The Marcus Corporation: Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended November 26, 2015, the second quarter and first 26 weeks of a transition period resulting from the company’s change in fiscal year-end from the last Thursday in May to the last Thursday in December. The company operates in two primary segments: Theatres and Hotels/Resorts.
The transition period will contain 31 weeks from May 29, 2015 through December 31, 2015. Beginning January 1, 2016, the company will report on a calendar-year basis.
Financial performance and key metrics
| Metric | 13 weeks ended November 26, 2015 | 13 weeks ended November 27, 2014 | 26 weeks ended November 26, 2015 | 26 weeks ended November 27, 2014 |
|---|---|---|---|---|
| Total revenues | $115.7 million | $116.1 million | $264.9 million | $247.8 million |
| Operating income | $10.6 million | $11.6 million | $36.4 million | $34.3 million |
| Net earnings attributable to Marcus | $4.9 million | $5.2 million | $19.6 million | $17.7 million |
| Diluted EPS, Common Stock | $0.18 | $0.19 | $0.70 | $0.64 |
| Operating margin | 9.1% | 10.0% | 13.7% | 13.8% |
Second-quarter revenue declined 0.3%, operating income declined 9.2%, and net earnings attributable to Marcus declined 5.3%. For the first 26 weeks, revenue increased 6.9%, operating income increased 6.1%, and net earnings attributable to Marcus increased 11.0%.
- Theatre revenue was $56.5 million in the quarter, essentially flat year over year, and $139.8 million for the first 26 weeks, up 11.2%.
- Theatre operating income was $7.3 million in the quarter, down 25.1%, with the operating margin declining to 13.0% from 17.4%. First-half operating income increased 3.1% to $25.4 million, while the margin declined to 18.2% from 19.6%.
- Comparable theatre attendance declined 3.6% in the quarter because of a weaker film slate and numerous screens being closed for renovations. Attendance increased 5.7% for the first 26 weeks.
- Average ticket price increased 0.6% in the quarter and 2.2% for the first 26 weeks. Average concession revenue per person increased 6.6% and 10.1%, respectively.
- Hotels/Resorts revenue declined 0.9% in the quarter to $59.1 million, primarily because of the Hotel Phillips sale, but increased 2.4% for the first 26 weeks to $124.8 million.
- Hotels/Resorts operating income increased 33.1% in the quarter to $7.6 million and 14.4% for the first 26 weeks to $19.1 million. Operating margins improved to 12.9% and 15.3%, respectively.
- Comparable hotel occupancy was 78.0% in the quarter and 80.6% for the first 26 weeks, down from 78.8% and 82.6%. ADR increased 3.4% and 3.1%, while RevPAR increased 2.4% and 0.5%.
Cash flow, liquidity, debt, and balance sheet
- Net cash provided by operating activities was $46.1 million for the first 26 weeks, compared with $35.2 million in the prior-year period.
- Capital expenditures were $33.8 million, compared with $27.0 million. Theatre projects accounted for approximately $20.8 million and hotel projects approximately $9.9 million.
- Net cash used in investing activities was $31.3 million. This included $13.1 million of net proceeds from the Hotel Phillips sale and a $9.4 million increase in restricted cash.
- Net cash used in financing activities was $15.4 million. Revolving-credit borrowings decreased by $8.5 million on a net basis, and the company paid $5.6 million of dividends.
- Cash and cash equivalents were $6.1 million at November 26, 2015, compared with $6.7 million at May 28, 2015. Restricted cash was $18.2 million.
- Total debt, including current maturities and capital lease obligations, was approximately $258.0 million at November 26, 2015, compared with approximately $270.8 million at May 28, 2015. The debt-to-capitalization ratio improved to 0.40 from 0.42.
- Management reported approximately $136 million of unused credit lines and believes operating cash flow and available borrowing capacity will support liquidity needs for the next 12 months.
- Management estimated total transition-period capital expenditures of approximately $40 million to $45 million, subject to project timing.
Material changes, outlook, risks, and unusual items
- The company sold Hotel Phillips on October 16, 2015, for approximately $13.5 million, generating approximately $13.1 million of net proceeds and a loss on sale of approximately $70,000. The hotel contributed $3.9 million of revenue and $499,000 of operating income during the first 26 weeks before its sale.
- Theatre results were affected by 17 large auditoriums and another 15 screens being out of service for upgrades. Renovation work was substantially completed by late November and early December.
- The company stated that theatre performance during the final five-week transition period benefited significantly from the release of Star Wars: The Force Awakens. Management expected RevPAR increases generally tracking market trends during the remaining transition period and the first quarter of fiscal 2016.
- Management expected improved hotel comparisons from the AC Hotel Chicago Downtown and reported that future group-room bookings were ahead of the comparable prior-year pace.
- The company expects to complete five additional DreamLounger theatre conversions in March and April 2016 and add three Ultra Screen DLX auditoriums during the same period.
- The company purchased the SafeHouse restaurant in Milwaukee during the first 13 weeks and was evaluating opportunities to expand the concept and pursue additional hotel management, investment, and joint-venture opportunities.
- Theatre performance remains dependent on the quantity and appeal of motion pictures, release timing and distribution windows. Hotel results are exposed to economic conditions, room supply, occupancy, pricing, competition, and consumer travel demand.
- Other disclosed risks include severe weather, renovation-related disruption, increased depreciation, impairment losses, acquisition and development execution, and terrorism or violence affecting leisure and travel venues. The filing states that no material changes occurred to the risk factors reported in the prior Form 10-K.
- The company maintained an effective interest-rate swap covering $25 million of floating-rate debt through January 2018. The swap liability was $33,000 at November 26, 2015, and management did not expect a material earnings effect within the following 12 months.
- The filing text indicates no material changes in market-risk exposures and no significant changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the effect of the fiscal-year change on comparisons, including the additional holiday week in the 31-week transition period.
- Assess whether theatre attendance and margins recover after renovated screens return to service and whether the company’s film slate assumptions are realized.
- Monitor hotel occupancy, ADR, RevPAR, group-booking pace, and the effect of added room supply in the company’s markets.
- Verify the timing and final cost of the estimated $40 million to $45 million transition-period capital program.
- Review revolving-credit availability, debt maturities, interest rates, covenant compliance, and the company’s reliance on seasonal operating cash flow.
- Evaluate the impact of the Hotel Phillips disposition and any additional hotel monetizations on revenue, earnings, cash flow, and asset quality.
- Consider the contingent capital-lease booking commitment, which could require payments of up to approximately $6.2 million per year, although management did not expect shortfall payments based on historical booking patterns.