Shares of AMC Theaters (NYSE:AMC) have been surging on hopes that the economy is on a path to reopening -- and that appetite for returning to public entertainment venues will be strong once consumers are able to do so. And yet, against this backdrop, AMC reported an expected net loss of $2.18 billion, which includes $1.85 billion in non-cash impairment charges related to the temporary closure of its theaters due to coronavirus. Free cash flow (revenue less cash operating and capital expenses, which measures the rate of cash accumulation or burn added to or subtracted from the balance sheet) was negative $275 million in the first quarter.
Amazingly, AMC took epic steps to ax costs and raise fresh cash. It's optimistic that it will be operating again by July, albeit at partial capacity like the first handful of theaters it was able to reopen in Norway. Though only 25% of seats were available and the slate of movies is limited at the moment, CEO Adam Aron said it sold 83% of those tickets and ironically did the same amount of business as this same time last year.
Thus, talk of bankruptcy is way too premature -- perhaps, as I've said before regarding AMC, even totally unnecessary. Nevertheless, the movie theater apocalypse is here, and the fact that AMC did the same amount of business with severe restrictions as it did last year when pandemic wasn't a concern is telling. The world's largest purveyor of films may need to do some right-sizing of the business during its recovery.
Mountain-like challenges are greeted with austerity almost as large
To be fair, AMC's cash burn could be greater in the second quarter. January and February were still a-okay, and it wasn't until the second half of March that cinemas started shuttering en masse. With revenue essentially going to zero since then and a new slate of films still waiting in the wings -- Christoper Nolan's Tenet will release July 17, followed by Disney's Mulan a week later -- AMC isn't out of the woods yet.
However, forced into a corner, management took extraordinary steps to cut costs. Most employees -- including even corporate level employees -- were furloughed. Non-healthcare benefits like 401(k)s were axed and any planned annual pay increases canceled. Aron said even some costs typically considered fixed were renegotiated with landlords and movie studio partners, essentially deferring payment until later. After all, you can't squeeze blood from a turnip, and getting pay later from a viable business is preferable to going through bankruptcy proceedings (last time I'll use the b-word here, I promise).
In short, while revenue is close to non-existent, costs have been reduced to as close to zero as can be imagined. Some of those costs will start to return when theaters open, but Aron said AMC has learned much and expects to reemerge as a much more efficient operation.
The cash burn is real -- for now
Of course, no guidance was given as to what the bleeding will look like for the second quarter. But there were some hints. AMC's balance sheet at the end of March showed a cash and equivalents balance of $300 million. In April, $500 million of five-year debt was issued to add to the war chest. At the end of April, management said its cash balance was $718 million. That would imply cash burn of some $82 million in April, the first month of Q2. That includes the very early days of the crisis, so maybe the rate of decline will be slower in May and June.
For now, though, AMC has done what it can given the dire situation, but theaters reopening in July -- and how eager households are to frequent them -- will be the primary item to watch. As this story unfolds, I wouldn't be surprised if some theaters need to close permanently as the industry right-sizes itself for the times and looks to consolidate expenses and get itself back to profitable scale. Stay tuned.