The Marcus Corporation — Fiscal 2016 First-Quarter 10-Q Summary
Reporting period: 13 weeks ended August 27, 2015, compared with the 13 weeks ended August 28, 2014. The company operates primarily through its Theatres and Hotels/Resorts segments. Fiscal 2016 is a 52-week year.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $149.2 million | $131.8 million | +13.2% |
| Operating income | $25.9 million | $22.7 million | +14.0% |
| Operating margin | 17.3% | 17.2% | Approximately +10 bps |
| Net earnings attributable to Marcus | $14.7 million | $12.4 million | +17.8% |
| Diluted EPS — Common Stock | $0.53 | $0.45 | +17.8% |
| Net cash provided by operating activities | $17.4 million | $16.6 million | +$0.8 million |
| Capital expenditures | $14.7 million | $13.1 million | +$1.6 million |
Revenue growth was driven by higher theatre admissions and concessions, increased hotel and resort revenue, and other food and beverage activity. Net earnings benefited from operating growth and a lower effective tax rate of approximately 38.5% to 38.6%, compared with 39.1% in the prior-year quarter.
Segment results
- Theatres: Revenue increased 20.1% to $83.3 million and operating income increased 21.6% to $18.1 million. Operating margin rose to 21.7% from 21.4%. Comparable attendance increased 12.8%, average ticket price increased 3.5%, and average concession revenue per person increased 13.1%. Management attributed the results to a stronger film slate, including Jurassic World, Inside Out, and Minions, as well as recliner seating, premium large-format screens, pricing initiatives, the $5 Tuesday promotion, and the customer loyalty program.
- Hotels and Resorts: Revenue increased 5.6% to $65.7 million and operating income increased 4.6% to $11.5 million. Operating margin declined modestly to 17.5% from 17.7%. Average daily rate increased 3.2% to $159.15, but occupancy declined to 82.5% from 86.0%, causing RevPAR to decline 1.1% to $131.26.
Liquidity, cash flow, debt, and balance sheet
- Cash and cash equivalents were $5.7 million at August 27, 2015, compared with $6.7 million at May 28, 2015; restricted cash was $9.0 million.
- The company reported approximately $125 million of unused credit lines and stated that operating cash generation and available credit were expected to support fiscal 2016 liquidity needs.
- Debt included $18.1 million of current maturities, $229.3 million of long-term debt, and capital lease obligations totaling $22.1 million. The reported debt-to-capitalization ratio was 0.41, versus 0.42 at fiscal 2015 year-end.
- Operating cash flow of $17.4 million exceeded capital expenditures of $14.7 million. Investing cash usage totaled $15.5 million, including $1.6 million for an interest in a joint venture.
- Financing cash usage was $2.9 million. The company borrowed $69.5 million and repaid $68.0 million under its revolving credit facility, paid $1.5 million of principal on debt, and paid $2.8 million of dividends.
- Total assets were $805.0 million and total equity was $358.2 million at August 27, 2015.
Material changes, outlook, and unusual items
- Management maintained its fiscal 2016 capital expenditure estimate of $70 million to $90 million, including potential joint venture investments but excluding significant unidentified acquisitions.
- Management reported that second-quarter theatre box office results were higher than the comparable prior-year period through the filing date, while noting that future performance depends heavily on film quality, studio marketing, and release windows.
- Management expected hotel RevPAR increases generally consistent with industry trends for the remaining fiscal year and cited stronger group booking pace. Increased hotel supply, economic conditions, and group occupancy remain risks.
- The hotels division incurred approximately $0.3 million of preopening and startup costs related to the renovated and rebranded AC Hotel Chicago Downtown.
- The company acquired the SafeHouse restaurant in Milwaukee and agreed to sell the Hotel Phillips in Kansas City, with closing expected in mid-October 2015. Assets held for sale were $17.4 million at quarter-end.
- The company closed one six-screen budget-oriented theatre early in the second quarter and continued investments in recliner seating, Take Five Lounge and Zaffiro’s Express outlets, and premium auditoriums.
- The digital cinema licensing arrangement covered 642 screens. The maximum potential annual shortfall payment under the arrangement was approximately $6.2 million, although management did not expect shortfall payments based on historical booking patterns.
- The company reported no material change in market risk exposures or risk factors from the prior Form 10-K. Disclosure controls were deemed effective, and no significant changes in internal control over financial reporting were identified.
Important facts for investors to verify
- Confirm the final closing and accounting treatment for the Hotel Phillips sale and the related $17.4 million of assets held for sale.
- Monitor theatre attendance, concession spending, film rental costs, and the concentration of results in blockbuster releases.
- Assess hotel occupancy, ADR, RevPAR, group booking pace, and the performance ramp of the AC Hotel Chicago Downtown.
- Compare actual fiscal 2016 capital expenditures with the maintained $70 million to $90 million plan and evaluate associated borrowing needs.
- Review revolving-credit availability, debt maturities, interest-rate exposure, and the $25 million interest-rate swap expiring January 22, 2018.
- Evaluate the effect of future acquisitions, joint ventures, property sales, renovations, and potential share repurchases on liquidity and leverage.