The Marcus Corporation: Q3 2017 Form 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels and resorts. The fiscal third quarter covered 13 weeks ended September 28, 2017; the first three quarters covered 39 weeks ended September 28, 2017. Comparable prior periods ended September 29, 2016. Fiscal 2017 included the Wehrenberg theatre acquisition, new theatre openings, expanded theatre amenities, new Grand Geneva villas and the SafeHouse Chicago restaurant.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | First 39 Weeks 2017 | First 39 Weeks 2016 |
|---|---|---|---|---|
| Total revenue | $153.8 million | $144.7 million | $464.5 million | $405.1 million |
| Operating income | $21.4 million | $24.7 million | $58.2 million | $54.3 million |
| Operating margin | 13.9% | 17.1% | 12.5% | 13.4% |
| Net earnings attributable to Marcus | $11.0 million | $14.4 million | $30.6 million | $29.2 million |
| Diluted EPS, Common Stock | $0.39 | $0.51 | $1.08 | $1.05 |
| Net cash from operating activities | Not separately reported | Not separately reported | $50.9 million | $44.8 million |
- Theatre revenue increased 9.6% in Q3 and 23.5% for the first 39 weeks. Theatre operating income declined 12.5% in Q3 but increased 13.5% year to date; margins were 17.6% and 19.8%, respectively, versus 22.1% and 21.6%.
- Hotels and resorts revenue increased 2.0% in both periods, while operating income declined 9.3% in Q3 and 15.8% year to date. Margins were 15.1% and 7.5%, compared with 17.0% and 9.1%.
- Interest expense increased to $3.4 million in Q3 and $9.5 million year to date, from $2.1 million and $7.0 million, primarily due to assumed capital lease obligations and higher borrowings.
- Capital expenditures were $87.3 million year to date, compared with $58.1 million in the prior-year period. Net cash used in investing activities was $84.6 million.
- Cash and cash equivalents were $6.6 million at September 28, 2017, with restricted cash of $7.9 million. Management reported approximately $64 million of unused credit lines.
- Long-term debt was $317.8 million, current maturities of long-term debt were $11.9 million and capital lease obligations totaled $27.8 million. The debt-to-capitalization ratio excluding capital leases was 0.44, versus 0.42 at December 29, 2016.
- Shareholders’ equity attributable to Marcus was $415.2 million, compared with $390.1 million at December 29, 2016.
Material changes versus the prior comparable period
- Revenue growth reflected the Wehrenberg acquisition, new theatres, higher ticket prices, increased concession spending per patron, new hotel villas and SafeHouse Chicago revenue.
- Q3 profitability weakened because of a weaker movie slate, renovation-related screen closures, higher fixed costs, theatre preopening costs, SafeHouse startup losses and higher interest expense.
- Comparable theatre attendance declined 17.4% in Q3 and 4.4% year to date; comparable box office receipts declined 15.6% and 3.6%, respectively. Higher average ticket prices and concession spending per person partially offset lower attendance.
- Comparable hotel RevPAR declined 0.4% in Q3 but increased 0.5% year to date. Group business productivity was weaker, while non-group business helped offset the decline.
- The company issued $50 million of unsecured senior notes at 4.32%, maturing in fiscal 2027, and issued a $15 million mortgage note at LIBOR plus 2.75%, maturing in fiscal 2020.
- Cash dividends paid increased to $10.1 million from $9.0 million, following an 11.1% increase in the regular quarterly dividend. Approximately 2.9 million shares remained available for repurchase.
Guidance, outlook, commentary and risks
- Management expected fiscal 2017 capital expenditures of approximately $105 million to $115 million, excluding potential additional growth opportunities.
- Management stated that fourth-quarter theatre box office results were ahead of the prior year through the filing date and viewed the upcoming film slate as favorable. October 2017 price increases were expected to benefit future ticket and concession revenue.
- Hotel group room revenue bookings for the remainder of fiscal 2017 and fiscal 2018 were ahead of the prior-year pace; however, SafeHouse Chicago could continue to generate startup losses for the next two quarters.
- The company expected its remaining-quarter effective tax rate to remain near its historical 38% to 40% range, subject to changes in facts, unrecognized tax benefits and tax rates.
- On October 20, 2017, the company sold its 11% interest in The Westin Atlanta Perimeter North and recorded a preliminary pre-tax gain of approximately $4.9 million in the fourth quarter. Future management-fee revenue will decline modestly.
- Principal risks include the availability and appeal of films, movie release windows, economic and competitive conditions, hotel supply and demand, weather, renovation and development costs, acquisition execution, interest rates, consumer spending and events affecting travel or public venues.
- Management reported no material change in market-risk exposures, no material change in risk factors, and effective disclosure controls and procedures.
Investor verification checklist
- Verify the sustainability of theatre attendance and comparable box office trends after the weaker Q3 film slate and renovation closures.
- Assess whether Wehrenberg integration, recliner conversions and new food-and-beverage offerings can restore theatre margins.
- Monitor SafeHouse Chicago startup performance and hotel group bookings, RevPAR, occupancy and ADR.
- Reconcile capital spending, debt increases, interest expense and approximately $64 million of available credit capacity.
- Confirm the final fourth-quarter gain on the Westin Atlanta sale and the effect of lost management fees.
- Review the impact of upcoming revenue-recognition, lease and other accounting standards, particularly loyalty programs, gift cards and customer incentives.