Oct 31, 2013
Executives
Mike Magusiak - President and CEO Tiffany Kice - EVP and CFO Dick Frank - Executive Chairman
Analysts
Mike Gallow J. R.
Bisel [ph] Michael Halen
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Earnings Call. At this time, all participants are in a listen-only mode and later we will conduct the question-and-answer session and instructions will be given at that time.
(Operator Instructions). And as a reminder, the conference is being recorded.
I would now like to turn the conference over to our host Mr. Mike Magusiak.
Please go ahead sir.
Mike
Magusiak
Tiffany
Kice
Mike Magusiak
Thanks, Tiffany. We believe that we have developed and are executing on a very solid strategic plan to increase comparable store sales, grow our concept with both domestic and international new locations and improve our profit margins.
I believe that these strategies in combination with returning capital shareholders will enhance long term shareholder value. After posing positive same store sales of 1.6% and 2.9% in both Q1 and Q2 respectively with 5 out of 6 being positive, sales declined in Q3 by 2.1%.
We attribute the decline in the third quarter primarily to a significant decrease in birthday party sales and secondarily to increase competition from kids’ movies along with overall political and economic uncertainties for our guest. To address declining birthday sales, we have modified our marketing plan to include a newly developed birthday commercial.
It’s started airing two weeks ago with increased birthday media weights. In regards to kids’ movies during the third quarter, revenue from kids’ movies rated G&PG increased by approximately 65% or 320 million compared to the same period in the prior year and primarily during the first part of the third quarter.
This increase in kids’ movies is significant considering that our total revenue during the quarter was 196 million. On a year-to-date basis, we believe that movies have not materially impacted sales.
Comparable store sales for the third quarter declined in both absolute dollars in compared to the positive sales trend through the first half of the year; however, comparable store sales in the first three quarters of 2013, remain positive for each of our four regions. In the first four weeks of the fourth quarter, sales trends have turned positive, increasing 0.4%.
Now, I would like to share with you the key enhancements to our plan to increase comparable store sales. First, an enhanced strategy of capital reinvestment in which we will impact each company own store on average every two years; second, the evolution of our concept with major attractions; third, the continued refinement of our pricing strategy the testing of increased token prices for games and rides; and fourth, an enhanced marketing plan that will be fully implemented at the beginning of 2014.
We have recently enhanced our existing store capital strategy by utilizing transferred games from existing stores and used games in combination with new games and rides. This substantially reduces the cost of game enhancements on a first store basis and enables us to impact each of our stores more frequently.
This strategy was fully implemented in the third quarter of this year as demonstrated by the significant increase in the number of stores impacted by capital in the third quarter. During the first half of 2013, we impacted 34 stores with capital improvements.
This compares to 63 stores in the third quarter and a projected 60 to 70 stores in the fourth quarter. In summary, the 2013 capital plan will impact approximately 160 to 170 stores in the form of game enhancements, major remodels and store expansions for total cost of approximately $20 million.
Our existing store capital plan for 2014 is projected to impact 260 to 270 stores at a cost of approximately $27 million to $29 million. In addition, to improving approximately half of our store base, we’re also committed to the evolution of our entertainment attraction.
We are currently testing two different major attractions that received very positive guest feedback and are installing a third major attraction within the next two weeks. We currently plan to spend 3 million to 4 million on new major attractions in 2014 which are included in the projected existing store capital spend of $27 million to $29 million; we believe that our capital plan to impact more stores, more frequently combined with expenditures on major attractions will positively improve future comparable store sales.
The next component of our plan to increase sales, while improving margins is the implementation of a refined value strategy. We implemented new menu boards in all domestic company owned stores during October of last year, featuring reduced price points for value deals including pizza, drinks and tokens at very attractive price points of $19.99.
$29.99, $39.99 and $49.99 for families of all sizes. In conjunction with our new menu pricing, we implemented a revised coupon strategy with reduced discounts compared to our coupon offerings in the prior year and incorporated additional coupon offers to provide more flexibility to our guests.
We believe that this pricing strategy was very effective based on a significant increase in sales of value deals and improved margins resulted from reduced discounting. We continue to believe that we offer our guests great value based on the number of metrics, including consumer research and guest feedback.
In fact all of our games require only token to play and tokens can be purchased for as low as $0.20 each, representing a value that we believe is approximately three to four times better than our competitors pricing. To capitalize on our great value we have recently implemented a test in four markets, reducing the number of tokens included in value deals, token deals and coupon offers.
Essentially we're testing a price increase in these four markets and still believe that our game value remains significantly better than our competitors. The next primary component of our plan, increase comparable store sales is implementation of a refined marketing plan.
