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Movie theater operators are looking for a Hollywood ending.
Slow to reopen amid the coronavirus pandemic, theater chains are reeling from low attendance and a lack of new films to lure moviegoers, as studios continue to push back premieres. Theaters are mostly or completely shut down in New York City, Los Angeles, and San Francisco—representing about a quarter of domestic box-office sales and the key markets that studios need to debut their big offerings.
“It’s a perfect storm,” says Rich Greenfield, a media analyst at research firm LightShed Partners, who says that theater operators are burning cash and may need to reorganize debt in bankruptcy if they can’t kick-start sales soon. “Consumer behavior was already shifting toward streaming and smaller screens. It’s the absolute worst possible time, crushing movie theaters.”
Some chains are raising funds as they try to survive the next few months, when a feared new wave of Covid-19 cases could put a further damper on ticket sales for theaters that are already only partly open because of health mandates. Beyond anyone’s reach—or ability to plan—is an end to the pandemic that would return business to normal.
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It’s a perfect storm. Consumer behavior was already shifting toward streaming and smaller screens…crushing movie theaters.
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S&P Global Ratings sees the situation as so dire for movie theater operators that it downgraded the ratings for four of them and said that it believes a default, distressed exchange, or redemption appears “inevitable” in the next six months. S&P said that largest chain,
AMC Entertainment Holdings
(ticker: AMC), which it downgraded to CCC- from CCC+, could run out of liquidity within six months unless it raises capital or attendance levels improve. AMC says it has improved its liquidity.
The National Association of Theatre Owners, a lobbying group, on Oct. 8 renewed its call for Congress to provide aid for cinemas, saying “the stark reality is that many movie theaters will not be able to open again if they don’t receive government help.”
In the U.S. and Canada, box office sales this year totaled $1.9 billion as of Thursday, from 353 movie releases, according to Box Office Mojo. That is a sixth of the $11.3 billion in sales last year from 909 releases, and down from the record $11.9 billion in sales in 2018. For the past few weeks, only about half as many theaters are open compared with last year, Comscore reports.
The most recent weekly survey of consumer sentiment by Morning Consult says that only 23% are comfortable going to a movie theater, and 38% said that it would take more than six months to get to that level of comfort.
That may make movie theater operators a tough sell for investors, even though the shares are badly beaten down from the highs they reached this time last year. B. Riley Securities analyst Eric Wold says the stocks are so volatile—and the state of the industry so unpredictable—that they are “uninvestible” right now.
Streaming services for home theaters from
Netflix
(NFLX);
Walt Disney
(DIS), which offers streaming of its catalog with Disney+; and
Roku
(ROKU) might be a better nearer-term choice for investors looking to get exposure to entertainment stocks.
Netflix, whose shares are up about 64% this year, to $532, has its own releases, with more than a dozen set for October alone. Roku shares are up more than 65%, to $224.
Disney is down 15% this year, to $123, with shares taking a hit with news of 28,000 layoffs. Now, activist investor Dan Loeb’s Third Point is pitching its favored strategy for Disney: Double down on streaming by debuting new films on Disney+ rather than in theaters. Loeb argues that this will keep subscribers on the service longer.
B. Riley’s Wold, however, sees a brighter future for theater operators. If they can stay open into early next year, “they’ll be OK.”
Milwaukee-based
Marcus
(MCS), with 1,100 screens at 91 locations, trades around $7.50, a shadow of its 52-week high of $37.39, and is down 76% this year. Marcus has backtracked and shut down more than a dozen cinemas that it had just reopened. It recently raised cash in a convertible debt deal, which it will use in part to pay down debt. The company has said that it can “continue to sustain our operations well into 2021.”
Cinemark Holdings
(CNK), based in Plano, Texas, with 534 theaters globally, raised $400 million in a convertible note offering in August. The proceeds will provide the cushion to get the company through 2021 smoothly despite the pandemic, CEO Mark Zoradi tells Barron’s.
The company operates under various theater brands, including Rave Cinemas and Century Cinemas. Regardless of shutdowns in parts of California affecting its ability to fully reopen, “financially we’re in a good spot,” Zoradi says. Share are down 74% this year to about $8.60.
Zoradi says that he believes the industry will survive once it gets past this crisis. The 2021 release calendar is shaping up to be a big year, and people are impatient to return to life as they knew it. “People have repeatedly shown us that they want to get out of the house and experience the movies in a big theater environment.”
Shares of Kansas City-based AMC are down 43% this year. With 11,000 screens in 1,000 theaters, AMC has also gone to market to raise cash in a secondary stock offering.
Theaters have slowly reopened since the summer, and AMC last week pledged to stay open even as British rival
Cineworld Group
(CINE.UK) closed its Regal cinemas in the U.S., blaming shutdown orders still in place in New York City and Los Angeles.
Cineworld CEO Mooky Greidinger says in a statement that the company will resume operations “when key markets have more concrete guidance on their reopening status” and major film releases return to big screens.
S&P Global Ratings recently downgraded Cineworld debt to CCC- from CCC+ and assigned a negative outlook. “We anticipate that global cinema attendance will recover much more slowly in the fourth quarter of 2020 than we had previously expected and now expect the impact of Covid-19 on theater attendance to last well into 2021,” S&P Global Ratings said.
AMC’s net debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortization) ratio was about 15 at the end of last year, and is nearly 500 now, according to FactSet. “We have substantially increased our cash reserves and improved our liquidity in other ways to extend our financial runway into 2021,” CEO Adam Aron said in August. But even though AMC is open, sales are weak, S&P notes. “We expect the company’s cash burn will remain elevated and could accelerate further over the remainder of 2020 unless there is a significant improvement in attendance levels relative to the September box office.”
IMAX
(IMAX), whose giant-screen format makes it popular for action movies, recently told B. Riley’s Wold that it expects positive cash flow in the fourth quarter, after a monthly cash-burn rate of $9 million under Covid-19 lockdowns.
IMAX said on Oct. 8 that it will furlough about 150 employees for at least two months beginning on Oct. 26. The move will allow the company to “temporarily retrench, conserve resources, and adjust its operations” in response to the lack of Hollywood releases and theater closures.
The furloughs will not affect operations in China and Japan. IMAX ticket presales in China, where it has half of its 1,500 theaters, are running 10% above last year’s levels for National Holiday week, which was Oct. 1-8. China “has emerged as an engine of stability for IMAX,” said its CEO Rich Gelfond in a statement.
Film studios keep pushing back the premieres of blockbusters, including Wonder Woman 1984, delayed by Warner Bros., and Candyman, which Universal has pushed to next year. MGM again moved its James Bond movie, No Time to Die, to next April. The canary in the coal mine was Tenet, Christopher Nolan’s sci-fi thriller that opened on Labor Day weekend and was supposed to be a gate crusher. Instead it has attracted a tepid $300 million or so in box office sales, most of that outside the U.S.
“Even with no competition and every open theater going full throttle, the numbers were underwhelming,” Greenfield said. “Consumers are just not ready.”
But one promising sign is that the releases are being postponed, not moved to a streaming platform, as Disney did with its live action Mulan last month. Studios make more money premiering big titles in traditional theaters, says David A. Gross, who runs Franchise Entertainment Research.
“The theatrical business is broken right now,” Gross tells Barron’s. “Netflix and Disney+ are having their moment, but when you really tear into the numbers, no one is concluding we should run the theater movies to the small screen.”
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