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Chuck E. Cheese's to debut attractions, direct mail

IRVING Texas CEC Entertainment Inc., parent to the 544-unit Chuck E. Cheese’s chain, is using new store attractions and a first-time direct mail marketing campaign to drive recently stalled sales, according to a report released Monday by Morgan Keegan Equity Research.

Chuck E. Cheese has tested in one Dallas unit a new attraction called “Birthday Star Blast,” a clear, human-sized plastic capsule into which money, tickets and prize vouchers are blown — much like in casinos and television game shows of the past — to be gathered by the child celebrating his or her birthday. The test is to be expanded to 20 more stores.

Birthday parties represent about 24 percent of Chuck E. Cheese’s business, so additions such as the Birthday Star Blast, which cost less than $3,000 per store, are likely to increase sales, according to the securities report from Morgan Keegan analysts Robert Derrington and Destin Tompkins. They had accompanied Mike Magusiak, CEC’s chief executive, and Chris Morris, the chief financial officer, on a tour with East Coast investors. Morgan Keegan solicits and undertakes investment banking business with CEC, and now holds an “Outperform” on the stock.

Should the Birthday Star Blast become a systemwide feature that drives two incremental birthday parties per week, it would boost same-store sales by 1 percent, the analysts noted. The chain’s same-store sales fell 5.4 percent during its latest quarter. In addition, 60 percent of the sales from Birthday Star Blast would flow through to pretax profit, they said.

CEC also will for the first time start using direct-mail marketing this month for 240 of its stores. The analysts said direct mail prices have fallen dramatically, and CEC’s program will cost between $50,000 and $60,000 and is expected to reach 24 million consumers. Newspaper inserts with coupons would promote the birthday party push.

Areas of concern for the company, the report highlighted, included the potential impact of H1N1, or swine, flu on sales. Those concerns, the analysts said, are “likely to fade with nation vaccination program beginning in October.” Meanwhile, the company is cleaning and “sanitizing games and rides in sight of customers,” the report said.

Sales at units in California and Florida, both hit hard by the recession, have been a drag on systemwide same-store sales, but a couponing effort is planned for California in September.

“Ultimately we believe the near-term concerns … will fade, leaving the longer-term opportunities for the company more widely recognized,” the analysts said.

CEC reported last month that profit for the second quarter ended June 28 fell to $9 million, or 39 cents per share, from $11.3 million, or 47 cents per share, in the same quarter a year ago. Second-quarter revenue fell 4.0 percent to $184.8 million.

Contact Ron Ruggless at [email protected].

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