Chuck E. Cheese's fund-raising sales initiative raises revenues, too

Nation's Restaurant News, Oct 25, 2004 by Susan Spielberg

IRVING, TEXAS -- CEC Entertainment, parent of 487 Chuck E. Cheese's restaurant-and-children's-entertainment complexes, has rolled out a sales initiative tied to fund-raisers for local elementary schools that is proving philanthropy can be profitable.

The initiative, which began Sept. 1, has boosted traffic, generating more than 600 bookings for fund-raising events so far--a rate of more than 100 per week. CEC donates 10 percent of the proceeds from the events, which take place on weeknights, to elementary-school Parent Teacher Associations.

"We believe that program holds the potential to lift Chuck E.'s same-store sales beyond most other initiatives in the company's arsenal and with minimal capital outlay," said Robert Derrington, an analyst with Morgan Keegan & Co. Inc. in Memphis, Tenn., who noted that the program leverages the chain's relatively unused weeknight store capacity.

Many restaurants are known to support fund-raising efforts for community, social, political or religious causes in a variety of ways, including the outright donation of food or gift certificates and the funding of local initiatives.

When companies support causes through direct giving they assume that their generosity will be rewarded through favorable publicity that ultimately will generate more traffic for their establishments. But when a restaurant contributes a percentage of proceeds from a designated time period to a cause, it has immediate feedback as to the success of its efforts through incremental sales and guest counts.

One advantage Chuck E. Cheese's has in its school fundraising events is its mascot's appeal to children, which generates excitement regarding the event.

"I think that the power of Chuck E. Cheese's brand, the Chuck E. Cheese mascot ... is really going to work in our favor," said Chris Morris, chief financial officer of Irving, Texas-based CEC Entertainment.

"We will have Chuck E. Cheese visit the school the day of the fund-raising program and the principal will walk Chuck E. Cheese around the classrooms and get the kids really excited about the program that evening," he explained. "And then Chuck E. Cheese will be in front of the school, passing out fliers as the parents come to pick up their children."

Morris said the company gives the children stickers, and if they bring the stickers to the store later that evening they get free tokens for playing games.

"We see it as a big opportunity for us, even though others are doing that [type of fund-raiser], just because of the power of the Chuck E. Cheese's brand," he asserted.

Other restaurant chains, including CiCi's Pizza, Chick-Fil-A and Papa John's, have donated a percentage of their proceeds to various causes.

A typical Chuck E. Cheese's is about 10,000 square feet and serves pizza, sandwiches and salads in a setting with numerous games and entertainment attractions. Analyst Derrington thinks Chuck E. Cheese's and fundraising for schools match perfectly. For one thing, the chain caters to families with children.

"That's key," he said. "And organizations like elementary schools are constantly trying to raise money. With all of the No Child Left Behind edicts from our government, each of the schools are generally trying to figure out how to provide a better service, a better product, a better educational experience on a shoestring budget," he stated.

Derrington, who predicts that CEC stock will outperform the market, thinks the fund-raisers could add significantly to the company's earnings. He estimates that if the company books two fundraisers per month per store, that could add 2 percentage points to same-store sales and increase earnings-per-share by 8 cents. Four fund-raising events per store per month could lift systemwide same-store sales by 4 percent and EPS by 15 cents, he said.

"We already expected them to have a pretty good operating trend both in the fourth quarter and in the new year, and this program, from our view, certainly looks like it adds incremental strength to sales as well as earnings growth," he said.

CEC reported net income of $22 million, or 58 cents per diluted share, for the third quarter ended Sept. 26, compared with $16.8 million, or 42 cents a share, for the previous third quarter. Results for the third quarter of 2003 included a pretax charge of $4.25 million, or 7 cents a share after taxes, related to the settlement of litigation.

Revenues rose 7.9 percent to $183.6 million, which included $120.4 million from food-and-beverage sales and $62.4 million from games and merchandise. Comparable-store sales edged up 0.4 percent during the quarter.

CEC, which owns and operates 440 of the 487 restaurants in its system, said it expects to add 33 to 34 company stores to its fleet this year and 34 to 38 in 2005. The company plans to remodel 140 to 150 stores next year, with 50 to 60 of the remodels allocating a greater percentage of square footage to the game rooms.

Besides the fund-raising events, CEC has engaged in two other sales initiatives. The company's "More Fun" promotion, which includes national advertising, in-store marketing and incentives for operators, focuses on a value message that all games cost one token. Tokens generally cost 25 cents each, although the chain offers various deals and includes tokens with some meal packages.