When the curtain closes on 2021 in a little over a month, there's little doubt that the emergence of retail investors will be one of the years' biggest stories. Even though retail investors have been putting their money to work on Wall Street for more than a century, they've never had such an influence on equities as they have this year.
Though GameStop (GME 2.56%) was initially heralded as the king of all "meme stocks," -- i.e., companies valued more for the social media buzz they create than their actual operating performance -- it's movie theater chain AMC Entertainment (AMC) that's become the undisputed favorite holding of the retail movement.
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Retail investors are betting on a big turnaround in AMC
Retail's unwavering love for AMC boils down to two main factors: the expectation of a short squeeze and the resurgence of the movie theater industry following the worst of the coronavirus pandemic.
First, AMC's enthusiastic retail crowd believes that a large number of short-sellers (investors betting against AMC and wanting a lower share price) will be forced from their positions at a loss. Since the losses associated with short-selling are, in theory, unlimited, a rapidly rising stock coupled with buy-to-cover orders from short-sellers looking to exit can send a company's share price "to the moon" over the very short term.
Secondly, retail investor are counting on a tangible recovery in AMC's operations. In the September-ended quarter, AMC announced that essentially all of its domestic and international theaters had reopened, with some 40 million guests visiting its theaters over the three-month stretch. It was also noted that October admission revenue hit the highest levels seen since the pandemic began in March 2020.
Arguably the biggest boon for the company has been a healthy uptick in concession spending. Chief Financial Officer Sean Goodman noted during the company's conference call with analysts and investors that food and beverage spend per patron rose 39% in Q3 2021 to $7.41, compared to where it stood in the third quarter of 2019, prior to the pandemic. Concession sales offer much juicier margins for the company.
CEO Adam Aron has also been introducing new initiatives to potentially reignite AMC's growth. This includes launching its very own popcorn brand, AMC Theatres Perfectly Popcorn, at mall kiosks throughout the country in 2022, as well as accepting a variety of cryptocurrencies for online payment.
Unfortunately, the collective positivity of retail investors and AMC's CEO and CFO doesn't mask the undeniable reality that AMC is still an absolute mess.
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Its debt situation can't be swept under the rug or ignored
Even though optimists are probably tired of hearing about it, AMC's debt situation needs to be addressed. While the company doesn't have any debt due through 2023, its $5.45 billion in corporate borrowings isn't going to resolve itself without major action taken by Aron and the board.
Through the first nine months of 2021, AMC's interest expense on its corporate debt has ballooned to $328.3 million from $233.7 million in the year-ago period. If we extrapolate this nine-month total out for a full year, AMC is paying approximately 8% interest (close to $438 million) on its $5.45 billion in outstanding debt. That's 8% interest at a time when lending rates have never been lower. That's your first red flag.
The next blaring warning sign comes from the bond market. AMC has $475 million in debt due in May 2027 and $595 million that comes due in November 2026. When issued, these bonds carried a face value of 100. As of this past weekend, the 2027 bond was trading for 75.2% of face value, with the 2026 bond going for 73.6% of face value. Bonds aren't priced this far from par unless there's serious doubt from bondholders about a company's ability to make good on its future debts.
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AMC is burning through its cash at an alarming rate and can't sell any more shares
The complement to AMC's worrisome debt load is that its cash position is precarious.
Since the pandemic began, AMC's outstanding share count has effectively gone up fivefold, with Aron and the board selling as many shares as were authorized to raise capital. As of this past weekend, AMC was very close to its authorized share allotment, which means selling stock is no longer an option to raise cash. To boot, the two times Aron tried to rally support among retail investors for a share issuance, investors shot down the idea before it even went to vote.
The problem for AMC is that, despite $1.81 billion in liquidity, the company is still burning through its cash at an alarming rate. During the third quarter, AMC's liquidity shrank by 10%, with the company's cash position declining by roughly $200 million. Through the first nine months of 2021, AMC has delivered a free cash outflow of $714.5 million.
