The Marcus Corporation: Fiscal 2018 First-Quarter 10-Q Summary
Business context and reporting period
The Marcus Corporation operates movie theatres and hotels/resorts. The filing covers the 13 weeks ended March 29, 2018, compared with the 13 weeks ended March 30, 2017. Fiscal 2018 is a 52-week year ending December 27, 2018.
Financial performance and key metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenues | $168.2 million | $165.5 million | +1.7% |
| Operating income | $17.0 million | $18.5 million | -7.8% |
| Net earnings attributable to Marcus | $9.8 million | $9.5 million | +3.9% |
| Diluted EPS, Common Stock | $0.35 | $0.33 | +$0.02 |
| Effective tax rate | 25.8% | 37.7% | Lower by 11.9 points |
| Cash flow from operations | $12.0 million | $25.9 million | -$13.9 million |
| Capital expenditures | $16.0 million | $22.2 million | -$6.2 million |
Theatres generated $112.9 million of revenue and $24.0 million of operating income, compared with $112.0 million and $24.7 million, respectively, in the prior-year quarter. Theatre operating margin declined to 21.2% from 22.1%. Total attendance declined 4.8%, while average ticket price increased 3.5% and average concession revenue per person increased 6.4%.
Hotels and resorts generated $55.2 million of revenue and a $2.6 million operating loss, compared with $53.3 million of revenue and a $2.7 million operating loss. Company-owned hotel occupancy was 66.5%, ADR was $127.47, and RevPAR was $84.74, compared with 68.9%, $125.92, and $86.80, respectively, in the prior-year quarter.
At March 29, 2018, cash and cash equivalents were $8.2 million and restricted cash was $5.2 million. Total debt, excluding capital lease obligations, was approximately $302.7 million, consisting of $12.2 million of current maturities and $290.5 million of long-term debt. Capital lease obligations totaled $34.0 million. Management reported approximately $90 million of unused credit lines and a debt-to-capitalization ratio, excluding capital leases, of 0.40.
Cash, cash equivalents and restricted cash declined to $13.4 million at quarter-end from $20.7 million at the beginning of the period. Financing activity included a net $1.0 million increase in revolving-credit borrowings, $4.1 million of dividends paid, and $3.2 million of net cash used in financing activities. The quarterly dividend was increased 20% beginning in March 2018.
Material changes versus the prior comparable period
- Revenue increased, but operating income declined because of lower theatre attendance, higher theatre fixed and concession-related costs, increased corporate expenses, and unfavorable winter weather costs.
- Net earnings increased primarily because the effective tax rate fell following the Tax Cuts and Jobs Act; income tax expense declined to $3.4 million from $5.7 million.
- Interest expense increased 13.2% to $3.3 million because of higher average interest rates and increased short-term rates.
- Corporate operating losses increased because of higher legal, pension, 401(k), incentive compensation, and charitable foundation expenses.
- Cash flow from operations decreased principally because of the timing of payments of accounts payable, taxes, and accrued liabilities.
- The Company adopted the new revenue recognition standard using the modified retrospective method. The adoption reduced retained earnings by $3.5 million, primarily from loyalty-program accounting. Gross presentation of internet ticket fees and cost reimbursements increased reported revenues and expenses without materially affecting operating income, net earnings, or operating cash flow.
- The Company entered into two interest-rate swaps covering $50 million of floating-rate debt, with fixed rates of 2.559% and 2.687%. The swaps qualify as cash-flow hedges.
Guidance, outlook, commentary, risks, and unusual items
Management maintained its fiscal 2018 capital-expenditure estimate of $65 million to $80 million, including potential joint-venture investments but excluding significant unidentified acquisitions.
Management stated that second-quarter theatre box office performance was ahead of the comparable prior-year period through the filing date and expected the second-quarter film slate to outperform the prior year. Planned theatre investments included recliner conversions, premium large-format screens, food-and-beverage outlets, and development of a second BistroPlex.
Management expected the fiscal 2018 effective tax rate to remain approximately 25% to 27%, subject to changes in tax law, state rates, and unrecognized tax benefits. Hotel group bookings for future 2018 periods were slightly ahead of the prior year, and management expected favorable hotel revenue trends to continue.
Key risks include the availability and appeal of motion pictures, film-release windows, economic conditions, hotel supply and competition, weather, renovation-related disruption, capital requirements, interest-rate exposure, execution of strategic initiatives, and the ability to identify and finance acquisitions or development opportunities. Management noted no material change to the risk factors reported in the 2017 Form 10-K.
Unusual or nonrecurring items included the $3.5 million cumulative retained-earnings reduction from revenue-standard adoption, prior-year SafeHouse preopening and startup costs, and the absence of a prior-year $0.4 million property-disposition loss.
Important facts for investors to verify
- Assess whether attendance weakness and dependence on blockbuster films persist after the first quarter.
- Verify the effect of theatre renovations, new locations, recliner conversions, and premium-format investments on attendance, margins, and capital spending.
- Monitor hotel occupancy and RevPAR, particularly in the context of new hotel supply, renovations, and seasonal weakness.
- Reconcile reported revenue growth for the effects of gross internet-ticket-fee presentation, cost reimbursements, and loyalty-program accounting.
- Evaluate liquidity and refinancing exposure given approximately $302.7 million of debt excluding capital leases, variable-rate borrowings, and only $8.2 million of unrestricted cash.
- Compare actual capital expenditures with the maintained $65 million to $80 million full-year estimate.
- Confirm the sustainability of the lower 25% to 27% tax-rate expectation and its contribution to earnings growth.
- Review the remaining share-repurchase authorization, dividends, and the effect of shareholder distributions on leverage and liquidity.