RRGB Red Robin Gourmet Burgers Inc

CEC Entertainment Inc.’s (CEC) adjusted earnings of 8 cents per share in the fourth quarter of 2012 missed the Zacks Consensus Estimate by 11.1% and the year-ago earnings by 60%. The downfall in earnings can be attributed to lower revenues coupled with higher costs.

On a reported basis (including asset impairment charges), loss per share was 3 cents in the fourth quarter of 2012 compared to earnings per share 15 cents in the year-ago period.

Total revenues tumbled 0.4% year over year to $177.8 million in the fourth quarter, which fell shy of the Zacks Consensus Estimate of $180.0 million. The drop in revenues was due to lower comparable store sales (down 2.2%).

The company’s cost structure, which includes cost of food, beverage, entertainment and merchandise, increased 10 basis points (bps) year over year to 16.2% as a percentage of company store sales, mainly due to an increase in cheese prices. Also, an increase in depreciation and amortization expense, labor expenses and other operating expenses led to a 110 bps contraction in restaurant margin to 14.6%.

Full-Year Update

Earnings per share decreased 14.2% to $2.47 in 2012 despite a benefit of 17 cents from share repurchase. Earnings per share missed the Zacks Consensus Estimate by 10.2%. Total revenues also fell 2.2% to $803.5 million owing to a 2.9% plunge in comps. Revenues also fell shy of the Zacks Consensus Estimate by 1.7%.

Store Update

During the reported quarter, CEC opened 5 company-owned stores and closed 2. On the franchisee front, there was no opening or closure in the quarter.

At the end of 2012, the company had 514 company-operated stores and 51 franchised stores. For 2013, the company expects to open 15 new company-owned stores and relocate one store.

Outlook

For fiscal 2013, the company expects comparable sales growth to remain in the range of 1%–2%, down from the prior expectation of 2%-3%.

Uncertainty over the payroll tax holiday and rising gasoline prices compelled CEC to reduce the comps guidance. Through week seven of 2013, comparable store sales have already decreased 3.2%.

CEC expects earnings per share in the range of $2.70—$2.85, down from the prior expectation of $2.80—$3.00.

Our Take

The key takeaways from CEC’s fourth quarter earnings were continued underperformance on top- and bottom- lines and margins pressure. The company has been missing the Zacks Consensus Estimate on both lines for the past two quarters.

Even in the first half of 2012, its performance was not satisfactory. The reduction in 2013 guidance to reflect the elimination of payroll tax holiday and increased gasoline prices also limits visibility for the coming months.

Yet another downward trend in comps for the first quarter of 2013 also evokes pessimism over the stock. Although the company continues to make efforts to increase traffic to enhance sales and comps, its initiatives are yet to attain fruition.

CEC currently retains a Zacks Rank #4 (Sell). Others players in the same industry, which look attractive at current levels include Red Robin Gourmet Burgers Inc. (RRGB) carrying a Zacks Rank #1 (Strong Buy) and AFC Enterprises Inc. (AFCE) and Burger King Worldwide Inc. (BKW) carrying a Zacks Rank #2 (Buy).

 
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