We implemented a number of marketing initiatives during 2012 and 2013 and believe that we continue to learn and refine our strategies to increase sales. Key lessons learned and current conclusions are; first creative messaging should combine both brand and reasons to visit.
Second both kids and moms creative must continue to evolve and change. Third, there is a strong correlation between kids television birthday media weights and fresh and compelling commercials to birthday sales and finally we believe digital branding via banner ads to moms was ineffective in driving guest traffic.
With these refinements, we believe that we have developed a strong marketing plan for 2014. Plan highlights include; a reallocation of adverting expenditures from digital branding to television, which will result in a preliminary total budget of $42 million to $43 million in 2014, compared to $42 million in 2013; total advertising media weights to increase approximately 10% to 15% with over 80% of our spots directed at kids; birthday party advertising television media weights to increase by approximately 50%; moms television weights were more than double focusing on value in emotional messaging; and finally a re-work of our website to improve communication of great value, including package deals, Chuck E-Club offerings, All Games Are One Token and Chuck E live performance with tickets splash giveaways every hour.
In addition to developing what we believe is a strong sales plan; we have also implemented a fairly significant cost reduction program. The impact of this cost reduction program is evident in our store margins benefiting by 120 basis points through the third quarter of 2013.
A majority of this benefit was in the 80 basis point improvement in cost of sales through the first three quarters of the year, compared to the same quarters last year. As Tiffany noted earlier, the primary drivers of improved cost of sales margins include the implementation of a revised pricing structure, as well as modifications to our ticket categories and refined pizza dough with a thinner crispier crust.
Margin improvement initiatives that we are currently testing or implementing include, but are not limited to one additional pricing test that have been recently implemented in four markets, that effectively raise the price of games and rides; second, the installation of energy efficient thermostats in approximately 200 stores resulting in improved utility margins; third the requirement of non-slip footwear for all employees; fourth, holding store management accountable through incentive compensation programs for workers compensation and general liability claims, which we believe reduces incidents; and finally changing the sourcing of games and rides parts, as well as increasing the spacing of games within our stores, which improves the guest experience and reduces repair and maintenance attributable to fewer games. And finally, the next significant component of our strategic plan is the growth of our concept with domestic company owned locations and international franchise locations.
We accelerated both domestic and international growth last year and now new domestic locations are a significant contributor to revenue growth. Total revenue in the first three quarters of this year increased $17.5 million, representing a 2.8% increase compared to the same quarters last year.
Comparable store sales contributed $5 million or 8:10s of a percent of the revenue growth and domestic new units contributed $12.5 million or 2.0% of the revenue growth. Starting with domestic growth, in 2013 we anticipate opening 13 to 14 new stores, including one relocation.
We anticipate closing five stores including the relocated store resulting in the net addition of eight to nine company owned stores. In 2014, we anticipate opening 12 to 15 locations, including three relocations and one franchise acquisition.
From 2007 through 2011 we opened a total of 27 new and relocated stores. These stores averaged over $2 million sales during 2012 and produced an average cash return on investment over 20%.
Switching now to international development, we continue to believe that we have an excellent long term growth opportunity. Currently excluding Canada, we have 19 international stores open with an additional two stores under construction in Mexico City and Riyadh, Saudi Arabia.
We have already executed 13 development agreements with high quality franchise partners that have purchased the rights to open approximately 70 additional locations. Our belief that international development provides our company with an excellent growth vehicle is primarily based on the high sales volume of international locations, coupled with significant interest from existing and potential franchise partners.
We currently project that there could be more than two times the number of our domestic locations internationally over the long term and we remain very excited and committed to this long term growth initiative. With that I’ll turn the call back to Tiffany to go over our business outlook for the year.
Tiffany Kice
Thank you, Mike. Through the end of October our comparable store sales are positive 0.8%.
At this time, we expect comparable store sales to be relatively flat for the fourth quarter and the related diluted EPS for that period to be in a range of $0.15 to $0.19. Additionally in regards to 2013, we expect to open eight to nine net new company owned stores.
We have opened eight new stores through the third quarter, including one relocation and have closed three stores and anticipate opening five to six more in the latter part of the fourth quarter and closing one additional store. Average cheese block prices to be in the range of $1.75 to $1.85 per pound for the fourth quarter; depreciation and amortization for the year remain relatively flat with the prior year; rent expense for the year to increase approximately 4% to 5% from the prior year; advertising expense for the year to increase approximately $6 million from the prior year; capital expenditures to range from approximately $75 million to $80 million; and payment of four quarterly dividends totaling approximately $17.3 million.
In regards to fiscal 2014, we intend to open $12 to $15 new stores including three relocations and one franchise acquisition; capital expenditures are expected to range from approximately $70 million to $75 million and advertising expenses anticipate to increase approximately $1 million from the prior year. I will now turn the call over to Dick for some concluding remarks.
