Q1 2006 CEC Entertainment Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: 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. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mike Magusiak. Please go ahead.

MIKE MAGUSIAK, PRESIDENT, CEC ENTERTAINMENT, INC.: Thank you. Welcome to our conference call. I'm Mike Magusiak, President of the Company; and I'm joined by Dick Frank, our Chairman and CEO, 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 on the Company's risk factors was included in our press release and is also included the Company's filings with the SEC.

Our primary objectives for today's call include, first, to discuss sales and earnings for the first quarter; second, to discuss our strategies to continue growing long-term earnings; and third, to comment on our outlook for the business going forward. Chris, please provide an overview of our financial statements.

CHRIS MORRIS, EVP, CFO, CEC ENTERTAINMENT, INC.: Thanks, Mike. Revenue for the quarter increased 6% to $227 million. This increase was primarily due to a weighted average increase of 25 Company-owned stores and an increase in first-quarter comparable store sales of 1.2%. Net income decreased to $29.2 million in the first-quarter 2006 from $31.3 million in the first quarter of the prior year. Diluted earnings per share for the quarter increased to $0.85 from $0.84 in 2005, after adjusting for equity compensation expense.

Before I discuss margin, I would like to take a few minutes to discuss sales trends and the first-quarter impact of the Company's marketing initiatives. As we have previously disclosed, same-week comparable store sales for the last six months of 2005 were approximately 3% below the same period in 2004 -- negative 5.1% in Q3 and negative 1.2% in Q4. During the same time frame, menu prices were approximately 1% above 2004 levels, implying a 4% decline in traffic for the last six months of 2005.

As we discussed in our last conference call, the Company's 2006 marketing initiatives are focused on improving traffic trends and regaining comparable store sales momentum through enhancing the value proposition to our guests.

Specifically, in the first quarter, the Company launched the Every Kid Is a Winner campaign, whereby every child under the age of 12 received a game card and instantly won up to 20 tokens. The principal objectives of this marketing promotion were to generate increased excitement about visiting Chuck E., provide a compelling value offer to moms and dads, and to ultimately drive traffic.

In addition, the Company increased the appeal of its 2006 coupon offers and added an incremental coupon drop the last week of the quarter. The combined impact of these initiatives, along with others, drove an estimated 4% to 5% increase in traffic.

Partially offsetting this increase was an estimated 3% to 4% decline in average guest check. Despite the short-term decline in average guest check, we believe the Company's marketing initiatives stimulated critical traffic momentum during the first quarter.

Sales results during the quarter were impacted by several external factors. Period one comparable store sales were up 6.6%. Period two costs were down 4.3%; and period three costs were up 1.9%. We believe period one benefited from poor weather conditions in the prior year; and period two was negatively impacted from winter storms in the current year. Period three costs were up 1.9% despite the negative impact associated with the number of school spring breaks shifting from Q1 in the prior year to Q2 in the current year.

The Company continues to build on traffic growth …