A lot has changed in recent months since I called the dividend of AMC Entertainment (AMC +0.00%) a relatively safe bet. Not only has that dividend payout since been slashed, but it's looking increasingly likely there will be no future dividends at all. AMC CEO Adam Aron said in a recent interview with CNN Business (a subsidiary of AT&T) that his company "literally doesn't have a penny of revenue coming in the door," as all of its theaters around the world are closed due to coronavirus. AMC theaters in the U.S. will remain closed for at least six weeks starting March 17. And once they do reopen, the lack of fresh releases in the pipeline -- thanks to studios indefinitely delaying so many premieres -- means that there won't be much to draw customers back to the cineplex, meaning the situation is unlikely to improve any time soon.
To put it simply, AMC and its peers like Cinemark Holdings (CNK 1.62%) and Cineworld Group (CNWGY +0.00%) are in a world of hurt, with the latter having been reduced to penny-stock status in the last month. AMC and Cinemark shares are down 74% and 70%, respectively, in the last year. With banks inundated with requests for cash, Aron's call for loans and other government assistance to stay afloat in the short term will be one to keep an eye on.
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The battle against coronavirus ... and streaming
It's worth noting that troubles have been mounting for years. Total ticket sales have been slowly trending downward, offset by higher ticket prices justified by comfier seats, better screens, and more menu options at the concession stand. AMC also took a cue from the now-defunct Movie Pass and launched a monthly subscription service. It was a decent short-term strategy, but as it failed to generate any serious revenue growth and debt still mounted, the coronavirus situation turned a cracking foundation into a disaster.
For example, over at AMC, revenue increased just 0.2% in 2019. Adjusted free cash flow did turn positive again to $60.9 million after running at negative $53.1 million in 2018. That was due to the company cutting expenses and winding down its theater upgrades. Nevertheless, even in a year that produced what is now the highest-grossing box-office feature of all time in Avengers: Endgame, it was disappointing that results weren't better.
Ticket sales have become increasingly dominated by fewer movies -- ahem, Walt Disney and its steady stream of Marvel, Star Wars, and Pixar titles, along with remakes of classic animated films. But even that strategy of making fewer features and focusing on potential blockbusters isn't as surefire as it used to be. Star Wars: The Rise of Skywalker fell way short of expectations, and the performance of Disney's films from its acquisition of Fox has thus far been lackluster at best -- even though the acquired studio released some real gems in 2019.
And producing content has gotten expensive. Even streaming-TV leader Netflix said late in 2019 that a project's budget was running some 30% higher than the year prior. Maybe coronavirus will tame the Hollywood beast, but the trend is increasingly working against the silver screen. People are opting to stay home more often, and pairing that with higher content-creation costs, TV with digital distribution is looking more and more like the favored medium.
Balance sheet matters
Along the way, movie theaters relied heavily on debt to make acquisitions and upgrades that have thus far been unable to turn back the tide. AMC is especially at risk, with a sizable debt burden and only $265 million in cash and equivalents on hand at the end of 2019. Cinemark was in better shape with $488 million in cash, but it too has ample long-term liabilities compared to its size. Extended theater closures aren't going to help.
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Here's how I see this playing out. Theaters like AMC will likely get the liquidity they need to survive. However, just as the so-called "retail apocalypse" brought on by Amazon and other e-commerce companies has been reducing the number of brick-and-mortar stores out there, so too will streaming services reduce the number of theaters over time. Things have been building to this point -- COVID-19 and the ensuing economic downturn will just so happen to be the crisis that brings it to a head.
I'm uncreatively declaring that the "movie theater apocalypse" is here. It won't mean the total destruction of the industry, but in a year or two, I think there will be fewer screens and box-office releases than there were in 2019. Perhaps AMC's own attempt to launch a home-entertainment movie streaming business last year was the clue that something was seriously amiss.
