Earlier this month, AMC Entertainment (AMC 13.81%) announced its plans to reopen virtually all of its 1,000 theaters around the globe in July. This would come four months after the company shut down all of its venues due to COVID-19.
Without movies to show, its revenue for the last two weeks of the first quarter came to a halt. AMC's quarterly generally accepted accounting principles (GAAP) revenue fell by about 22% versus a year ago, from $1.2 billion to $941.5 million. Its loss widened from roughly $130 million to $2.2 billion. With theaters shut for nearly four months, the second quarter's results will feel an even greater impact.
Management's decision to allow people back to patronize its movie theaters should help AMC's third-quarter revenue. However, there are reasons investors should pause before celebrating and jumping in to buy shares.
Social distancing rules
AMC plans to restrict the number of people it will allow into its theaters at one time, among other safety precautions. It is not clear how this will work, but don't expect a packed house.
AMC is already starting with less than full theaters. Of course, people must feel comfortable going to a theater. With coronavirus cases on the rise in certain U.S. states, that is not a sure thing. On top of that, local government authorities may even pause their reopening plans or reimpose stricter guidelines. This could delay theater openings in certain states.
These are short-term events that will surely pass. However, the company faces longer-term challenges.
Streaming will hurt attendance
Even before the coronavirus pandemic, AMC was battling streaming services like Netflix that were seeking to shorten the time frame between a movie's theatrical release and when it was available for home viewing. The popular streaming service added 15.8 million paid subscribers in the first quarter.
There are also others cropping up, including Walt Disney's Disney+, AT&T's HBO Max, and Comcast's Peacock.
With people getting used to watching content at home during the pandemic and increased subscription services creating more original content, AMC took the risky step and chose not to show any of Comcast's (owner of NBCUniversal) films. This comes after the latter made comments suggesting it would seek to simultaneously release movies in theaters and on a premium video on-demand service (viewers pay a fee to watch at home) following the success of its Trolls World Tour release during the pandemic.
This is a risky move considering content drives viewership. Therefore, this places theater operators like AMC at a distinct disadvantage in the battle with moviemakers. Already facing competition from streaming services, this step closed a door to providing content.
On top of AMC's business issues, the company has a lot of debt. The company made an exchange offer with existing bondholders that would reduce the more than $5 billion debt burden by approximately $1 billion. However, the creditors had a lukewarm response.
The high level of debt adds an element of risk when AMC is confronting business challenges.
With growing competition from home services, a decision not to show certain content, and a lot of debt, I wouldn't stand in line to buy these shares.