MARCUS CORP annual report, FY2023

The Marcus Corporation: FY2023 Form 10-K Summary

Business context and reporting period

The Marcus Corporation operates two segments: movie theatres and hotels and resorts. Fiscal 2023 covered the 52 weeks ended December 28, 2023, compared with the 52 weeks ended December 29, 2022. At year-end, the company operated 79 theatres with 993 screens across 17 states, and owned or managed approximately 4,400 hotel and resort rooms. The filing was audited by Deloitte & Touche LLP, which issued unqualified opinions on the financial statements and internal control over financial reporting.

Key financial metrics

Metric	FY2023	FY2022	Change
Total revenue	$729.6 million	$677.4 million	+7.7%
Operating income	$33.9 million	$8.3 million	+$25.6 million
Net earnings attributable to Marcus	$14.8 million	$(12.0) million	Improved by $26.8 million
Diluted EPS	$0.46	$(0.39)	Improved by $0.85
Adjusted EBITDA	$108.7 million	$85.1 million	+27.8%
Net cash from operations	$102.6 million	$93.2 million	+$9.4 million
Cash capital expenditures	$38.8 million	$36.8 million	+5.2%
Cash and cash equivalents	$55.6 million	$21.7 million	+$33.9 million

The consolidated operating margin was approximately 4.7%, compared with approximately 1.2% in FY2022. The company reported $6.9 million of income tax expense and a 31.7% effective tax rate. Depreciation and amortization was $67.3 million, and interest expense declined to $12.7 million from $15.3 million.

Segment performance

Theatres: Revenue increased 12.4% to $458.4 million, operating income increased to $36.2 million from $8.1 million, and the operating margin improved to 7.9% from 2.0%. Comparable attendance increased 5.0%, admission revenue increased 16.2%, average ticket price increased 10.9%, and concession revenue per patron increased 5.2%. The segment operated fewer locations and screens after closing six underperforming theatres during FY2023.
Hotels and resorts: Revenue increased modestly to $270.8 million from $269.3 million, while operating income declined to $17.5 million from $18.7 million, primarily reflecting the December 2022 sale of The Skirvin Hilton and higher labor costs. Excluding The Skirvin Hilton, segment revenue increased 6.9% and operating income increased slightly. Company-owned hotel occupancy was 63.7%, ADR was $186.43, and RevPAR was $118.72.
Adjusted EBITDA: Theatre Adjusted EBITDA increased 44.1% to $86.4 million. Hotels and resorts Adjusted EBITDA declined 3.0% to $37.7 million, while corporate items represented $(15.4) million.

Material changes versus the prior comparable period

Results improved substantially as theatre attendance recovered and the number of films released increased following pandemic-related production disruptions.
The fiscal 2023 film slate included 110 wide-release films versus 85 in FY2022, although releases remained below the 117 shown in FY2019.
The company recorded $1.1 million of impairment charges in FY2023, compared with $1.5 million in FY2022.
Interest expense decreased by $2.6 million, primarily due to lower borrowings, despite higher average interest rates.
Operating cash flow increased, but investing cash use rose to $36.7 million because FY2022 included $31.1 million of net proceeds from the Skirvin Hilton sale.
The quarterly common stock dividend increased 40% during FY2023 from $0.05 to $0.07 per share; total dividends paid were $7.4 million.
The company did not repurchase shares in the open market during FY2023 and had approximately 2.4 million shares remaining under repurchase authorizations at year-end.
The company ceased management of Hyatt Regency Schaumburg after its sale to new ownership and closed several underperforming theatres.