Dick Frank
Thanks Tiffany. Although we are disappointed with our comparable store sales performance in the quarter, we are somewhat encouraged by the early sales results of the fourth quarter.
More importantly we believe in our plan and continue to evaluate and enhance our strategies to further drive future performance. Enhancements to our plan to increase comparable store sales include; a revised strategy of capital reinvestment in which we will impact each company location every two years.
The introduction of new major entertainment attractions; the continued execution and involvement of our value proposition; and a revised marketing plan for 2014 based upon our lessons learned in 2013. Highlights on a year-to-date basis for 2013 through the end of the third quarter include; total revenues increasing 2.8% or $17.5 million to $643.2 million; net new store revenue increasing $12.5 million; comparable store sales increasing $5 million or 8:10s of 1%; store level margins increasing 120 basis points; and finally earnings per share increased 11.2% to $2.78 a share.
On October 29, 2013, our Board declared our fourth quarter dividend with a 13% increase to $0.27 per share. We remain committed to returning capital to our shareholders and note since beginning of fiscal 2010 we have returned through dividends and our share repurchase program approximately $230 million or 39% of the $595 million in operating cash flow generated over the same period of time.
At this time, Mike, Tiffany, and I, would be glad to take any questions that you may have.
Operator
(Operator Instructions). Our first question comes from the line of Mike Gallow.
Please go ahead sir.
Mike Gallow
Mike, can I just dig in a little bit on some of the pricing and promotional adjustments? How much is average ticket op as a result of that?
And how do you know or do you have any research that indicates that those adjustments haven’t hurt your customer traffic? Thanks.
Mike
Magusiak
Mike Gallow
Great. In terms of just the price increase that you’re testing, could you elaborate at all on when you think that would roll out, if it’s still preliminary what you’re see in the test et cetera?
Is it simply just a reduction of the number of tokens and packages? Are there other elements to it as well?
Mike
Magusiak
Mike Gallow
Great and then just can I just drill in the birthday parties, little more on what’s happened there? If I go back a couple of years ago with ticket blaster, you had a lot of momentum and it seems like you’ve really lost that momentum.
So help me with that a little bit. Obviously that’s really not susceptible as much, at least the kid’s movie calendar.
So help us one with what you think happened there and a two little more detail on what you’re doing to improve that side of the business?
Mike
Magusiak
Operator
And our next question comes from the line of Will Slabow. Please go ahead.
J. R. Bisel
Hey guys this is J. R.
Bisel here on the call for Will. Digging deeper on these birthday sales, I'm wondering Tiffany mainly if you saw a deceleration in specific months or was it steady throughout the quarter, these sales trends for the birthday parties.
Tiffany Kice
In third quarter, period 7 was down 11.1%, July sorry, August was down 12%, September was down 9.5%. So I'd say pretty consistent over that quarter, first half.
J. R. Bisel
And switching gears here, you know, I know you just spoke to the additional sales, sorry the additional advertising spend in the last couple of weeks and you saw a nice acceleration in the first few weeks of 4Q, outside of those birthday, those bookings being flat did you see anything else that kind of helps you get into that positive territory?
Tiffany Kice
When I look at, you're meaning in October?
J. R. Bisel
Yes, in October, sorry.
Tiffany Kice
I'm feeling pretty good about October. I mean it’s just four weeks.
So you got to kind of take that in perspective and we're going into a holiday season with low volume. But when you kind of back out your birthday parties and you look at just your comparable store sales of everyday that was positive more than the 0.4.
The birthdays were down about 8%.
Mike
Magusiak
J. R. Bisel
And can you remind us how long this promotion is going to run in the stores?
Mike
Magusiak
Operator
(Operator Instructions), our next question in queue comes from the line of Michael Halen. Please go ahead, sir.
Michael Halen
What percentage of customers came to play games only in the quarter?
Tiffany Kice
Well if you look, basically 54.9% is entertainment and merchandise sales. Game only is typically what - around 10% - 12%.
Mike
Magusiak
Michael Halen
Okay, that's a positive. I think the Freebirds promotion makes a lot of sense.
You can possibly mitigate some lost business due to some of these kid movies. Do you have any additional movie tie-ins planned for 2014?
Mike
Magusiak
Michael Halen
Okay, and finally can you please give us some color on how you expect the 2014 unit openings to shake out throughout the year?
Mike
Magusiak
Operator
And at this point we have no more questions in queue.
Mike
Magusiak
Operator
That does conclude our conference for today. Thank you for your participation and for using AT&T's Executive Teleconference Service.
You may now disconnect.