The Marcus Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 39 weeks ended February 27, 2014, compared with the periods ended February 28, 2013. Marcus operates two primary segments: movie theatres and hotels/resorts. Fiscal 2014 is a 52-week year ending in May 2014.
Financial performance and key metrics
| Metric | Q3 FY2014 | Q3 FY2013 | First 39 weeks FY2014 | First 39 weeks FY2013 |
|---|---|---|---|---|
| Revenue | $109.8 million | $93.7 million | $339.5 million | $312.2 million |
| Operating income | $5.7 million | $(0.2) million | $38.8 million | $29.9 million |
| Net earnings attributable to Marcus | $4.1 million | $(1.4) million | $20.7 million | $14.0 million |
| Diluted EPS, Common Stock | $0.15 | $(0.05) | $0.77 | $0.50 |
| Operating margin | Approximately 5.2% | Approximately (0.2)% | Approximately 11.4% | Approximately 9.6% |
- Quarterly revenue increased 17.3%; first-nine-month revenue increased 8.7%.
- Quarterly operating income improved by $5.9 million; first-nine-month operating income increased $8.9 million, or 29.6%.
- Theatres generated Q3 revenue of $67.8 million and operating income of $14.0 million, with a 20.6% margin. Comparable attendance increased 35.9% in the quarter and 12.9% year to date.
- Hotels and resorts generated Q3 revenue of $41.9 million and an operating loss of $4.4 million, improved from a $5.9 million loss. First-nine-month operating income increased to $13.6 million from $9.1 million.
- Comparable hotel occupancy was 59.2% in Q3 versus 57.9%; ADR was $122.31 versus $121.96; RevPAR was $72.36 versus $70.58.
- Net cash provided by operating activities was $47.2 million, up from $42.3 million. Capital expenditures were $33.1 million, compared with $14.6 million.
- Cash and cash equivalents were $4.3 million at February 27, 2014, versus $10.2 million at May 30, 2013. Restricted cash was $7.8 million.
- Long-term debt was $200.4 million, current maturities were $32.5 million, and capital lease obligations totaled $29.4 million. The debt-to-capitalization ratio was 0.42 versus 0.44 at fiscal year-end.
- Management reported approximately $175 million of unused credit lines at quarter-end.
Material changes versus the prior comparable period
- Performance benefited from a stronger film slate, increased theatre attendance, premium seating and amenity investments, and higher hotel occupancy and room rates.
- The $5 Tuesday theatre promotion increased midweek attendance but reduced average ticket price and, in the quarter, average concession revenue per person.
- Q3 and year-to-date comparisons benefited from the absence of approximately $1.4 million and $3.0 million, respectively, of prior-year Las Vegas litigation settlement costs and approximately $0.6 million and $1.0 million, respectively, of prior-year theatre impairment charges.
- Fiscal 2013 included a $6.0 million gain from extinguishment of Skirvin Hilton debt. In fiscal 2014, a settlement with the joint venture partner reallocated approximately $3.6 million of that prior extinguishment income to Marcus, recorded primarily as a loss attributable to noncontrolling interests. This favorably affected Marcus-attributable earnings by approximately $3.8 million in Q3 and $4.1 million year to date, or approximately $0.08 and $0.09 per share.
- The company issued $50 million of 4.02% senior notes due 2025 and used the proceeds partly to reduce revolving credit borrowings. Interest expense increased 4.9% in Q3 and 10.3% year to date.
- Capital spending increased substantially, primarily for theatre enhancements and hotel renovations. The company repurchased approximately 288,000 shares for $3.7 million year to date, versus approximately 1.8 million shares for $20.4 million in the prior year period.
Guidance, outlook, risks and unusual items
- Management expected fiscal 2014 capital expenditures of approximately $60 million to $70 million, including up to $50 million for theatres.
- Management expected the effective tax rate for the remaining quarter to remain near its historical 40% level, subject to changes in facts, unrecognized tax benefits, and tax rates.
- Management expected to refinance the $20.8 million mortgage on the downtown Chicago hotel, scheduled to mature in June 2014.
- The company planned additional DreamLounger, Ultra Screen DLX, Take Five Lounge, Zaffiro’s Express and Big Screen Bistro investments, plus construction of a replacement theatre in Sun Prairie, Wisconsin.
- Early fourth-quarter box office results were reported as ahead of the prior year, but management noted dependence on film quality, release timing, studio marketing and theatrical distribution windows.
- Hotel results remain exposed to economic conditions, weather, room supply, pricing pressure from online travel agencies, renovation-related rooms out of service and competitive conditions. Rooms at The Pfister were expected to remain out of service during Q4.
- Other risks include the capital intensity of the businesses, higher depreciation and preopening costs, availability of acquisition or development opportunities, consumer spending, and adverse events affecting travel or entertainment demand.
- The company was pursuing The Corners of Brookfield mixed-use development and expected potential construction to begin in summer or early fall 2014, with a revised target opening in September 2016. The project remained subject to financing, leasing and partner milestones.
- No material change to previously disclosed risk factors or market-risk exposures was reported. Management stated that disclosure controls were effective and that no significant changes in internal control occurred.
Most important facts for investors to verify
- Whether strong theatre attendance and premium amenities can offset lower ticket prices and unusually favorable prior-year comparisons.
- The sustainability of hotel ADR and RevPAR gains, including the effects of renovations, weather, online travel agencies and additional room supply.
- Refinancing of the $20.8 million Chicago hotel mortgage and the company’s ability to fund planned $60 million to $70 million of capital expenditures.
- The recurring versus nonrecurring nature of the Skirvin Hilton settlement-related allocation and its effect on Marcus-attributable earnings.
- Future interest expense, debt maturities, revolving-credit availability and compliance with applicable debt agreements.
- The economics, financing commitments and execution risks associated with The Corners of Brookfield project and other planned developments.