Now Showing: Great Performances by Major Theater Operators

Media that cover the entertainment industry tends to focus on films that under-performed at the box office. This year there were some big-budget films with small box-office results, such as "The Lone Ranger" starring Johnny Depp and "After Earth" with Will Smith. But it turns out that these are the exceptions to the rule--in the second quarter, 11 films grossed over $100 million in box-office receipts, compared to six that reached that milestone in the second quarter of  2012.

Today we look at three large theater operators that sounded positively joyful when they made their second-quarter earnings announcements.

Right on the cine-mark

Cinemark (NYSE: CNK  ) operates 504 theaters with 5,794 screens across 40 states, and also in Mexico, Brazil, Argentina, and 10 additional Latin American countries. It announced a nearly 12% quarterly revenue increase to $725.6 million. Other key metrics were just as vibrant: admissions revenue rose 11% as attendance increased 6.7%. The popcorn was really poppin': concessions revenue soared 13.6%. Cinemark's adjusted EBITDA was $178 million, up 13% from 2012.

Tim Warner, Cinemark's CEO, brushed aside the headlines about box-office stinkers to point out that North American box-office receipts reached a record level for the quarter, over $3 billion, up almost 8% from last year's second quarter.

He credited the diversity and breadth of films that came out of Hollywood during the quarter. This points out a key risk factor each of these companies faces: success depends on the quality of the product delivered to them by the film- production companies and how effectively these films are marketed. 

But do they even have an idea of which films will be particularly successful? As we saw with the example of Mr. Depp and Mr. Smith, past success does not guarantee future positive results. In following these companies, it helps to keep up with box-office trends and announcements of upcoming releases of films. In other words, you have to be good at picking movies as well as stocks

Regal-ing us with great results

Regal Entertainment  (NYSE: RGC  ) is the nation's largest operator of multi-screen theaters, with 7,340 screens and 576 theater locations in 42 states at the end of the second quarter. 

This company reported record quarterly results in total revenue, admissions revenue and adjusted EBITDA. Chief executive officer Amy Miles pointed to the healthy box-office environment and the company's ability to integrate recent acquisitions as key drivers of its success.

Total revenue was up 16% compared to last year's second quarter. Adjusted EBITDA soared to $178.2 million from $138.8 million the year before.

Smaller doesn't mean less profitable

Carmike Cinemas (NASDAQ: CKEC  ) has achieved consistently outstanding results in per-patron spending, which has now increased year-over-year for 14 quarters in a row. For the second quarter, the company reported a nearly 25% increase in admissions revenue compared to the second quarter of 2012.

Total revenue was up over 26% during the quarter, reaching $170.5 million. Adjusted EBITDA increased a whopping 40%. Operating costs as a percentage of revenue dropped nearly 2%, sending more revenue dollars to the bottom line.

The smaller of these three theater chains, at the end of the quarter Carmike had 245 theaters with 2,476 screens in 35 states.

Are movie theaters a growth industry?

According to statistics published at BoxOffice.com, over the last 10 years total domestic box-office gross receipts declined year-over-year three times, with the greatest decrease in 2005, at 5.2%. The greatest increase was 10% in 2009, illustrating the axiom that when a recession hits, people go to the movies rather than enjoying more expensive forms of entertainment. For the full 10 years, the average yearly growth rate was around 2%.

Over the same 10-year period, the number of tickets sold declined year-over-year seven times. In 2003, 1.5 billion tickets were sold. In 2012 the number was down to 1.4 billion. The revenue increases for the industry were due to higher ticket prices rather than a higher volume of customers.

What we learned

The box office stats above have resulted in theater operators  pursuing a strategy of upgrading the experience offered so that they draw an increased share of customers. They have also added screens and locations so their total volume potential is higher. Theater owners are upgrading technology to provide moviegoers with a "premium" experience, which translates into their being able to charge significantly more per ticket.

Regal has 123 "premium" screens in IMAX and RPX format. It reported that box- office per-premium screen growth was 19% in the quarter, more than two times the results for its traditional screens. Regal added 58 theaters to its group between the second quarter of 2012 and 2013. In other words, it grew the company by more than 11% in one year.

Carmike has carved a lucrative niche in small- to mid-sized community locations and considers itself "America's Hometown Theatre Chain." Its technology focus includes nearly all of its theaters being equipped for digital technology, and 227 locations equipped for 3-D. It has 19 theaters with its "Big D" large format digital auditoriums and seven IMAX auditoriums. Carmike's stated goal is to add locations through both opening new theaters and making acquisitions to build a chain of 300 locations.

As far as growth, Cinemark's international presence, which accounted for 36% of its attendance in the second quarter, adds extra (Latin) spice to its expansion potential for the future.

Conclusion

Operationally and strategically, each of these theater operators is positioned for continued success. Any one of them would make a solid addition to a portfolio. These companies benefit from America's love affair with the movies, but fortunately they don't have to take the risk of financing film production. If a film bombs, they just change the marquee out front, not the management team, as sometimes unfortunately happens at movie-production studios.  

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