CEC Entertainment, Inc. (NYSE:CEC) today announced preliminary results for the second quarter and six months ended July 2, 2006. The Company also announced that it has revised its strategic plan in order to provide a greater emphasis on achieving a higher return on investment by focusing on growing sales in existing restaurants and slowing new restaurant development.
Revenues for the second quarter of 2006 increased to $176.2 million from $168.4 million in the second quarter of 2005. Net income in the second quarter of 2006 decreased to $12.6 million from $13.1 million in the same period of 2005 but diluted earnings per share in the second quarter of 2006 increased to $0.38 per share compared to $0.36 per share in the second quarter of 2005.
Revenues for the first six months of 2006 increased to $403.2 million from $382.5 million in the first six months of 2005. Net income was $41.8 million in the first six months of 2006 and $44.4 million in the same period of 2005 but diluted earnings per share in the first six months of 2006 increased to $1.23 per share compared to $1.20 per share in the first six months of 2005.
Total revenues increased 4.6% in the second quarter of 2006 over the prior year due to new store development and an increase in comparable store sales of 1.2%. Insurance expense decreased $7.2 million in the second quarter from the prior year due to a favorable development of workers' compensation and general liability claims primarily relating to claims originating in the last 24 months. However, this benefit was partially offset by a $3.5 million asset impairment charge for 4 small market restaurants, a $1.1 million write-off of inventory and development costs for abandoned sites, and increased utility costs in the second quarter of this year. During the first six months of 2006, the Company generated operating cash flow of $87.7 million, invested $52.4 million primarily in new and existing stores and repurchased $66.8 million of its common stock. Outstanding borrowings on the Company's credit facility increased $25.7 million to $162.8 million at the end of the quarter.
Following an in-depth evaluation, the Company revised its strategic plan to provide a greater focus on growing comparable store sales and achieving a higher return on investment. The Company plans to increase its capital investment in existing restaurants to approximately $48 million in 2006 compared to an average of $24 million over the past four years. The Company also plans to reduce the pace of new restaurant openings and intends to target development in densely populated areas that offer the potential for higher sales and returns on investment. Beginning in 2007, the Company expects to open approximately 8 to 12 new restaurants per year. The Company continues to focus on increasing the value to its guests with improved offers and increased distribution of coupons, cross promotions and direct e-marketing.
Richard M. Frank, Chairman and Chief Executive Officer, stated that, "We are pleased with the solid comparable store sales performance of our restaurants in a difficult consumer environment, providing evidence that our strategic initiatives are taking hold and the Chuck E. Cheese brand is vibrant. As we move forward, our primary objective will continue to be building sales momentum in existing restaurants. We believe our strategic plan will allow the Company to enhance return on investment and increase free cash flow."
Based on current estimates and excluding any potential impact resulting from our Audit Committee's review of stock option practices, the Company expects diluted earnings per share to range from $0.45 to $0.47 per share for the third quarter of 2006 and reaffirms its fiscal year guidance of $1.94 to $2.02 per share. In 2006, comparable store sales are expected to increase 2.0%-3.0% over the prior year and the Company plans to open 16-18 new restaurants, including 3 to 4 relocations.
Mr. Frank added, "Our Company remains committed to returning capital to our shareholders as evidenced by our stock repurchase program. Since 2003, the Company has repurchased over $380 million of its common stock. We are confident that our focus on growing comparable store sales and achieving higher returns on invested capital, led by our talented and motivated management team and employees, will allow us to continue to generate strong cash flow and deliver long-term value to our shareholders."
Review of Stock Option Granting Practices
The Company also announced today that the Audit Committee of its Board of Directors, which is comprised solely of independent directors, is reviewing the Company's practices relating to its stock option grants. This voluntary review was initiated in light of the recent media coverage regarding the stock option granting practices of publicly traded companies. The Audit Committee plans to engage independent outside legal counsel to assist in the review. The Company will not be able to comment on any aspect of the review or possible outcome until after the Audit Committee completes its review. Results for the second quarter are preliminary until the review is completed. The timely filing of the Company's current report on Form 10-Q to be filed with the Securities Exchange Commission for the period ended July 2, 2006 due on August 11, 2006, is uncertain pending completion of the review.
Certain statements in this press release, other than historical information, may be considered forward-looking statements, within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, and is subject to various risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on CEC's operating results, performance or financial condition are its ability to implement its growth strategies, national, regional and local economic conditions affecting the restaurant/entertainment industry, competition within each of the restaurant and entertainment industries, success of its franchise operations, negative publicity, fluctuations in quarterly results of operations, including seasonality, government regulations, weather, school holidays, commodity and labor costs and the potential impact of the Audit Committee's review of the Company's stock option granting practices.
CEC Entertainment, Inc. operates a system of 522 Chuck E. Cheese's restaurants in 48 states, of which 477 are owned and operated by the Company.
CEC ENTERTAINMENT, INC. PRELIMINARY CONDENSED CONSOLIDATED RESULTS OF OPERATIONS (Thousands, except per share date) Quarter Ended Year Ended 07/02/06 07/03/05 07/02/06 07/03/05 ---------- --------- --------- --------- Revenues: Food and beverage $110,283 $109,455 $258,883 $248,499 Games and merchandise 65,139 58,253 142,644 132,495 Franchise fees and royalties 747 685 1,631 1,480 Interest income 11 8 13 13 ---------- --------- --------- --------- 176,180 168,401 403,171 382,487 ---------- --------- --------- --------- Costs and expenses: C