At a time when Sony's
Admissions revenue decreased by 3.6% to $410.4 million, as a 4,000 drop in the number of moviegoers to 62,300 offset an $0.18 rise in average ticket prices to $6.59. Smaller crowds left fewer people to splurge on overpriced snacks, and concession revenues declined 4% to $154.6 million. Unfortunately, the bottom line took an even bigger hit, as operating margins dropped by over 300 basis points to 12.14%. Through the first nine months, despite a slight increase in sales, net income has plunged by more than half to $58 million ($0.39), versus $126.6 million ($0.89) earned at this time last year.
For a company that is experiencing a falloff in business, some cash management prudence might be expected, but Regal is spending more than ever. In June, management authorized a one-time $5 dividend payment. As I mentioned earlier, the $710 million debt-financed payment was four times the size of Regal's entire $185 million net income last year. At the time, the company had only around $300 million in cash to play with.
This was actually the second such special dividend -- a similar payment had been authorized the summer before. The decision -- which was contested in court by some shareholders -- left the company heavily leveraged, forcing both Moody's
Now, Regal is continuing to shower shareholders with money by announcing a 50% boost in the company's quarterly dividend payment. There is nothing wrong with enhancing shareholder value through dividends, provided other obligations can be met. But why raise the company's yield to 6.3% now? The move seems questionable considering that total debt has swelled to more than $2 billion (with a debt/equity ratio in excess of 25), cash flows are down from last year, and the current ratio of 0.75 indicates that short-term assets are not sufficient to cover short-term liabilities.
Management's generosity doesn't stop there, however, as a planned $50 million stock buyback is also in the works. Stock repurchases can be another great way to enhance shareholder value, but like dividends, only under the right circumstances. There is very little benefit if the price paid is too steep. Essentially, Regal's management is saying they believe the stock is currently undervalued, and while it may not be overvalued, it would be hard to call any stock trading at 35 times book value with a PEG ratio above two a bargain.
Regal is the country's dominant movie exhibitor, operating more than 6,000 screens (one in five nationwide). That's 2,500 more than AMC
But with a deteriorating balance sheet, sliding revenues, contracting margins, and slumping earnings lurking behind the curtains, shareholders might be better off running straight for the exits.
Fool contributor Nathan Slaughter is preparing for a horror-movie marathon leading up to Halloween. He owns none of the companies mentioned.