AMC Entertainment (AMC 2.32%) sold off after its recent earnings report in which the company reported a surprise decline in adjusted EBITDA, as well as a scary-looking $100 million loss. However, there are several one-time items and non-cash charges embedded in these numbers, and on closer look, I'd argue that the sell-off -- the stock dropped more than 13% the day after its earnings report -- is mostly due to investor confusion. In fact, the post-earnings sell-off could be a buying opportunity, due to several positives going on underneath the surface.
Importantly, AMC showed strong progress with its new subscription program called AMC Stubs A-List, which lets members see three movies per week for $19.95 per month. Despite being twice the price of MoviePass -- which seems to be hovering near collapse -- the A-List program is becoming even more successful than management thought it would be.
AMC CEO Adam Aron had a lot to say about A-List, as well as the appearance of losses at the company.
Did AMC actually make money?
In the quarter, AMC reported a headline EBITDA decline of about 3.4%, as well as a net loss of $100.4 million. But several one-time items skewed these results.
The company received lower revenues thanks to non-core minority investments that AMC sold off in the past year, a one-time bonus payment due to improved operating performance, and the early subsidization of the new A-List subscription program. All told, these items totaled $14.2 million. Excluding these items, adjusted EBITDA would have increased 6.2% rather than declining 3.4%.
Adjusted for foreign currency losses in its international segment, AMC would have grown adjusted EBITDA by an even greater 7.2%. That's in stark contrast to the headline 3.4% loss that came though the financial statements.
There were other one-time charges, as well. On a net-loss basis, the headline number came in at a scary-looking $100.4 million loss. However, that includes $54.6 million in fair-value adjustments related to the company's new $600 million convertible debt investment from Silver Lake Partners. It's a non-cash charge that will fluctuate with the company's stock price.
There also was an $8 million charge for expenses related to the pending IPO of the company's Odeon European circuit. The company has decided not to go through with the IPO of its European assets at this time -- though it may next year. Still, the company decided to make all the preparations for the IPO should it happen, which cost $8 million in the quarter.
A-List: Short-term pain, long-term gain?
The big news, however, came on AMC's new A-List subscription plan, which was rolled out in July. For $19.95 per month, A-List offers customers access to up to three movies per week at any AMC theater, along with other perks such as popcorn size upgrades, express services, and loyalty points.
Only four months old, A-List has already reached 500,000 members -- well ahead of AMC's own projections. AMC expected the launch of A-List to cause headwinds in the form of marketing costs, as well as the costs from early adopters who took advantage of seeing all three movies per week. Management estimated A-List would run about $15 million in losses in 2018, then break even in 2019 and make money thereafter, as long as members moderated their moviegoing to about 2.5 visits per month.
It looks like A-List already is getting to that visitation level ahead of schedule, and management now sees profits as early as 2019. According to Aron:
... new members are averaging about 3.4 visits in their first full calendar month of membership, but far favorable to our expectations. By month two in the program, they're already down to 2.8 visits, and by month three down to 2.7 visits. If this trend continues as other proprietary data in our possession often suggests that it will, we now believe that they could get down to the modeled 2.5 average visits per month before that full year transpires.
The program is exceeding the company's membership forecasts -- it had thought it would take a year to get to 500,000 members -- and members are moderating their pace of moviegoing faster than expected. Those are both positive signs, and AMC already has a price hike planned for next year in higher-cost geographies such as New York and California.
Moviegoing is alive!
AMC's headline financial numbers look far worse than its actual business execution. The A-List rollout is a long-term positive, even if it means a short-term hit to profits. In addition, AMC continues to spend huge amounts of money on luxury recliner-seating upgrades. Both of these investments come with near-term costs but could pay off big over the next few years. Luxury recliners can lead to more premium pricing, and a successful subscription plan can rejuvenate attendance, boosting high-margin food sales.