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Sunday, June 26, 2011

Chuck E Cheese (CEC)

It's been more than 10 years since I've scoped the place out ("kids are grown" syndrome) or looked at it seriously as an investment.  Unlike Hot Topic, I don't have anyone in the target market to rely on.

CEC (sec)

Smokey on board.

Looking at the 10-K.

544 stores, including 14 in Canada.  Franchisees run 47 stores in various states and some countries (Guatamala, Chile, Saudi Arabia, UAE).

A lot of re-investment is required to keep the stores up to date: game enhancements, remodels, expansions.  Requires about $150K per store.  They're doing around 150 stores this year.  Assume $25 million routine capex needed for this.  They did 15 remodels last year and expect 15-20 this year at a cost of $600K per store.  Add another $12 million.  They did 28 store expansions last year and expect 30 to 35 this year.  Cost is about $1 million per store.  So there's another $35 million of capex.  It's really interesting (and somewhat re-assuring) to see the same issues with the business model all these years later.

5 new stores opening this year, 2 relocations.  I personally saw a relocation many years ago (actually 2 relocations of the same store over about a 10 year period) and it made a lot of sense.  The new location was far better, the new store was better, the layout was better, and it was certainly more crowded.  But it's expensive, and that's the problem with CEC.

New stores generate about $2 million in revenue per year.  It costs about $2.8 million to open a new store.

They have a plan to expand into Latin America.  International franchisees opened stores in Guam, Chile, and Saudi Arabia in 2010, so they seem to be serious about it.  They expect four more in 2011.

It's interesting to watch the impact of the "computer-controlled robotic characters" on the kids as they grow older: from awe, to amusement, to disillusionment, to ridicule.  And then they move on to Hot Topic and get lip piercings etc.

About half the revenues is from food/drinks, including pitchers of beer, from what I recall.
"We used to get drunk at Chuck E Cheese, sometimes Bill would get stoned and Jason was always high."
Oh what a world, what a world.

They mention the tickets.  I totally forgot about that part.  That's actually a great business model: selling cheap trinkets for huge numbers of tokens (aka quarters).

17K employees, no unions.

I really like it when companies present financial data for several years and make it easy to read.

Revenues have been slowly increasing.  I would have expected more increases given the new stores, but the flat part is basically 2009 and 2010 when the economy sucked. (still does).  Of course the costs have been going up regardless as they expand and add stores.

So operating income has been flat-to-falling since 2006.  They've been making about $2.50 per share in earnings with an odd dip in 2007 that seems to have been brought back up due to share repurchse, which seems to be continuing each year.  They've been earning about $55 million per year total.

I'd guess that the comps have been slightly negative for several years.   And I'd be correct.

They've been closing 2 stores per year.

12.8% operating margin, down from 13.6% and 13.3%.  11.4% net margins.

NOTE: Inflation could be a problem for them.  I recall when cheese prices went up and it killed their margins.

In previous years, the capex for game enhancements, major remodels, and expansions was $160 million. I've got to see the cash flow statement.

Toilette & Douche auditors.  Non-qualified opinion.

As expected, assets are almost all PP&E.  A lot of debt.  They should be paying off a lot of that debt instead of doing so many share repurchases.

Huge number of stock options, especially considering the lousy performance numbers.

Ok, cash flow from operations has been around $150 million.  Capex was around $100 million during the year, but was around $80 million in earlier years.  They've got the revolver revolving and the treasury stock repurchases, and that's about it for the cash flow statement.  Wow, they've gone wild with the share repurchase; so much so that it may distort things.

They seem to spin off about $70 million a year in cash flow.  Let's take a look at a realistic share count.

About 600K RSUs.  Stock options are winding down to zero.  I'd add a million to the share count, make it 2 million.  22 million shares.  So we get about $3.18 in what might be free cash flow.  I would expect that number to grow as the economy slowly improves.  Give it a P/E of 15 and you get a $47 share value.  It's around $40 now, which is definitely reasonable.

It would be useful to estimate where this will go in the long term and look closer at the real annual capex requirements per dollar of earnings.

Update same day:
A quick look at Q1
Balance looks about the same.
Revenues up slightly.
Net income up slightly.
Share count keeps dropping, I think they're obsessed with it.  Pay down the debt, people.
Cash flow is a bit weaker, but it looks like it's due to timing of things.  $40 million more debt paid off, that's good.

Comps were up 1.1%.  Here's a good thing: menu prices increased 2.1%.  It's important for them to be able to increase the prices without losing much of the business, given the strong possibility of inflation.

Operating margin dropped to 22.8% from 23.2%.

Cost of food and drink increased 0.6%.  Cheese prices went up 21%!  Produce was up 15%!  This was offset by drink cost decreases (odd!).

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