MARCUS CORP quarterly report, Q2 FY2023

The Marcus Corporation: Fiscal 2023 Second-Quarter Form 10-Q Summary

Business context and reporting period

The Marcus Corporation operates movie theatres and hotels and resorts, with corporate activities reported separately. The filing covers the 13 weeks ended June 29, 2023 and the first 26 weeks of fiscal 2023, compared with the comparable periods ended June 30, 2022. Fiscal 2023 was not materially affected by COVID-19 during the first quarter or first half.

Key financial metrics

Metric	Second quarter 2023	Second quarter 2022	First half 2023	First half 2022
Total revenues	$207.0 million	$198.6 million	$359.3 million	$330.8 million
Operating income	$20.8 million	$18.9 million	$11.8 million	$2.1 million
Net earnings (loss)	$13.5 million	$9.0 million	$4.0 million	$(5.9) million
Diluted EPS	$0.35	$0.24	$0.13	$(0.19)
Adjusted EBITDA	$38.7 million	$37.3 million	$48.2 million	$40.7 million
Operating margin	Approximately 10.0%	Approximately 9.5%	Approximately 3.3%	Approximately 0.6%

Second-quarter revenue increased 4.3%, operating income increased 10.1%, and net earnings increased 50.3%. First-half revenue increased 8.6%, while operating income improved by $9.7 million and the Company returned to profitability from a prior-year loss. Interest expense declined to $3.1 million in the quarter and $6.1 million in the first half, compared with $4.1 million and $8.2 million, respectively, in the prior-year periods. Investment income was $0.4 million in the quarter and $0.6 million in the first half, versus investment losses in the comparable 2022 periods.

Theatres generated second-quarter revenue of $136.9 million, up 5.7%, and operating income of $19.8 million, up 20.6%. The theatre operating margin increased to 14.5% from 12.7%.
First-half theatre revenue was $233.2 million, up 11.6%, and operating income was $21.3 million, up 153.6%. The first-half theatre operating margin was 9.1%, versus 4.0%.
Second-quarter hotels and resorts revenue was $70.1 million, up 1.5%, while operating income declined 10.4% to $6.1 million. The operating margin declined to 8.7% from 9.9%.
First-half hotels and resorts revenue was $125.9 million, up 3.5%, while operating income declined 72.1% to $1.1 million. Results were affected by the December 2022 sale of The Skirvin Hilton and higher labor costs.
Comparable hotel occupancy increased to 68.2% from 65.3% in the quarter and to 59.5% from 55.7% in the first half. First-half ADR was $173.68 and RevPAR was $103.33.

Cash flow, debt and liquidity

First-half operating cash flow was $47.3 million, compared with $55.2 million in the prior year. The prior-year period benefited from $22.7 million of income tax refunds and $4.3 million of government grants that did not recur.
Capital expenditures were $15.9 million, including approximately $6.8 million for theatres and $8.9 million for hotels and resorts.
Cash, cash equivalents and restricted cash totaled $48.9 million at June 29, 2023, including unrestricted cash and cash equivalents of $44.6 million.
Total debt, net of debt issuance costs, was $180.2 million, consisting principally of $80.0 million of senior notes and $100.1 million of 5.00% convertible senior notes due 2025. The debt-to-capitalization ratio, excluding lease obligations, was 0.28.
No borrowings were outstanding under the $225.0 million revolving credit facility at quarter-end. Availability was $220.6 million after letters of credit.
The Company paid $3.1 million of dividends during the first half, compared with no dividends in the prior-year period. Approximately 2.5 million shares remained available for repurchase under existing authorizations.

Material changes versus the prior comparable period

Results benefited from more new film releases, higher theatre pricing, increased concession spending per customer and improved labor productivity.
Comparable theatre attendance increased 3.0% in the first half but declined 3.8% in the second quarter. Average ticket price increased 12.0% in the first half and 14.2% in the quarter.
Theatres underperformed reported U.S. industry admission-revenue growth in both periods, which management attributed to film mix, weather and the differing impact of prior-year COVID-19 conditions across markets.
Hotel performance improved on a comparable-property basis, but consolidated hotel operating income declined because The Skirvin Hilton was sold in December 2022 and staffing levels and labor costs increased.
The Company amended its credit agreement in February 2023 to replace LIBOR with SOFR. Beginning in the first quarter, it returned to compliance with previously waived financial covenants, removing prior limits on quarterly dividends and share repurchases.

Guidance, outlook, risks and unusual items

Management expects the fiscal 2023 effective income tax rate to be approximately 24% to 28%, excluding changes in tax rates, valuation allowances or other one-time tax benefits.
Management reported positive early third-quarter film performance and expects more film availability in 2023, but film supply remains below pre-pandemic levels.
The Writers Guild of America strike began in May 2023 and the actors’ strike began in July 2023. A prolonged production shutdown could disrupt film release schedules, particularly in 2024 and 2025.
Fiscal 2023 hotel group room revenue bookings were approximately 8% ahead of the comparable prior-year position, while fiscal 2024 bookings were approximately 7% ahead of the comparable fiscal 2023 position. Management also reported favorable banquet and catering booking trends.
Key risks include film availability and theatrical release windows, labor costs and availability, economic conditions, consumer spending, hotel occupancy and room rates, competition, weather, future pandemics, capital requirements, financing conditions, debt covenant compliance and potential shareholder securities claims.
The filing reported no indicators of long-lived asset or goodwill impairment during the first half. The interest-rate swap terminated on March 1, 2023.
The Company stated that there were no material changes to previously disclosed risk factors or market-risk exposures and that disclosure controls and internal control over financial reporting remained effective.

Important facts for investors to verify

Whether film production strikes reduce the quantity, timing or audience appeal of releases in 2024 and 2025.
Whether theatre attendance can improve while maintaining recent ticket-price and concession-spending gains.
Whether hotel labor costs normalize and whether group demand converts into higher margins rather than primarily higher revenue.
The refinancing or repayment plan for the $100.1 million convertible notes and other debt obligations due or maturing through 2025-2027.
Compliance with the credit agreement’s maximum 0.55 debt-to-capitalization ratio and minimum 2.5 fixed-charge coverage ratio.
The sustainability of liquidity after capital expenditures, dividends, potential share repurchases and seasonal operating fluctuations.
The effect of the Skirvin Hilton sale on year-over-year comparability of hotel revenue and operating income.
The potential dilution or cash obligation associated with the convertible notes, which were eligible for conversion during the reported period.