Chuck E. Cheese could file for an IPO which will would value the company at over $1 billion, and could signal that the company has turned since struggling earlier this decade. Reuters broke the news on Tuesday as it stated that the restaurant chain’s owner, Apollo Management LLC, “has initiated conversations with banks about an IPO that could come in the second half of 2017.” Apollo has yet to hire underwriters, and there is no guarantee that such an IPO will actually occur.
Chuck E. Cheese’s prospects are somewhat better off compared to the past and we could uncover details which will make it appear more appealing, but investors should be highly skeptical if this IPO follows through. The restaurant industry is in a tough spot, there will be better investment opportunities as the 2017 IPO market turns around, and I question whether this company’s reputation has actually managed to turn around from constant fights and past struggles.
A Road to Recovery
This would actually be the second time that Chuck E. Cheese goes public. The company originally went public as “ShowBiz Pizza Time” in 1989 and performed well in the late 90s and early 2000s. But it went private in 2014 after Apollo Management bought it out for over $1 billion after years of struggling.
While children still love the toys and games Chuck E. Cheese offered, the chain still had to face competition from the growing popularity of home entertainment systems and the Internet. In addition, Chuck E. Cheese CEO Thomas Leverton noted in a June 2016 interview that while children still wanted to go, parents carried the final veto on whether they would go and the company had not done enough to appeal to them.
Since then, Chuck E. Cheese has tried to work on appealing to adults by offering Vietnam tours, improving its food, cleanliness, and customer service, with the possible hope of drawing in customers just looking for a quick bite without necessarily bringing in children. But while improvements will help, it will never be a place where customers come just for the food.
In addition to the problems with food and cleanliness, the place “where a kid can be a kid” is battling a viral reputation as a place for massive brawls. While Chuck E. Cheese Director of Corporate Communication Michael Chism emphasized in 2013 that “over 99.99 percent of approximately 65,000,000 annual guest visits at Chuck E. Cheese’s go without incident,” that has not stopped videos of massive brawls making national news and impacting visits.
Trying to Differentiate Itself
Despite all of these concerns, Chuck E. Cheese did manage to see an 11 percent revenue growth in 2015 according to Bloomberg. But even if Chuck E. Cheese may be doing somewhat better, the general state of the restaurant industry is another cause for concern.
The restaurant industry is battling a demand for higher wages which has become closely linked with the political fight for a $15 minimum wage, a shortage of qualified cooks all while customers have become more culinary discerning, and a lack of consumer spending. Restaurants posted declining sales in all four quarters of 2016, and analysts are expecting similar results in 2017.
Chuck E. Cheese will undoubtedly try to claim that it is different from the rest of the restaurant industry by pointing to Dave & Buster’s, which had a terrific 2016 as it jumped by 35 percent last year. The restaurant and amusement chain did so well because it was able to become both a one-stop food and entertainment venue. Chuck E. Cheese will undoubtedly argue that it can replicate those results, especially as they work on making their places more appealing to grown-ups.
But because Chuck E. Cheese is fundamentally a children’s venue, I remain skeptical. This is a company trying to have it all, whether we are talking about staying appealing to children, offering something to make adults wants to come, and having the best food quality possible. Whether it can actually pull this off remains to be seen.
Watch with Skepticism
Since Chuck E. Cheese and Apollo Management have not made any formal moves towards launching an IPO, they will have plenty of time to convince investors that they will be different from other investors.
But they are going to need to make a very persuasive argument. Investing in any restaurant in general in 2017 is not a good idea given the weakness of the industry. While Chuck E. Cheese will try to claim it is different by playing up its reputation as an entertainment venue, investors should be worried about its seedier reputation as well as the fights which occur in the venue. Don’t hesitate to give this company a look, but Chuck E. Cheese needs to give out more information before anyone should think of trying it out.