Widespread inflation is rattling economies and pinching consumers' budgets. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index increased by 8.3% in April from the year before. That was just a little bit lower than the 8.5% year-over-year increase in March, but it is still uncomfortably high.
One of the most significant components of inflation is energy, making folks pay more to put gas in their cars to go to the movies. Rising inflation could be good and bad news for AMC Entertainment Holdings (AMC 2.00%). Let's consider each perspective.
The potentially good news for AMC
AMC is burdened with a significant degree of fixed costs; its expenses are roughly the same regardless of sales. That crippled the business at the pandemic's onset when it was forced to close its theaters for months. Even though revenue fell to zero, AMC was obligated to cover the rent or lease payments on its theaters and interest expenses on its debt.
Now that folks are returning to movie theaters, AMC's revenue is exploding. In its most recent quarter, which ended on March 31, revenue jumped to $785 million, up from $148 million in the same quarter the prior year. Again, the business model with high fixed costs means a large part of its expenses stays relatively flat even though revenue is rising.
How could inflation help in this scenario for AMC? The company could increase prices for tickets and concessions. With prices rising throughout the economy, the theaters' price increases would not be viewed unfavorably.
Indeed, that is the track that AMC has taken. It has increased ticket prices by a whopping 15.8% in its U.S. markets as of March 31, nearly double the rate of inflation. So far, consumers have not balked at the increase and continue visiting theaters. But it can be difficult to read into changes in attendance because of the significant disruption caused by the pandemic.
The potentially bad news for AMC
Rising inflation forces households to pay more for essentials like food and rent. That leaves less money for discretionary entertainment like a night out at the movie theater. It could induce households to replace higher-cost entertainment like watching a film at AMC's theaters with lower-cost similar experiences like streaming a movie at home.
Indeed, that is what consumers have been doing over the last two decades, even before inflation started biting. Between 2002 and 2019, the number of movie tickets sold in the U.S. and Canada dropped from 1.575 billion to 1.24 billion. Movie theaters have been steadily increasing prices with little extra value added to consumers.
The industry's one innovation is power reclining leather seats that have replaced cloth seats. According to consumers' response and the falloff in ticket sales, that has hardly been a reason to compel folks to pay higher prices.
It remains to be seen how inflation ultimately impacts AMC, but I believe it will be an overall positive. The company is burdened with expenses so high that it is reporting massive losses on the bottom line. It needs revenue to climb much higher to have a chance at breaking even. Attendance has been falling for decades, and it appears the only hope is rising prices.