The Marcus Corporation 2016 Q1 Form 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels/resorts. The filing covers the 13 weeks ended March 31, 2016, compared with the 13 weeks ended March 26, 2015. Fiscal 2016 uses a 52-week year ending December 29, 2016; the comparable fiscal 2015C period included the week beginning December 26, 2014.
Financial performance and condition
| Metric | Q1 2016 | Comparable Q1 | Change |
|---|---|---|---|
| Revenue | $125.4 million | $118.7 million | 5.7% increase |
| Operating income | $11.3 million | $7.6 million | 49.1% increase |
| Operating margin | 9.0% | 6.4% | Improved |
| Net earnings attributable to Marcus | $5.5 million | $3.2 million | 68.4% increase |
| Diluted EPS | $0.20 | $0.12 | 66.7% increase |
| Operating cash flow | $10.4 million | $(1.4) million | $11.8 million improvement |
| Capital expenditures | $16.5 million | $20.8 million | Decrease |
- Theatre revenue increased 10.8% to $80.5 million, and theatre operating income increased 17.7% to $17.8 million. Theatre operating margin improved to 22.1% from 20.8%.
- Hotels and resorts revenue declined 2.5% to $44.8 million, primarily because of the Hotel Phillips sale, difficult calendar comparisons, and weak ski operations. The operating loss improved to $2.6 million from $3.5 million.
- Comparable hotel occupancy was 65.8%, ADR was $126.34, and RevPAR was $83.13. RevPAR increased 4.4% year over year.
- Cash and cash equivalents totaled $9.0 million at March 31, 2016, compared with $6.7 million at December 31, 2015. Restricted cash was $15.9 million.
- Total debt, including current maturities and capital lease obligations, was approximately $258.3 million. The debt-to-capitalization ratio was 0.40, compared with 0.38 at December 31, 2015.
- Management reported approximately $130 million of unused credit lines at quarter-end and believes available liquidity and operating cash flows are adequate for fiscal 2016 needs.
- Income tax expense was $3.5 million, with an effective tax rate of 39.3%, compared with 35.3% in the prior comparable period.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the theatre division, reflecting a stronger film slate, 2.3% comparable attendance growth, an 8.0% increase in average ticket price, and an 8.3% increase in average concession revenue per person.
- Theatre results benefited from investments in recliner seating, premium large-format screens, food and beverage offerings, pricing initiatives, and the customer loyalty program.
- Hotel and resort revenue decreased on an absolute basis, but comparable revenue increased 2.2% after adjusting for the Hotel Phillips sale. Cost controls and higher RevPAR substantially reduced the operating loss.
- Cash flow from operations improved to $10.4 million from a $1.4 million use of cash, partly because of favorable timing in receivable collections, accounts payable, and income tax payments.
- Capital expenditures declined by $4.3 million. Approximately $14.4 million was spent on theatres and $2.1 million on hotels and resorts.
- The Company repurchased 257,173 common shares for approximately $4.7 million, leaving approximately 3.0 million shares available under repurchase authorizations. Dividends paid increased to $3.0 million from $2.5 million.
- No impairment charge was recorded in the current quarter, compared with a $316,000 impairment charge in the prior comparable period.
Guidance, outlook, risks, and unusual items
- Management maintained its fiscal 2016 capital expenditure estimate of $75 million to $95 million, excluding significant unidentified acquisitions. Project timing may shift into the following fiscal year.
- Management expects the effective tax rate for the remaining quarters of fiscal 2016 to remain near its historical 39% to 40% range, subject to changes in tax matters and rates.
- Management expects hotel RevPAR increases generally to track industry trends and anticipates continued benefit from the ramp-up of the AC Hotel Chicago Downtown.
- The second-quarter theatre comparison may be challenging because the prior comparable period included major releases such as Jurassic World, Avengers: Age of Ultron, and Furious 7. Management identified Jungle Book, Captain America: Civil War, Finding Dory, and other scheduled releases as potential contributors to current-year results.
- In April 2016, the Company purchased a 16-screen theatre in Country Club Hills, Illinois, using a tax-deferred like-kind exchange related to the Hotel Phillips sale. Renovation and reopening were expected later in 2016.
- Management expects to pursue theatre renovations, new theatre construction, dining outlets, hotel renovations, management contracts, joint ventures, and possible monetization of selected owned hotels.
- Key risks include film availability and audience appeal, release-window changes, economic conditions, hotel supply and competition, weather, property renovation costs, impairment risk, acquisition execution, access to capital, and reduced consumer spending caused by terrorism or other violence.
- The Company has an interest-rate swap covering $25 million of floating-rate debt through January 2018. Its March 31, 2016 fair value was a $143,000 liability.
- The digital cinema licensing arrangement covers 642 screens and could require annual shortfall payments of up to approximately $6.2 million, although management does not expect shortfall payments based on historical booking patterns.
- No material change in market-risk exposures or risk factors was reported, and management concluded that disclosure controls were effective.
Important facts for investors to verify
- Verify the sustainability of theatre attendance, ticket-price, concession-spend, and operating-margin gains after the unusually strong first-quarter film slate.
- Monitor second-quarter film comparisons and the effect of film rental costs on theatre profitability.
- Assess hotel RevPAR trends, room supply, economic conditions, and the effect of the Hotel Phillips sale and ongoing renovations.
- Reconcile the $75 million to $95 million full-year capital expenditure outlook with actual renovation, construction, and acquisition spending.
- Review debt maturities, revolving-credit availability, seasonal borrowing needs, interest-rate exposure, and the 0.40 debt-to-capitalization ratio.
- Evaluate the cash-flow impact of share repurchases, dividends, capital expenditures, and the Country Club Hills theatre acquisition.
- Confirm the effects of pending accounting standards, particularly revenue recognition, leases, deferred-tax presentation, financial assets, and stock compensation.