CEC Entertainment, Inc. (CEC)

Q2 2010 Earnings Call

August 5, 2010 04:30 pm ET

Executives

Mike Magusiak - President and Chief Executive Officer

Darin Harper – Vice President and Controller

Dick Frank - Executive Chairman

Analysts

Brad Ludington - KeyBanc Capital Markets

Michael Gallo - C.L. King & Associates

Michael Wolleben - Sidoti & Co.

Robert Derrington - Morgan Keegan & Co.

Greg Schroeder - Wisco Research

Zev Nissionson – PCC

Greg Ruedy - Stephens Inc.

Robert Derrington - Morgan Keegan & Co.

Michael Wolleben - Sidoti & Co.

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the CEC Entertainment teleconference. 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)

And also as a reminder, this teleconference is being recorded. At this time I will turn the conference over to your host, President and CEO Mr. Mike Magusiak. Please go ahead sir.

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 Darin Harper, our Vice President and controller.

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 Q2 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 second quarter. Next, I will present our strategic plan to increase comparable store sales and earnings per share in the second half of 2010 and 2011. Third, Darin will discuss our business outlook and finally Dick will provide some concluding remarks and then open the lines for question and answer session.

Now I’ll turn the call over to Darin who will review our financial performance.

Darin Harper

Thank you Mike, good afternoon everyone. As we look at the results for the second quarter, we know that two primary factors weigh negatively on our earnings. First, unexpectedly soft sales and second, an unfavorable adjustment to income tax expense associated with our most recent IRS examination of prior tax years. This tax adjustment and related interest expense, reduced our diluted earnings per share for the second quarter of 2010 by $.13.

Now let’s discuss the results in more detail. From a top line perspective, revenues in the second quarter decreased 2.1% to $181 million primarily due to a 3.6% decline in fiscal week comparable store sales. On a same calendar week basis, which we believe to be more indicative of the health of our business, comparable store sales decreased 2.2%.

Mike will discuss the factors that we believe impacted our sales performance in detail later in this conference call. Partially offsetting the decrease in comparable store sales was a weighted average increase of approximately three stores as compared to the second quarter of 2009. Cost of food and beverage as a percentage of food and beverage sales, decreased 20 basis points to 22.4% during the second quarter compared to prior year. Decreases in beverage and paper costs were partially offset by higher cheese prices.

Quarter over quarter cheese costs increased $0.24 cents or 20% per pound. Cost of entertainment and merchandise as a percentage of entertainment and merchandise sales decreased 50 basis points to 8.5% during the second quarter of 2010 from 9% in the second quarter of 2009, primarily due to a birthday party promotion during the second quarter of 2009 that resulted in additional price merchandise costs from increased ticket redemption.

Also in the second quarter of 2009, we incurred additional costs associated with an attraction dispensing novelty photo cards. Labor expense as a percentage of company store sales increased 20 basis points to 28.7% during the second quarter of 2010 compared to 28.5% in the second quarter of 2009, primarily due to higher workers compensation claims, unemployment taxes and other benefits.

Also improved labor productivity from our hourly workforce partially offset a 3.7% increase in average hourly wage rates at our stores. Depreciation and amortization expense increased 4.2% to $19.8 million primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development. Store rent expense increased 4.3% to $17.4 million primarily due to an increase in the 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 remained unchanged at 16.5% quarter over quarter. A deleveraging effect associated with the decline in revenues was offset by a reduction in other store operating costs during the quarter.

Advertising expenses as a percentage of total revenues decreased 10 basis points to 4.6% in the current year from 4.7% in the prior year primarily due to lower television media costs partially offset by an increase in television spending in certain local markets.

General administrative expenses as a percentage of total revenues remained generally flat quarter over quarter. Interest expense increased to $3.4 million during the second quarter of 2010 compared to $3.1 million in the second quarter of 2009, primarily due to interest charges of $700,000 in current pursuant to additional tax reserves established during the second quarter of 2010. This increase was partially offset by lower interest expense associated with our outstanding debt.

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