AMC Entertainment Holdings (NYSE:AMC) boasts about being the world's largest movie theater company. It had about 1,000 theaters across the globe at the end of 2019, with approximately 64% located in the United States. The remaining ones are primarily in Europe, with the United Kingdom the largest international representative.
While international diversification is good, the coronavirus pandemic has shut down movie theaters across the United States and Europe.
If this was the only issue AMC was confronting, that would be one thing. Unfortunately, AMC's troubles won't end once restrictions are lifted and people are free to go to the movies.
The company has been updating theaters with reclining seats, upgraded sight and sound, and other improvements. And these renovations likely won't go unnoticed to the approximately 22.5 million households that belong to the various levels of AMC's loyalty program. While these members represent less than half of its domestic attendance, they account for more than two times the revenue that came from non-members.
What's more, the program allows AMC to collect data on customers while offering discounts on various items. There are free and $15 annual-fee plans that provide rewards to patrons. There is also a tier, launched in 2018, geared toward frequent guests, which allows admission on up to three movies per week for a monthly fee of $19.95 to $23.95.
Although I applaud the efforts, it didn't generate higher attendance nor revenue last year. AMC's top line was flat, at $5.5 billion, and attendance dipped from 358.9 million to 356.4 million.
Management blamed the decline on the movie cycle and less popular film releases. This is a factor, no doubt, but there are longer-term factors at play, too.
The company's two main revenue drivers are admissions (60% of 2019 revenue) and food/beverage (31%). Admission revenue was soft, while food and beverage revenue rose due in part to price increases and menu changes. The upshot is that AMC will need to get people back to the movies when the pandemic ends. However, it is not clear how many moviegoers will return to theaters since they have ordered streaming services and have gotten used to the experience. For instance, Netflix (NASDAQ:NFLX) added 15.8 million subscribers in the latest quarter, more than double management's own expectation. The streaming service had already been battling movie theater operators, including AMC, shortening the time between the theatrical release and when it appears on Netflix.
Most recently, AMC has decided it will no longer carry Comcast's (NASDAQ:CMCSA) Universal movies after that company noted the success of its Trolls World Tour film that was launched on demand since movie theaters were shut down. The film company noted that when theaters reopen, it would like to release movies in both formats. AMC interpreted this comment to mean that it would would shorten the window between the theatrical release and when it available in other formats, such as on demand and streaming. This is the latest salvo in the battle between theaters and production companies. For instance, The Irishman was released in theaters on Nov. 1 and was on Netflix at the end of the month.
AMC is trying to use its size to its advantage. This is a dangerous game and the outcome to AMC may not be what CEO Adam Aron hopes. After all, there are other movie theaters and, if push comes to shove, consumers like watching movies at home. Universal, as a content producer, is in a stronger position. After all, content drives demand.
Adding debt to a weak balance sheet
AMC completed three acquisitions from November 2016 through March 2017. This included the $1.2 billion shelled out for Odeon, the $1.1 billion deal for Carmike Cinemas, and $964 million for Nordic Cinema.
These deals added an international presence and created the world's largest movie chain. It also raised debt levels, which increased from 2015's $1.9 billion (55% debt/total capital) to $4.8 billion (80% debt/total capital) last year.
There were reports that AMC hired restructuring lawyers to help with its debt burden in the wake of the coronavirus pandemic that shut all U.S. theaters. The good news is that the company was able to issue a $500 million debt offering, albeit at an expensive 10.5% rate., which management expects provides sufficient liquidity to last until November.
Management solved the immediate liquidity issue, ensuring AMC's immediate survival, which is obviously paramount. After all, if the company runs out of cash, it's game over. But the solution adds more debt to AMC's already highly leveraged balance, resulting in higher interest payments.
With certain states allowing some businesses to reopen and others -- even those hard-hit by the coronavirus -- at least discussing plans to lift the stay-at-home orders in stages, there is at least hope that AMC's theaters will open sometime in the near future. However, the pandemic has pushed back release dates of a number of movies, so this will hold back attendance.
The question is not merely surviving the current situation, however. The long-term issues ,such as retaining guests and boosting revenue, remain in place. I wouldn't pay the price of admission to get into the shares.