CEC Entertainment, Inc. (CEC)

Q1 2010 Earnings Call Transcript

May 6, 2010 4:30 pm ET

Executives

Mike Magusiak – President & CEO

Chris Morris – EVP, CFO & Treasurer

Dick Frank – Executive Chairman

Analysts

Brad Ludington – KeyBanc Capital

Robert Derrington – Morgan Keegan

Mike Gallo – CL King

Greg Schroeder – Wisco Research

Michael Wolleben – Sidoti & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CEC Entertainment teleconference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given at that time. (Operator instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mike Magusiak. Please go ahead.

Mike Magusiak

Thank you. Welcome to our conference call. I am Mike Magusiak, President and CEO of the company, and I am joined by Dick Frank, our Executive Chairman and Chris Morris, 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 in this call may be found in the company’s quarter one earnings release and on the company’s Web site under “Investor Information”.

The primary objectives for today’s call are first, to discuss our financial performance during the first quarter. Next, I will present our multifaceted strategic plan to increase comparable store sales and earnings per share. This plan incorporates sales initiatives that were effective last year as well as new sales initiatives. Third, Chris will discuss our business outlook. Finally, Dick will provide some concluding remarks and then open the line for a Q&A session.

Now, I’d turn the call over to Chris Morris, who will review our financial performance.

Chris Morris

Thank you, Mike. Good afternoon everyone. Let’s start with the top line. Comparable store sales on a same calendar week basis were up 0.7% in Q1. Revenues in the first quarter totaled $246.3 million compared to $248.1 million in Q1 '09.

The decline in revenue was primarily due to the shift in calendar weeks between the two quarters caused by the 2009 fiscal year, including an extra operating week, which had the effect of pushing the weeks in the 2010 fiscal year forward one week. This calendar week shift resulted in a loss of the seasonally high sales volume week from the first quarter of 2010.

Our weighted average unit count increased by approximately 3 units in Q1 '10 compared to Q1 '09.

Cost of food and beverage as a percentage of food and beverage sales increased 170 basis points to 22.8% during the first quarter of 2010 and 21.1% in the first quarter of '09, primarily due to a 50 basis point increase in cheese cost associated with a $0.24 per pound increase in cheese prices; a 50 basis point increase in wing cost associated with an increase in wing product mix; and increases in other miscellaneous items.

Cost of entertainment merchandise as a percentage of entertainment merchandise sales decreased a 100 basis points to 8.1% during the first quarter of 2010 from 9.1% in the first quarter of 2009, primarily due to charges in the prior year associated with the liquidation of certain prize inventory during the first quarter of 2009.

Labor expense as a percentage of company store sales increased 20 basis points to 24.7% during the first quarter of 2010 compared to 24.5% in the first quarter of 2009, primarily due to higher unemployment taxes and a 3.7% increase in average hourly wage rates at our stores.

Depreciation and amortization expense increased 3.7% to $19.6 million primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development. Store rent expense increased 3.4% to $17.5 million primarily due to an increase in a number of leased properties resulting from new store development and expansions of existing stores.

Other store operating expenses as a percentage of company store sales increased 50 basis points to 12.7% from 12.2% in the prior year, primarily due to a 30 basis point increase in insurance expense resulting from a favorable adjustment to our self-insurance reserves in the first quarter of the prior year. The balance of the increase is primarily due to the deleveraging effects associated with the decline of revenues.

Advertising expenses as a percentage of total revenues decreased 30 basis points to 3.7% in the current year from 4% in the prior year.

General and administrative expenses as a percentage of total revenues decreased 30 basis points to 5.6% during the first quarter 2010 from 5.9% in the first quarter 2009, primarily due to an increase in our stock-based compensation forfeiture estimate in the first quarter of ‘09.

Interest expense decreased to $2.7 million during the first quarter of 2010 compared to $3.1 million in first quarter of 2009, primarily due to reduction in our average debt balance outstanding between the two quarters. During the first quarter of 2010, the average debt balance outstanding under our revolving credit facility was $323.1 million compared to $370.7 million during the first quarter of ‘09.

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