Escape to the multiplex
A banner year at the box office driven by films including “Fast & Furious,” “Star Trek” and “Hannah Montana” is turning out to be a powerful recession vaccine for the nation’s biggest movie theater chains.
Only a few months ago, investors feared consumers’ reluctance to spend money would keep them at home and from going to the movies, depressing business at the country’s 5,800 local theaters.
Like a twist ending to a Hollywood thriller, attendance at theaters this year has jumped 14%, according to tracking firm Hollywood.com Box Office.
Theater operators may have the weak economy and penny-pinching consumers to credit.
“Much like the ‘dollar stores’ in retail, the movie theaters are picking up a certain amount of discretionary entertainment spending, such as money spent on video games, staying in fancy hotels and going on long vacations,” said Chris White, an analyst with Wedbush Morgan Securities.
A strong showing at the multiplex has been one of the few bright spots for the Hollywood studios, which have been buffeted by losses in DVD sales that have long propped up the movie business.
More beneficially, however, the upswing at the box office has lifted theater operators, or “exhibitors” as they call themselves. Despite the tinsel associated with Hollywood, movie theaters have never been a glamour business and still generate income much like they did three-quarters of a century ago: Two-thirds from ticket sales, one-third from selling popcorn, soda and candy.
In recent years, exhibitors have boosted revenue largely by raising ticket prices and not as a result of attracting more moviegoers through turnstiles. Admissions at theaters -- the number of tickets sold -- peaked at 1.6 billion in 2002, the year “Spider-Man” appeared alongside a trifecta of “Lord of the Rings,” “Star Wars” and “Harry Potter” sequels. But otherwise theater admissions have generally remained flat, between 1.2 billion and 1.4 billion admissions annually since 1994.
Regal Entertainment Group and Carmike Cinemas Inc., the nation’s No. 1- and 4-ranked chains, reported revenue increases of 6.8% and 4.8%, respectively. Cinemark Holdings, the third-largest theater owner, reported last week that revenue from admission and concessions sales rose 6.7%.
In some cases, the concession sales are being aided by special promotions.
Carmike, for example, recently launched “Stimulus Tuesdays” throughout its 250 theaters, selling 16-ounce drinks and 46-ounce tubs of popcorn for $1 each, cutting the price to as much as $5 below what it normally charges.
The discount program is helping to attract more patrons to theaters, said Richard Hare, Carmike’s chief financial officer. “We’re getting more box-office sales on Tuesday, a traditionally very slow day of the week,” offsetting the profit lost on the markdown.
After sharp losses and declining profits in 2008, the sudden upswing in box-office revenue and attendance has inspired more confidence on Wall Street, which has regarded movie theaters as a mature industry with diminished growth prospects. Shares of Carmike, Cinemark and Regal have all jumped 20% to 100% this year, although they have yet to rebound to year-ago levels.
“People assumed that box office, like the economy, was going to hell in a handbasket,” said James Marsh, an analyst with Piper Jaffray & Co. “The sentiment has shifted pretty dramatically.” Vicissitudes at the box office aside, exhibitors still face entrenched difficulties, including amassing heavy debt as a result of upgrades and building more theaters than there was demand for. After a spate of theater bankruptcies around the turn of the century, the industry consolidated into a handful of mega players.
Studios and exhibitors are betting on the novelty of upcoming 3-D movies to help draw younger audiences raised on video games and the Internet -- and their parents who have grown accustomed to high-definition big screen TVs.
“Long term, one of the ongoing challenges for the exhibition industry is competition from other forms of entertainment, whether it’s video games, iPods or home theater systems,” said Drew Crum, an analyst with Stifel Nicolaus.
Though some 3-D movies, such as “Monsters vs. Aliens” from DreamWorks Animation SKG Inc., have performed well, it is far from certain whether the razzle-dazzle technology will be enough to stem long-term attendance stagnation.
It also will be some time before exhibitors can benefit from the higher ticket prices charged for 3-D movies. The rollout of digital screens has been delayed by the credit crunch that has hampered the ability of theater owners and studios to finance the conversion. So far, only 6% of the screens in North America are equipped with 3-D systems, well below the initial projections of more than 13% touted to be in place by spring.
Of course, audiences are notoriously fickle, and no one knows how long the resurgence at the box office will last. On paper, at least, movie theaters are poised for a strong spring and summer, fueled by a string of sequels including “Terminator Salvation,” “Transformers: Revenge of the Fallen” and “Harry Potter and the Half-Blood Prince.”
“We expect consumers will continue to view cinema as one of the most convenient and affordable forms of entertainment,” Cinemark Chief Executive Alan Stock said last week in a call with analysts.
Riding this year’s box-office wave, the Plano, Texas-based operator of 420 theaters reported that first-quarter net income jumped to $17.6 million, or 16 cents a share, compared with $5.3 million, or 5 cents, a year earlier. That was 3 cents better than what analysts polled by Thomson Reuters expected.
The higher revenue from ticket and concession sales for other major operators, however, have not flowed directly to the bottom line because of various one-time charges.
Carmike, based in Columbus, Ga., reported a loss of almost $4 million for the quarter, mostly from charges of $5.5 million relating to the severance of former CEO Michael W. Patrick. Excluding that charge, Carmike earned about $1.5 million, compared with a $4.3-million net loss during the same period in 2008.
Patrick’s sudden exit from Carmike in January -- announced without explanation -- preceded other executive shuffles among top theater operators this year.
In February, AMC Entertainment Inc., the country’s second-largest operator with 309 theaters, tapped Gerardo Lopez, a former Starbucks Corp. executive, to become chief executive. He replaced Peter Brown, who retired after the privately held company sustained heavy losses and dropped plans for an initial public stock offering in October. The chain is controlled by J.P. Morgan and Apollo Management.
And earlier this month Regal named Amy Miles, the chief financial officer, to succeed Mike Campbell as chief executive. Campbell remains executive chairman. Regal said the change was part of a succession plan, although analysts were surprised by the announcement.
Regal’s net income, which dropped 22% to $21.3 million in the quarter, was affected by higher operating costs for its theaters, interest expense and a shift in the reporting period that excluded results from the New Year’s holiday weekend.
“Despite the difficult economic climate, industry box office has not only remained resilient, but actually thrived during the first part of 2009,” Campbell told analysts.