The Marcus Corporation: Q1 Fiscal 2017 Form 10-Q Summary
Business context and reporting period
The company operates movie theatres and hotels/resorts. The reported quarter covered 13 weeks ended March 30, 2017, compared with 13 weeks ended March 31, 2016. Fiscal 2017 included the December 2016 acquisition of Wehrenberg Theatres, comprising 14 theatres and 197 screens, and the October 2016 opening of a renovated Country Club Hills theatre.
Financial performance and key metrics
- Revenue: $158.0 million, up 25.9% from $125.4 million.
- Operating income: $18.0 million, up 58.9% from $11.3 million; consolidated operating margin was approximately 11.4%, compared with 9.0%.
- Net earnings attributable to The Marcus Corporation: $9.5 million, or $0.33 diluted EPS for Common Stock, versus $5.5 million, or $0.20 diluted EPS, in the prior-year quarter.
- Income taxes: $5.7 million; the effective tax rate, adjusted for noncontrolling interests, was 37.7% versus 39.3%.
- Operating cash flow: $25.9 million, compared with $10.5 million.
- Capital expenditures: $22.2 million, compared with $16.5 million, including approximately $15.8 million for theatres and $6.2 million for hotels/resorts.
- Cash and liquidity: Cash and cash equivalents were $10.7 million at March 30, 2017, versus $3.2 million at December 29, 2016. Management reported approximately $116 million of unused credit lines.
- Debt: Long-term debt was $276.6 million and capital lease obligations totaled $31.1 million, including current and noncurrent portions. Debt-to-capitalization, excluding capital leases, was 0.42.
- Equity and dividends: Shareholders’ equity attributable to the company was $398.1 million. Quarterly dividends increased 11.1% beginning in March 2017; dividends paid during the quarter were $3.4 million.
Segment results and material changes
- Theatres: Revenue increased 38.4% to $111.4 million and operating income increased 38.7% to $24.7 million. The operating margin was 22.2%, compared with 22.1%. Total attendance increased 35.9%, while comparable-theatre attendance increased 8.6%. Comparable box office receipts rose 9.1% and comparable concession revenue rose 11.5%.
- Theatre results benefited from the Wehrenberg acquisition, the Country Club Hills theatre, a stronger film slate, customer-response to recliner and premium-format investments, pricing initiatives, and higher concession spending per guest.
- Hotels and resorts: Revenue increased 3.6% to $46.5 million, while operating loss widened slightly to $2.7 million from $2.6 million. Company-owned occupancy increased to 68.9% from 65.8%; RevPAR increased 4.4% to $86.80, while ADR decreased 0.3% to $125.92.
- Hotel operating results were affected by preopening expenses for the SafeHouse Chicago restaurant and bar, which opened March 1, 2017, and lower management-company profits. Excluding those items, management stated that the hotel operating margin improved by approximately two percentage points.
- Interest expense increased 21.4% to $2.9 million, primarily because of capital lease obligations assumed in the Wehrenberg acquisition.
- Capital expenditures increased, and the company had substantially higher long-term debt activity than in the prior-year quarter. The company issued $50.0 million of 4.32% senior notes due February 2027 and issued a $15.0 million mortgage note at LIBOR plus 2.75%, while repaying a $24.2 million mortgage note that matured in January 2017.
Outlook, risks, contingencies, and unusual items
- Management maintained its fiscal 2017 capital-expenditure estimate of $100 million to $120 million, excluding significant unidentified acquisitions. Timing and scope may change based on operating performance, economic conditions, available capital, competition, and project opportunities.
- Management stated that second-quarter film results were slightly ahead of the comparable prior-year period as of the filing date. Planned theatre initiatives included additional recliner conversions, premium-format auditoriums, food-and-beverage outlets, and the opening of new locations.
- Management expected hotel RevPAR increases generally to track industry and local-market trends for the remainder of fiscal 2017, while noting that future group-room bookings were slightly behind the prior year at the filing date.
- Growth initiatives included 29 new all-season villas at Grand Geneva Resort and Spa and the expected summer 2017 opening of the Omaha Marriott Downtown at The Capitol District. The company also ceased management of the Sheraton Madison Hotel and sold its 15% ownership interest early in the second quarter.
- The company expected its effective tax rate for the remaining fiscal 2017 quarters to remain near its historical 38% to 40% range, subject to changes in tax law, facts, and unrecognized tax benefits.
- Key risks include film availability and audience appeal, film-release windows, economic conditions, hotel supply and demand, competition, weather, execution of acquisitions and strategic initiatives, capital requirements, renovations, and consumer spending on travel and entertainment.
- The company stated that no material changes occurred in its market-risk exposures or previously disclosed risk factors. Disclosure controls were deemed effective, with no significant changes in internal control over financial reporting.
- The interest-rate swap had a $25.0 million notional amount and expires January 22, 2018. Management did not expect it to have a material earnings effect over the following 11 months.
Investor verification checklist
- Verify the sustainability of theatre attendance and concession growth after acquisition-related comparisons normalize.
- Assess integration, operating performance, and leverage effects from the Wehrenberg acquisition, including assumed capital leases.
- Track execution and returns on the planned $100 million to $120 million of fiscal 2017 capital expenditures.
- Monitor hotel group-booking pace, RevPAR trends, new-property openings, and the effect of SafeHouse preopening costs.
- Review debt covenants, refinancing needs, variable-rate exposure, and available borrowing capacity.
- Evaluate sensitivity to film slate quality, release windows, economic conditions, weather, and consumer discretionary spending.