CEC Entertainment ( CEC)

Q3 2010 Earnings Call

November 4, 2010 3:30 pm ET

Executives

Mike Magusiak - President and CEO

Dick Frank - Chairman

Tiffany Kice - EVP and CFO

Analysts

Robert Derrington - Morgan Keegan

Michael Gallo - CL King

Brad Ludington - KeyBanc Capital

Greg Ruedy - Stephens

Mike Wolleben - Sidoti & Company

Greg Schroeder - Morgan Joseph

Presentation

Operator

Welcome to the CEC Entertainment teleconference. (Operator Instructions) I would now like to turn the conference over to Mike Magusiak.

Mike Magusiak

Thank you. Welcome to our conference call. I am Mike Magusiak, President and CEO of our company, and I am joined by Dick Frank, our Executive Chairman; and Tiffany Kice our Executive Vice President and Chief Financial Officer.

Tiffany joined our team in August. Tiffany has over 22 years of accounting and retail experience, including the past 14 years in public accounting, with KPMG, where she served as an audit partner since 2006. We're very pleased that Tiffany joined our executive team.

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 on this call may be found in the company's Q3 earnings release and on the company's web site under Investor Information.

The primary objectives of today's call are first, Tiffany will discuss our financial performance during the third quarter. Next, I will present our strategic plan to increase comparable store sales, earnings per share and shareholder value. Third, Tiffany will discuss our business outlook and finally Dick will provide some concluding remarks and then open the lines for Q&A session.

Now I'd like to turn the call over to Tiffany who will review our financial performance.

Tiffany Kice

Thank you Mike, good afternoon everyone. This afternoon we reported an increase of 3.8% in comparable store sales on the same calendar week basis for the third quarter of 2010 and diluted earnings per share of $0.60, from $0.55 from the third quarter of 2009.

Despite the positive comparable store sales increase, net income decreased slightly, due to two unfavorable items reported in the third quarter of 2010 totaling approximately $1.1 million net of tax or $0.05 per share, relating to non-cash asset impairment charges and soft drink supplier transition costs.

Beyond these items, company's operating cost improved over the prior year third quarter as a percent of company store sales, due to reduction in certain cost per sales, as a result of our menu price increases, efficient labor utilization and cost savings initiative. These improvements were partially offset by increases in the price achieved and higher self insurance cost.

I will now discuss our financial results in more detail.

Starting with the top line total revenues in the third quarter increased 4.7% to $207.1 million from $197.8 million. This was primarily driven by a 3.9% increase in comparable store sales on a fiscal week basis, along with an increase in our weighted average unit count of approximately four stores as compared to the third quarter of 2009.

Our comparable store sales on the same calendar week basis, which we believed to be more indicative of the health of our business, increased 3.8%. Mike will provide additional insight of our positive sales performance later in this conference call.

Cost of food and beverage as a percentage of food and beverage sales, decreased 70 basis points to 22.3% in the third quarter of 2010 or 23% in the third quarter of 2009. Menu price increases and reductions in our beverage and paper cost resulting from the implementation of various cost savings initiative more than offset the approximate 45 basis point increase in our cheese costs.

Block cheese prices increased 38% or 31% per pound from the third quarter of 2009. Cost of entertainment and merchandise as a percentage of entertainment merchandise sale decreased 50 basis points to 8.3% in the third quarter of 2010, from 8.8% in the third quarter of 2009. The decrease is primarily due to higher ticket redemptions in the prior year.

Labor expense as a percentage of company store sales decreased 70 basis points to 27% in the third quarter of 2010, compared to 27.7% in the third quarter of 2009. In current utilization of our hourly labor force, coupled with the leveraged realized with regard to the fixed component of our labor cost as a result of higher sales were the primary drivers of this decrease. This decrease was partially offset by a 2% increase in the average hourly wage rate, along with increased sales and performance bonuses at the store level.

Depreciation and amortization expense for the quarter increased 3.5% to $19.9 million, primarily due to the ongoing capital investment initiatives occurring at our existing stores and new store development. Store rent expense for the quarter increased 4.2% to $17.7 million, primarily due to an increase in number of lease properties, resulting from new store development expansion with existing stores.

Other store operating expenses as a percentage of company store sales increased 110 basis points to 17.5% in the third quarter of 2010, compared to 16.4% in the third quarter of 2009. This increase was attributable primarily to two items, high self insurance cost and cost associated with our transition to a soft drink supplier.

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