The Marcus Corporation: Fiscal 2019 Second-Quarter 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels and resorts. The filing covers the 13 weeks ended June 27, 2019, and the first 26 weeks of fiscal 2019, compared with the corresponding periods ended June 28, 2018. Fiscal 2019 is a 52-week year ending December 26, 2019.
On February 1, 2019, the company acquired Movie Tavern, consisting of 22 dine-in theatres and 208 screens in nine states, for approximately $138.9 million, funded with $30.0 million of cash and 2.45 million shares of Common Stock.
Financial performance and key metrics
| Metric | 13 weeks ended June 27, 2019 | 13 weeks ended June 28, 2018 | Change |
|---|---|---|---|
| Total revenues | $232.5 million | $193.3 million | 20.3% increase |
| Operating income | $27.5 million | $29.1 million | 5.6% decrease |
| Net earnings attributable to Marcus | $18.1 million | $18.6 million | 3.0% decrease |
| Diluted EPS, Common Stock | $0.58 | $0.65 | 10.8% decrease |
| Operating margin | 11.8% | 15.1% | Down 3.3 points |
| Metric | 26 weeks ended June 27, 2019 | 26 weeks ended June 28, 2018 | Change |
|---|---|---|---|
| Total revenues | $402.5 million | $361.5 million | 11.4% increase |
| Operating income | $32.4 million | $46.1 million | 29.7% decrease |
| Net earnings attributable to Marcus | $19.9 million | $28.4 million | 29.9% decrease |
| Diluted EPS, Common Stock | $0.64 | $1.00 | 36.0% decrease |
| Operating margin | 8.1% | 12.8% | Down 4.7 points |
- Theatres generated second-quarter revenue of $162.4 million, up 29.4%, and operating income of $28.2 million, up 1.2%. The theatre operating margin declined to 17.4% from 22.2%. First-half theatre revenue increased 16.3% to $277.3 million, while operating income declined 21.3% to $40.8 million.
- Hotels and resorts generated second-quarter revenue of $70.0 million, up 3.3%, but operating income declined 36.9% to $4.0 million. First-half revenue increased 1.8% to $125.0 million, while operating income fell 76.8% to $0.9 million.
- Comparable theatre attendance declined 7.2% in the quarter and 11.8% in the first half, reflecting a weaker film slate. Movie Tavern drove consolidated attendance and revenue growth.
- Comparable hotel RevPAR increased 3.4% in the quarter and 1.2% in the first half, excluding the closed former InterContinental Milwaukee hotel.
- Net cash provided by operating activities was $59.7 million in the first half, compared with $55.4 million in the prior-year period.
- Net cash used in investing activities was $65.8 million, including $29.6 million for the cash portion of the Movie Tavern acquisition and $30.5 million of capital expenditures.
- Cash, cash equivalents and restricted cash totaled $16.5 million at June 27, 2019, including $11.7 million of unrestricted cash and cash equivalents.
Debt, leases and liquidity
- Debt excluding finance and operating lease obligations totaled approximately $249.9 million at quarter-end, consisting of $9.9 million of current maturities and $240.0 million of long-term debt.
- The company reported approximately $106 million of unused credit lines and stated that operating cash flow and available credit were expected to support ongoing liquidity needs through the remainder of fiscal 2019.
- The debt-to-capitalization ratio excluding lease obligations was 0.29 at June 27, 2019, compared with 0.33 at December 27, 2018.
- Operating lease obligations totaled $238.7 million and finance lease obligations totaled $26.0 million at June 27, 2019. The company adopted ASC 842 prospectively at the beginning of fiscal 2019, adding significant right-of-use assets and lease liabilities to the balance sheet without a material earnings effect.
- Interest expense declined to $3.1 million in the quarter and $6.2 million in the first half, primarily because of lower average borrowing levels, partially offset by higher variable interest rates.
- The company paid $9.6 million in dividends during the first half and increased its regular quarterly dividend rate by 6.7% in March 2019.
Material changes versus the prior comparable period
- Revenue growth was primarily acquisition-driven. Movie Tavern increased the company-owned screen count to 1,092 screens in 89 theatres from 884 screens in 67 theatres at the end of the prior-year first half.
- Theatre profitability was pressured by weaker comparable attendance, acquisition and preopening expenses of approximately $2.0 million in the first half, higher fixed costs, and Movie Tavern's lower operating margin due to leased locations and a greater mix of food and beverage sales.
- The former InterContinental Milwaukee hotel was closed for most of the periods for conversion to Saint Kate–The Arts Hotel. Preopening and initial start-up losses reduced hotel operating income by approximately $2.7 million in the quarter and $3.9 million in the first half.
- Corporate operating losses improved because of lower legal and bonus expenses.
- The effective income tax rate declined to 22.0% for the first half from 25.3%, benefiting from excess tax benefits on share-based compensation and other nonrecurring adjustments.
- Shareholders' equity increased to $612.3 million from $490.1 million, substantially reflecting the issuance of shares used in the Movie Tavern acquisition and earnings generated during the period.
Guidance, outlook, management commentary and risks
- Management expected the Movie Tavern acquisition to be accretive to earnings, EPS and cash flow during the first 12 months after closing, with integration progressing on schedule.
- Management maintained full-year fiscal 2019 capital expenditure guidance of $75 million to $95 million, excluding the Movie Tavern cash consideration and significant unidentified acquisitions, but indicated spending was more likely to be at the low end or below the range.
- Management expected the effective tax rate for the remaining fiscal 2019 quarters to be approximately 24% to 26%, subject to excess tax benefits and changes in tax rates.
- Management reported a stronger early third-quarter film slate and expected a strong fourth-quarter slate, but theatre results remain dependent on film availability, audience appeal, studio marketing and release windows.
- Saint Kate received favorable initial guest and community reactions, but management expects a ramp-up period and unfavorable comparisons with the previously branded hotel during portions of fiscal 2019.
- Management expects hotel revenue trends generally to track or exceed industry trends, but cited economic conditions, hotel supply growth, competitive conditions and slowing national RevPAR growth as risks.
- Other risks include weather, consumer spending, interest-rate changes, execution and integration of acquisitions, capital requirements, property renovations, litigation and the availability of attractive development opportunities.
- The company reported no material change in market-risk exposures, no material change in risk factors from its 2018 Form 10-K, and effective disclosure controls as of June 27, 2019.
Most important facts for investors to verify
- Whether Movie Tavern achieves the expected accretion and whether integration, conversion and preopening costs remain within expectations.
- Comparable theatre attendance, pricing, concession spending per person and theatre margins after the weaker first-half film slate.
- The pace and profitability of Saint Kate following its reopening, including the effect of remaining renovation and start-up activity.
- Actual fiscal 2019 capital spending versus the $75 million to $95 million range and the resulting borrowing needs.
- Available revolver capacity, variable-rate debt exposure and the effect of interest-rate changes on future interest expense.
- Hotel RevPAR, occupancy, room rates and competitive room supply in the company's principal markets.
- The final purchase-price allocation for Movie Tavern, which remained preliminary at the filing date.