To add the icing on the cake, AMC is also $376 million in arrears on its rent payments due to the pandemic. The company will continue to catch up on these back payments with its remaining cash. In other words, AMC's liquidity is going to quickly disappear in the coming quarters.
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AMC has completely lost its bargaining power
Another unfavorable reality the retail community needs to face is that AMC's bargaining power is virtually nonexistent.
CEO Aron cheered the fact that his company was able to reach an agreement with AT&T's Warner Bros. studios to feature all releases exclusively in theaters for 45 days in 2022. However, this "win" comes on the heels of movie theaters like AMC consistently garnering film exclusivity for 75 to 90 days prior to the pandemic. Even with the bulk of box office revenue being collected within the first few weeks of release, losing anywhere from 30 to 45 days of theatrical exclusivity is probably going to cost AMC 10% or more of its grossing potential.
To make matters worse, the movie theater industry has been in decline for almost two decades. Not counting the pandemic years (2020/2021), inflation-adjusted domestic box office gross has declined by 22% between 2002 and 2019. AMC has been able to offset some of this decline with higher ticket prices, but it doesn't mask the fact that fewer people are choosing to head to the theater.
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Let's be real: Popcorn and crypto aren't needle-movers
Investors also have to look at AMC's recent growth initiatives with an objective eye. If they do, they're going to realize that selling popcorn at mall kiosks and accepting a handful of popular cryptocurrencies isn't going to move the needle. All it's doing is distracting retail investors from the real challenges that lie ahead for the company.
Although Aron has demonstrated a willingness to take his cues from retail investors, more so than any other CEO of a publicly traded company, adding cryptocurrencies like Dogecoin and Shiba Inu as payment options represents nothing more than (pardon the pun) leadership theater.
The relatively high transaction fees associated with Dogecoin and Shiba Inu makes it unlikely they'll be used by "hodlers" to pay for tickets or gift cards. The other option would be for AMC to eat the fees, which would be less than ideal given its rapidly shrinking liquidity.
It's also highly unlikely that consumers will pay for tickets or gift cards with crypto given the tax implications of using crypto to buy goods or services. In short, these "initiatives" are fluff.
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The SEC's meme stock report delivered quite the blow
Finally, AMC's retail investors were dealt an unfavorable hand when the Securities and Exchange Commission (SEC) released its report, commonly referred to as the "Meme Stock Report," on equity and options activity in GameStop, AMC, and a handful of other companies, in mid-October.
The report, which examined the rapid rise in select equity share prices in late January and early February, found no evidence of naked short-selling. Taken directly from the SEC report (page 30):
The unusually high amount of short selling raised the question of whether some of the short sales were "naked" -- namely, made without arranging to borrow the underlying security. When a naked short sale occurs, the seller fails to deliver the securities to the buyer, and staff did observe spikes in fails to deliver in GME. However, fails to deliver can occur either with short or long sales, making them an imperfect measure of naked short selling. Moreover, based on the staff's review of the available data, GME did not experience persistent fails to deliver at the individual clearing member level. Specifically, staff observed that most clearing members were able to clear any fails relatively quickly, i.e., within a few days, and for the most part did not experience fails across multiple days.
The report also had a logical explanation for GameStop's short interest exceeding 100%:
Some commentators have asked how short interest can get as high as it did in GameStop. Short interest can exceed 100% -- as it did with GME -- when the same shares are lent multiple times by successive purchasers. If someone purchases a stock from a short seller and subsequently lends the stock out again, it will appear as if the stock was sold short twice for the purpose of the short interest calculation.
In AMC's case, its short interest, relative to float, hovered above 40% for much of 2020, and has spent virtually the entirety of 2021 below 20%. Neither the variables for a short squeeze, nor the thesis proposed by retail investors of Wall Street wrongdoing, holds water.
There's no sugarcoating it: AMC is still a mess.
