets and improving returns to shareholders are positives for the stock.

CEC, which operates and franchises family dining and entertainment centers, currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of its peers Domino's Pizza Inc. ( DPZ - Analyst Report ) reported third quarter 2011 adjusted earnings of 35 cents per share, which outpaced the Zacks Consensus Estimate by 2 cents.