CEC Entertainment, Inc.

- Outline of Revenue Model for Consumer/Retail Company

($ in Millions Except Per Share and Per Unit Data)

Assumptions:
Company Name: CEC Entertainment, Inc.

Units (for Conversions): 1,000

Months in year 12

Last Historical Year: 2013.12.31

Most Recent Quarter End Date: 2013.12.31

Historical
Revenue Assumptions: Units: FY10 FY11

Pre-Sensitivity Toggle Assumptions:

# of New and Acquired Stores: # Stores 12 4
# of Closed Stores: # Stores (2) (4)
Growth in Sales per Comparable Store: % N/A (1.1%)
Growth in Sales per New Store: % N/A 23.5%

# of Beginning Stores: # Stores 497 507

# of New and Acquired Stores: # Stores 12 4
# of Closed Stores: # Stores (2) (4)
# of Ending Stores: # Stores 507 507
Growth Rate in # of Stores: % 0.0%

Post-Sensitivity Toggle Assumptions:

Average Sales per Comparable Store: $ Thousands $ 1,614 $ 1,596
Growth in Average Sales per Comparable Store: % (1.1%)

Average Sales per New Store: $ Thousands $ 1,462 $ 1,806

Growth in Average Sales per New Store: % 23.5%

# of Comparable Stores: # Stores 473 475

% of Total Ending Stores: % 93.3% 93.7%

Total Sales, Comparable Stores: $M 763 758

Total Sales, New Stores: $M 50 58
Total Store Sales: $M $ 813 $ 816

Food and Beverage % Total Store Sales: % 49.0% 47.7%

 Entertainment and Merchandise % Total Store Sales: % 51.0% 52.3%

Historical
Income Statement: FY10 FY11
Revenue:
Food and Beverage Sales: $ 398.2 $ 388.9
Entertainment and Merchandise Sales: 414.9 427.0
Franchising Fees and Royalties: 4.1 5.3
Total Revenue: 817.2 821.2
Revenue Growth: 0.5%

Cost of Goods Sold (COGS):

Cost of Food and Beverage: 90.6 96.0
Cost of Entertainment and Merchandise: 34.2 32.4
Total COGS: 124.9 128.4

Gross Profit: 692.4 692.8

Gross Margin: 85% 84%

Operating Expenses:
Store Operating Expenses:
Labor Expenses: 222.3 222.6
Rent Expense: 70.4 75.0
Other Store Operating Expenses: 128.1 126.8
Depreciation and Amortization: 79.7 80.8
Total Store Operating Costs: 500.6 505.3
Other Costs and Expenses:
Advertising Expense: 35.3 35.0
General and Administrative Expense: 50.7 51.9
Asset Impairments: 0.9 2.7
Total Operating Expenses: 587.5 594.8

Operating Income (EBIT): 104.9 98.0

Operating (EBIT) Margin: 12.8% 11.9%

Net Interest Expense: (12.1) (8.9)

Pre-Tax Income: 92.8 89.1

Taxes: (38.7) (34.1)

Net Income: $ 54.0 $ 55.0

Effective Tax Rate: 41.7% 38.3%
Retail Company

Sensitivities:

Sensitivity Toggle for # of Stores per Year: 0.0%

Sensitivity Toggle for Sales per Store: 0.0%
Sensitivity Toggle for Expenses: 0.0%
Sensitivity Toggle for CapEx: 0.0%

Blue indicates hard-coded historical numbers.

Black indicates text, formulas, and items calculated elsewhere on the same worksheet.
Blue in a yellow box indicates hard-coded model drivers.
Black in a yellow box indicates model drivers that are formulas.
Green indicates links to other worksheets.

Historical Projected
FY12 FY13 FY14 FY15 FY16 FY17 FY18

13 13 15 16 16 17 17
(6) (5) (5) (6) (6) (7) (7)
(2.7%) 1.3% 1.0% 1.0% 1.0% 1.0% 1.0%
(12.9%) (7.5%) 0.5% 0.5% 0.5% 0.5% 0.5%

507 514 522 532 542 552 562

13 13 15 16 16 17 17
(6) (5) (5) (6) (6) (7) (7)
514 522 532 542 552 562 572
1.4% 1.6% 1.9% 1.9% 1.8% 1.8% 1.8%

$ 1,553 $ 1,573 $ 1,589 $ 1,605 $ 1,621 $ 1,637 $ 1,653

(2.7%) 1.3% 1.0% 1.0% 1.0% 1.0% 1.0%

$ 1,573 $ 1,455 $ 1,462 $ 1,470 $ 1,477 $ 1,484 $ 1,492

(12.9%) (7.5%) 0.5% 0.5% 0.5% 0.5% 0.5%

480 485 496 506 515 524 534

93.4% 92.9% 93.3% 93.3% 93.3% 93.3% 93.3%

745 763 789 812 835 858 882

53 54 52 53 54 56 57
$ 799 $ 817 $ 841 $ 865 $ 889 $ 914 $ 939

46.7% 45.1% 45.0% 44.5% 44.0% 43.5% 43.0%

 53.3% 54.9% 55.0% 55.5% 56.0% 56.5% 57.0%

Historical Projected
FY12 FY13 FY14 FY15 FY16 FY17 FY18

$ 372.9 $ 368.6 $ 378.3 $ 384.8 $ 391.3 $ 397.7 $ 404.0

426.0 448.2 462.4 480.0 498.0 516.5 535.5
4.5 5.0 4.7 4.7 4.7 4.7 4.7
803.5 821.7 845.4 869.5 894.0 918.9 944.2
(2.2%) 2.3% 2.9% 2.9% 2.8% 2.8% 2.8%

