The movie theater industry has matured in the United States, which stems from television series that offer movie-like quality at home and a value-conscious consumer that doesn't want to spend extra money on overpriced entertainment. Despite these trends, Regal Entertainment (NYSE: RGC) continues to grow.
Previews
Regal Entertainment is the largest movie theater company in the United States, with 7,343 screens in 575 theaters across 42 states. The majority of the company's revenue (67.8%) comes from admissions, whereas concessions account for 26.9% of revenue. Regal Entertainment buys its concession items in bulk, which allows Regal Entertainment to negotiate for better prices based on volumes. This, in turn, aids margins.
Regal Entertainment aims to grow its top line and generate free cash flow via new theater construction, technological advances, and consolidation via partnership opportunities. Regal Entertainment then plans to use this cash flow to reward shareholders with dividend payments to pay off debt.
Regal Entertainment made several big moves recently that are the primary reasons for the company's recent top-line growth.
Feature
Regal Entertainment's recent strategic deals:
- Acquired Great Escape Theatres (25 theaters/301 screens)
- Completed acquisition of Hollywood Theaters (43 theaters/513 screens)
- $20 Million cash investment in Open Road Films
The first two acquisitions are expected to add 6.5 million viewers.
The stake in Open Road Films is more of a unique move that could have significant potential. Open Road Films produces smaller budget films. Based on the company's results thus far, these films have the potential to drive more people to theaters. Open Road Films' recent titles consist of Side Effects, A Haunted House, The Host, Hit & Run, End of Watch, and Silent Hill. Open Road Films expects to release six to eight films per year. Whether these titles are released on the silver screen or they go straight to DVD, they offer potential for Regal Entertainment.
Another potential attendance-driver for Regal Entertainment is the installation of more IMAX (IMAX 1.26%) digital projection screens and RPXSM screens.
Parallel storyline
Not long ago, IMAX was a high-cost operation. Despite superior technology, profits were difficult to come by. Today, the more affordable IMAX Digital format has led IMAX to profitability, and now 564 of its 731 screens are IMAX Digital. IMAX saw revenue jump 11% in its last quarter year over year.
While IMAX gives Regal Entertainment more potential, IMAX itself gives investors more potential to increase their net worth. Movie studios want to enhance the moviegoer experience which will potentially lead to IMAX Digital screens in more theaters.
Plot twist
Regal Entertainment delivered a lot of impressive numbers in Fiscal 2013, including a 3.6% increase in attendance and a 0.3% bump in average ticket price. However, comp screen attendance dropped 2.4%. The improved attendance occurred because of the company's recent acquisitions, instead of repeat moviegoers. This likely indicates that fewer people are going to the movies than in the past, which would make Regal Entertainment's potential to grow the top and bottom lines simultaneously very challenging. That being said, shareholders should take heart as Regal Entertainment is willing to close under-performing theaters -- it closed six theaters (52 screens) in Fiscal 2013.
Antagonists
Prior to some analysis on Regal Entertainment, IMAX, Carmike Cinemas (NASDAQ: CKEC), and Cinemark Holdings (CNK -0.67%), first consider two visuals.
Top-line performance comparisons over the past year:
RGC Revenue TTM data by YCharts
Bottom-line:
RGC EPS Diluted TTM data by YCharts
Regal Entertainment's outperformance of its peers on the top line directly relates to acquisitions. Otherwise, this chart indicates slow growth throughout the industry, but at least it's growth.
Regal Entertainment's underperformance on the bottom line also directly relates to acquisitions. The only company offering consistent bottom-line performance is IMAX. However, Carmike Cinemas plans on closing underperforming locations, which should aid its bottom line. For growth, Carmike Cinemas aims to open new theaters in high potential markets. The company will also consider acquisitions for top-line growth. All the while, it plans to pay down debt. Carmike Cinemas' CEO David Passman must be doing something right, because the company finally turned a profit last year and it has been profitable in four of its last five quarters.
Many investors are also excited about Cinemark's potential simply because of its exposure to Latin America, which is growing at a faster rate than the U.S. Cinemark's admission revenue has grown 45.3% over the past five years whereas Regal Entertainment's admission revenue has only grown 6.7% over the same time frame. Currently, 4,000 of Cinemark's 5,240 screens are in the U.S., which means growth potential is still high in Latin America.
Credits
All four companies have potential, but Regal Entertainment doesn't look to be the best option. Carmike Cinemas is effectively cutting costs, which investors like. Cinemark offers international growth potential. IMAX is the most appealing thanks to the potential of more IMAX Digital screens throughout the industry and its consistency on the bottom line.
