MARCUS CORP quarterly report, Q2 FY2015

The Marcus Corporation — Fiscal 2015 Second-Quarter Form 10-Q

Reporting period: 13 and 26 weeks ended November 27, 2014, compared with the periods ended November 28, 2013. The company operates movie theatres and hotels and resorts. Fiscal 2015 is a 52-week year. Interim results are unaudited and seasonal.

Financial Performance and Position

Metric	13 weeks ended Nov. 27, 2014	13 weeks ended Nov. 28, 2013	26 weeks ended Nov. 27, 2014	26 weeks ended Nov. 28, 2013
Revenue	$116.1 million	$100.6 million	$247.8 million	$229.6 million
Operating income	$11.6 million	$8.8 million	$34.3 million	$33.2 million
Net earnings attributable to Marcus	$5.2 million	$3.2 million	$17.7 million	$16.7 million
Diluted EPS — Common Stock	$0.19	$0.12	$0.64	$0.62
Operating margin	10.0%	8.8%	13.8%	14.4%

Second-quarter revenue increased 15.4%, operating income increased 31.9%, and net earnings attributable to Marcus increased 61.0%. First-half revenue increased 7.9%, operating income increased 3.5%, and attributable net earnings increased 5.9%.
Second-quarter theatre revenue increased 20.3% to $56.3 million, while theatre operating income increased 84.3% to $9.8 million. Theatre operating margin improved to 17.4% from 11.3%.
Second-quarter hotels and resorts revenue increased 11.0% to $59.6 million, but operating income decreased 18.7% to $5.7 million. Margin declined to 9.6% from 13.1%.
For comparable company-owned hotels, second-quarter occupancy increased to 78.7% from 75.1%; RevPAR increased 4.3% to $114.14, while ADR declined 0.5% to $145.05.
At November 27, 2014, cash and cash equivalents were $9.0 million and restricted cash was $9.1 million. Total current assets were $42.0 million versus $36.7 million at May 29, 2014.
Total debt, including current maturities and capital lease obligations, was approximately $269.2 million; long-term debt was $234.7 million and capital lease obligations totaled $25.9 million. Debt-to-capitalization was 0.42, unchanged from fiscal year-end.
Net cash provided by operating activities was $35.2 million in the first half, compared with $37.8 million in the prior-year period. Capital expenditures were $27.0 million, resulting in negative operating cash flow after capital expenditures of approximately $8.2 million before other investing activity.
The company reported approximately $137 million of unused credit lines at the end of the second quarter and stated that available liquidity and operating cash flows were adequate for the remainder of fiscal 2015.

Material Changes Versus the Prior Comparable Period

Theatre performance improved substantially because of higher attendance, recent theatre investments, pricing strategies, the $5 Tuesday promotion, and the Magical Movie Rewards loyalty program. Comparable theatre attendance increased 25.6% in the quarter and 16.2% in the first half.
Theatre concession revenue increased 29.0% in the quarter, helped by attendance, selected price increases, and expanded food and beverage offerings. Average ticket price declined 6.6% in the quarter because of the $5 Tuesday promotion.
Hotels and resorts generated higher revenue and occupancy but lower operating income because of increased depreciation and disruption from the conversion of the Chicago hotel to an AC Hotel by Marriott. The Chicago renovation also caused rooms to be out of service.
Interest expense declined to $2.4 million from $2.6 million in the quarter and to $4.8 million from $5.0 million in the first half, primarily because of lower average interest rates despite slightly higher borrowings.
Capital expenditures increased to $27.0 million from $21.0 million in the first half, including $15.7 million for theatres and $9.9 million for hotels. The company also invested $1.5 million for a 10% interest in Hotel Zamora and Castile Restaurant.
Financing activity resulted in $2.0 million of net cash used in the first half, compared with $14.2 million used in the prior year. The company issued $67.0 million of long-term debt and made $64.2 million of principal payments.
Quarterly dividends increased to $0.095 per Common share and $0.086 per Class B share, reflecting an 11.8% increase in the regular quarterly dividend initiated in the prior fourth quarter.

Guidance, Outlook, Risks, and Unusual Items

Management revised expected fiscal 2015 capital expenditures to approximately $60 million to $70 million, excluding significant unidentified acquisitions, compared with a prior range of $70 million to $90 million. Theatre spending could represent approximately $40 million to $45 million.
Management expected the effective tax rate for the remainder of fiscal 2015 to remain near the historical 39% to 40% range, subject to changes in facts, unrecognized tax benefits, or tax rates.
Management expected favourable hotel revenue trends to continue generally in line with industry trends, but anticipated continued disruption from the Chicago hotel conversion through the remainder of fiscal 2015. Group booking pace for the remainder of fiscal 2015 was slightly ahead of the prior year as of the filing date.
Early fiscal third-quarter theatre results had not matched the prior year's holiday performance, primarily because no film had matched the performance of Frozen. Film availability and audience appeal remain significant variables.
The company was pursuing the Corners of Brookfield mixed-use development. If milestones are achieved, the company may recover most previously incurred pre-development costs and potentially recognize development profit in fiscal 2015 or 2016. If the project fails to meet milestones, pre-development costs may be written off.
The company disclosed an interest-rate swap with a $25.0 million notional amount, expiring January 22, 2018, and stated that it was an effective cash-flow hedge with no expected material effect on earnings over the next 12 months.
The digital cinema licensing arrangement covers 642 screens. The maximum potential shortfall payment is approximately $6.2 million per year, although management does not expect shortfall payments based on historical booking patterns. The company expects at least $5.0 million of obligation reduction over the next 12 months through virtual print fees.
Key risks include film slate quality and release windows, economic conditions affecting lodging and consumer spending, competition and additional hotel supply, weather, renovation disruption, capital intensity, acquisition and development execution, and availability of financing.
No material change to the risk factors in the fiscal 2014 Form 10-K was reported. Management concluded that disclosure controls were effective and that no significant changes in internal control over financial reporting occurred.

Important Facts for Investors to Verify

Whether theatre attendance and revenue momentum can be sustained after the favourable comparison from newly renovated recliner locations and the $5 Tuesday promotion.
The performance impact, total cost, and completion schedule of the Chicago hotel conversion, including rooms taken out of service.
Actual fiscal 2015 capital expenditures versus the revised $60 million to $70 million range and the resulting effect on borrowings and liquidity.
Film release quality, holiday-period performance, and changes in theatrical release windows.
Hotel ADR and operating-margin recovery, particularly in Midwestern markets and Milwaukee, where additional room supply is increasing.
Milestones and accounting consequences for the Corners of Brookfield development, including the potential write-off of pre-development costs.
Debt maturities, revolving-credit availability, interest-rate exposure, and the company’s ability to fund capital projects and dividends through seasonal periods of lower operating cash flow.