93.4 90.4
30.9 29.8
124.3 120.1

679.2 701.6
85% 85%

223.6 229.2
75.3 78.5
126.9 131.0
78.8 78.2
504.5 516.8

35.4 41.2
53.4 57.0
6.8 3.1
600.1 618.1

79.1 83.5
9.8% 10.2%

(9.4) (7.5)

69.7 76.0
(26.1) (28.2)

$ 43.6 $ 47.8
37.4% 37.1%
Why Revenue Models / Revenue Projections?

Very common topic in case studies and interviews in IB, PE, HFs, and anything else really.
Can come up in LBO case studies, 3-statement modeling case studies, normal interview questions, etc.

Often, you have enough data to do a MORE in-depth projection than a simple % growth rate assumptions…
but not enough data to do the same on the expense side.

Theoretically, you could just say 2%, 3%, 4%, etc. growth each year and project revenue like that.

BUT it's better to ground the numbers in reality whenever possible.

Much more credible to say, "We have 50 stores each generating $2 million in annual sales, on average, and
we plan to open 5 new stores per year for the next 5 years - based on that, revenue is expected to be…"

vs. "We're assuming 4% revenue growth per year."

The numbers you get will NOT necessarily be different or "more accurate" - you're still predicting the future!

But at least your numbers will have more real-world support behind them…

What is a Revenue Model?

Can be done many different ways, but boils down to Units Sold * Average Selling Price, or Total Market Size * % Market Share.

The method you use depends on the available data, the work and research you've done, and what the company discloses.
For this consumer/retail example, it makes the most sense to use a variation on Units Sold * Average Selling Price, since
"market share" is almost impossible to establish for a large and fragmented market like restaurants / kids' restaurants.

Plus, the company discloses lots of information on average sales per store, # of new stores built each year, and the # of
new stores it plans to build each year in the future.

Goal is to show what revenue may look like over the next 3, 5, or even 10 years, under a variety of different scenarios and
assumptions… for example, if the company opens only 10 stores instead of 15 stores, what happens?

How Do You Build a Revenue Model?

Depends on the industry… a few examples for some common industries:

Software / Subscription-Based: Use the # of subscribers, average annual subscription, growth rate, and churn rate.

Airlines: Start with Available Seat Miles, calculate segments flown and total # of flights, then make an assumption for the
average % of each flight that's occupied, and the $ per passenger.

Healthcare: Based on the pipeline of drugs/other products… estimate the market size for each drug, its launch date, and the
potential revenue from that drug. And then do the same for entire portfolio.

Retail: Divide it into existing stores vs. new stores and assume an average Sales per Square Foot/Meter, or Sales per Store,
and then make assumptions for new stores opened, stores closed, and how the sales figures change over time.

Step 1: Get the historical data you need - in this case, # of stores opened and closed in prior years, and the average
sales per store type - all taken from the company's filings.

Step 2: Make assumptions for the # of stores opened and closed each year - companies often disclose their plans for
this in their filings, or you can extrapolate from historical data.

Another option is to do your own "channel checks" and ask the company's suppliers, customers, partners, etc… or you
could also look in equity research and see what they do.

Step 3: Assume a growth rate in Sales per Comparable (Existing) Store, and Sales per New Store.

Tough to do with this data - all over the place, so safest just to assume relatively flat growth and make sure we can easily
change this.

Step 4: Calculate Ending Stores each year, with support for sensitivity toggles built in - so we can easily modify assumptions.

Step 5: Now, make similar "post-toggle" calculations for Sales per New Store and Sales per Existing Store.

Step 6: Now, divide the revenue into segments, if applicable… it is very much applicable here! Different margins and a clear
trend in one direction, away from food and beverages and toward entertainment and merchandise!

Step 7: Now, go back and check your numbers, fill in miscellaneous/smaller items, and see how equity research estimates
compare to what you've come up with… and other sources as well.
Go back and tweak as necessary.

What Next?

Try it yourself!

Go pick a company you're interested in, in an industry that's relatively easy to analyze in terms of key drivers, and project
revenue based on what's in their filings.

Doesn't have to be super-complicated - for most companies, it comes down to less than 5 key drivers.

Avoid conglomerates, companies with tons of business lines, or industries that are more complex, such as oil & gas,
commercial banking, etc.

Suggestions: Airlines, technology, consumer/retail, industrials/manufacturing, healthcare is iffy because it can get very
complex to model a company with a huge drug portfolio.
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