In Line 4Q for CEC Entertainment

Texas-based CEC Entertainment Inc. ( CEC - Snapshot Report ) reported earnings of 15 cents per share in the fourth quarter of 2011, in line with the Zacks Consensus Estimate. Reported earnings surpassed the prior-year earnings by a penny. On an adjusted basis, quarterly earnings were around 20 cents per share. The upside in earnings was facilitated by the repurchase of shares. In full-fiscal 2011, reported earnings were $2.88 per share versus $2.55 in fiscal 2010.

However, total revenue tumbled 2.3% year over year to $178.6 million, in the fourth quarter primarily due to lower comparable store sales (down 3.6%). Sales at company-operated restaurants dipped 2.2% to $177.6 million while franchise fees and royalties decreased 20.4% to $0.9 million.

In full-fiscal 2011, total revenue inched up 0.5% to $821.2 million. However, comparable store sales slid 2.0%.

Turning to the cost structure, cost of food and beverage as well as entertainment and merchandise as a percentage of company store sales, spiked 40 basis points (bps) to 16.1% driven by higher cheese costs. Labor expense, as a percentage of company-store sales nudged up 10 bps to 30.0% during the quarter as a slight hike in the average hourly wage rate was offset by a decrease in store level sales bonuses. General and administrative expenses increased 40 bps to 7.7% primarily due to a FICA tax credit received related to corporate payroll that expired at the end of 2010. Store rent expense upped 60 bps to 10.4% attributed to a rise in leased stores, arising from new store development.

However, other store operating expenses decreased 30 bps to 116.9%. Depreciation and amortization expense as a percentage of company-store sales reduced 40 bps to 10.8%. Advertising expense also decreased 20 bps to 4.2%.

Total operating costs and expenses increased 170 bps and in turn dragged the operating income down to 3.4% from 5.1%.

Store Update

During the reporting quarter, CEC opened 2 company-operated stores and closed 2 units. There was no franchised store opened in the quarter.

The company ended the fiscal year with 507 company-operated stores and 49 franchised stores. In full-fiscal 2011, CEC opened 4 company-operated and 3 franchised stores while shutdown 4 company-operated and 1 franchised store.

Management plans to open 12–15 company-owned stores, including approximately three relocations and one franchise acquisition.

Financials

At quarter end, CEC’s cash and cash equivalents were $18.7 million, while shareholders’ equity stood at $124.2 million.

For 2012, the company expects capital expenditure in the range of $94.0 million to $96.0 million.

Outlook

For fiscal 2012, CEC expects earnings per share in the range of $3.10 to $3.20 and comps in the range of 1% to 2%.

Our Take

CEC which operates and franchises family dining and entertainment centers, exhibited mixed results in the recently concluded quarter. While its earnings grew, its total revenue and comps are still lagging. However, the company is taking every possible step to turn around its sales. Management also remains keen on international exposure. 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 competes with Domino's Pizza Inc. ( DPZ - Analyst Report ) , currently, retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.