CEC Entertainment Inc. (CEC) reported fourth-quarter 2010 adjusted earnings of 19 cents per share, which came in line with the Zacks Consensus Estimate and showed an improvement from the prior-year quarter’s adjusted earnings of 12 cents. Including an unfavorable one-time impact of tax adjustment, the company earned 14 cents in the quarter under review.
On a GAAP basis, the company’s earnings per share were $2.55 in 2010 versus $2.67 in 2009.
Total revenue dropped 2.6% year over year to $182.8 million, primarily due to tough comparisons resulting from an extra average sales volume operating week in the fourth quarter of 2009 that benefited the quarter by $14.0 million. For full fiscal 2010, total revenue slipped 0.1% year over year to $817.2 million.
Behind the Headline
Same-week comparable store sales increased 3.9% in the fourth quarter, with October, November, and December rising 3.5%, 6.2% and 32.3%, respectively.
Turning to the cost structure, cost of food and beverage as a percentage of food and beverage sales fell 50 basis points (bps) to 23.6% in the quarter driven by menu price increases and other reductions in its cost structure resulting from the implementation of various cost savings initiatives as well as flat cheese price.
Labor expense as a percentage of company store sales rose 20 bps year over year to 29.9% during the quarter, mainly due to increased sales and performance bonuses at the store level, a 1% increase in the average hourly wage rate and higher group medical costs, partially offset by improved utilization of hourly labor force.
Depreciation and amortization expense, as a percentage of company store sales, increased 50 bps to 11.2% on account of the ongoing capital investment initiatives occurring at existing stores and new store development.
A rise in leased stores due to new store development resulted in a 70-basis point increase in rent expense to 9.8%. As a consequence, company store operating income declined 100 basis points year over year to 5.1%.
Store Update
At quarter-end, CEC owned 507 company-operated stores and 47 franchised stores.
Financials
At quarter-end, CEC’s total cash balances were $19.3 million, while its outstanding debt stood at $387.3 million.
In full fiscal 2010, cash provided by operating activities was $156.9 million and capital expenditure was $99.8 million. CEC repurchased around 4.0 million shares in 2010.
Outlook
For fiscal 2011, CEC expects earnings per share within $2.95 to $3.05, same-store sales up 1% to 2% and capital expenditure between $94.0 million and $95.0 million.
We believe sales in first quarter 2011 could be hampered by adverse weather. During week five of this year, sales were negative 6.7%, and the company had 21 markets where nearly four stores reported double-digit negative sales for the week.
For the first quarter of 2011, the company expects comparable store sales to be flat on a year-over year basis. Despite concerns over sales, management expects earnings per share to increase 5% year over year.
CEC currently retains a Zacks #4 Rank, which translates into a short-term Sell rating. We are also maintaining our long-term Neutral recommendation on the stock.
One of its peers Red Robin Gourmet Burgers Inc. (RRGB) reported its fourth quarter 2010 adjusted earnings of 12 cents per share, which surpassed the Zacks Consensus Estimate of 5 cents.
CEC ENTERTANMNT (CEC): Free Stock Analysis Report
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
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