Anyone who has ever trailed a tribe of 10-year-olds into a Chuck E. Cheese Pizza Time Theatre for a Saturday afternoon birthday party knows this outfit is onto something.
The big kids line up three deep at the video games while the preschoolers alternate their attention between the animated animal chorus line and Chuck E. Cheese himself, a costumed mouse character who roams the five-room restaurant.
The 25-cent tokens plunk into the game machines like pepperoni slices onto pizza and the electronic ordering system rings up $33,000 to $37,000 a week in mature units like the one in Evergreen Plaza in Rockville.
In round numbers, that's $1.6 million a year, enough in itself to make Pizza Time Theatre (trading symbol CHKY) a high-flying speculative stock. Spice those sales with the knowledge that Pizza Time was founded by Nolan Bushnell -- whose last idea for a new business was Atari -- and Wall Street drools.
The well-known bandwagon effect drew investors to Pizza Time, to its imitators and to two new public companies that operate Chuck E. Cheese franchises -- Electronic Theatre Restaurants and Family Entertainment Centers Inc.
Family Entertainment Centers is based in Rockville and is the leading Pizza Time franchise in sales. Founded by Patrick Hopf -- a securities analyst who liked the concept well enough to put his own money in it -- and David Roberts -- a lawyer turned restaurateur -- Family Entertainment holds exclusive rights to run Chuck E. Cheese pizza parlors in Virginia, Maryland, Delaware and the District of Columbia.
Incorporated only 2 1/2 years ago, Family Entertainment's promising Pizza Time franchise enabled the company to sell $5 million worth of stock to the public earlier this month. Though the company's book value was only $1.17 a share, the stock went out at $10.50 a share. hat was three weeks ago, before investors got a taste of the reality of the pizza party business. On Friday, Sept. 17, Pizza Time served Wall Street analysts a large order of bad news: after two years of steady growth, Chuck E.'s third-quarter profits will be flat.
It was all the fault of E. T., claimed representatives of the pizza-peddling mouse. Kids spent their allowances on "E. T., the Extra-Terrestrial" and other blockbuster movies this summer and had nothing left for pizza. Several new Pizza Time Theaters opened, but neither sales nor profits grew as they had been.
One off quarter is nothing to be ashamed of in the midst of the worst recession in decades, but Pizza Time shares haven't been selling on the basis of any long-term assessment.
Last Monday morning, Chuck E.'s fickle fans swallowed hard and pushed the sell button. Almost half a million shares were dumped, and Pizza Time plunged from $23.50 to $16.25 in a single day.
The stock hit a low of $14.75 before Bushnell emerged from his Silicon Valley heaquarters like a headwaiter trying to soothe a disgruntled diner.
Bushnell said revenues for the first nine months of the year will climb to $65 million from $22 million last year and earnings will increase to about 79 cents a share from 31 cents a year ago. And he felt compelled to assure investors that he intends to renew his employment contract for three more years when it expires next month.
The stock halted its slide and picked up a buck (closing up 1/2 at 17 1/4 Friday), but the damage was done. Analysts cut their projections of Pizza Time's profits and began to question its prognosis. L. F. Rothschild, Unterberg Towbin -- the company that helped sell Pizza Time's shares to the public -- expressed reservations. "There's probably still underlying demand for Pizza Time, but the company has to prove it can expand profitably," analyst Mary Lisanti told Dow Jones.
Pizza Time's plunge also gave indigestion to investors who bought Family Entertainment Centers' stock on Sept. 1. Their $10.50 shares were bid at $7.625 Thursday -- a 27 percent loss in 23 days.
Family Entertainment hasn't put out an earnings report since it sold the stock, and under SEC rules company officials can't even discuss their operations. Nothing the company has done can be blamed for what happened to the stock, but that's no consolation to stockholders.
Last Monday, Family Entertainment opened its 11th Chuck E. Cheese store. The Alexandria unit will be followed next month by the first Baltimore-market store (in Essex) and later this year by a Norfolk opening. Another dozen are on order for next year.
The long-term viability of the pizza-plus electronic entertainment concept remains to be seen, but indications are Chuck E. Cheese is becoming more than a once-a-year pizza party place. Family Entertainment is using the $5 million raised by the public stock sale to fill its franchise territory quickly to keep out imitators like Show Business and Animated Playhouse.
The offering statement for Family Entertainment indicates its Pizza Time Theatres are dishing out as much as 40 percent more business each week than the company-operated units. That's a topsy-turvy situation in fast-food land, where company-owned stores nearly always outperform franchises.
Bushnell reportedly is spending millions researching new kinds of electronic entertainment that could add new ingredients to the pizza-profit mix. In the meantime, investors in both Pizza Time and Family Entertainment are stuck with stock that's about as appetizing as leftover pizza. All they can do is save it for tomorrow and hope it tastes good reheated.