Debt, liquidity and capital resources

Total debt, net of debt issuance costs, was $169.9 million at December 28, 2023, compared with $180.4 million at the prior year-end. Finance lease obligations were $15.3 million.
The company had no borrowings outstanding under its $225.0 million revolving credit facility and had $220.6 million of availability after letters of credit.
Net debt was $129.6 million and net leverage was 1.19 times Adjusted EBITDA, compared with 2.07 times at the prior year-end.
The amended credit agreement requires a consolidated net leverage ratio generally no higher than 3.50:1.00 and an interest coverage ratio of at least 3.00:1.00. Management stated that the company was in compliance with its debt covenants.
Scheduled debt maturities, net of debt issuance costs, are $10.3 million in FY2024, $109.6 million in FY2025 and $49.9 million in FY2027. The $100.1 million of 5.00% convertible senior notes mature September 15, 2025.
Management believes liquidity is sufficient to meet obligations and capital requirements for at least the next 12 months and beyond.

Guidance, outlook and management commentary

Fiscal 2024 cash capital expenditures are expected to increase to approximately $60 million to $75 million, including approximately $15 million to $20 million for theatres and $40 million to $50 million for hotels and resorts.
Management expects the number of wide-release films in FY2024 to decline from FY2023 because of the delayed effects of the 2023 WGA and SAG-AFTRA strikes. It expects film and alternative-content availability may improve in FY2025.
Management expects FY2024 average ticket prices to remain broadly consistent with FY2023, subject to film mix and pricing initiatives.
Hotel demand is expected to benefit from continued group-business recovery, the 2024 Republican National Convention in Milwaukee, and the expanded Baird Center. Group room revenue bookings were approximately 10% ahead of the comparable prior-year pace for FY2024 and approximately 43% ahead for FY2025, excluding the RNC.
The company expects lower ADR growth in FY2024, with leisure demand normalizing near pre-pandemic levels and business and group travel continuing to recover.
Management expects a FY2024 effective tax rate of approximately 28% to 32%, excluding further valuation allowance changes, tax-rate changes or one-time benefits.
Potential future initiatives include additional premium large-format theatre screens, food and beverage expansion, loyalty-program investments, subscription and passport programs, technology upgrades, theatre acquisitions, hotel management contracts and selective hotel or real-estate sales.

Risks, contingencies and unusual items

Theatre performance remains dependent on the quantity, timing and appeal of films, studio marketing, release windows and production disruptions. Streaming, premium video-on-demand and other entertainment alternatives may reduce attendance.
Hotels and resorts are exposed to economic conditions, business and leisure travel demand, room supply, competition and potential weakness in occupancy or room rates.
Labor shortages, wage inflation, benefits costs and collective bargaining agreements may pressure margins. Approximately 6% of employees were covered by collective bargaining agreements at year-end.
The businesses are capital intensive and subject to impairment charges, renovation-related disruption, preopening costs and rising depreciation.
The company has substantial lease commitments and contractual obligations totaling $527.1 million, including $262.0 million of operating lease obligations and $23.2 million of construction commitments.
Convertible-note holders may require cash or share settlement upon conversion or certain fundamental changes, potentially affecting liquidity and dilution. The notes were eligible for conversion during FY2023, although no conversions had occurred.
Cybersecurity threats had not materially affected the company as of the filing date, but the company remains exposed to system failures, breaches, third-party risks, litigation and regulatory costs.
Fiscal 2023 included a $1.1 million impairment charge and a $0.8 million favorable valuation-allowance adjustment, while FY2022 included a $6.3 million hotel-sale gain and a $7.4 million unfavorable tax valuation-allowance adjustment.

Most important facts for investors to verify

Whether the reduced FY2024 film slate limits theatre attendance and operating leverage despite stronger FY2023 recovery.
The timing and funding of the $109.6 million of scheduled FY2025 debt maturities, including the convertible notes.
Whether the planned $60 million to $75 million of FY2024 capital expenditures can be funded while maintaining dividends and covenant compliance.
The sustainability of FY2023 theatre pricing, concession spending and attendance gains.
Hotel group-booking conversion, the actual financial benefit from the Milwaukee RNC, and the effect of slower ADR growth.
Potential dilution or cash requirements related to the 2025 convertible senior notes.
Future impairment risk for theatres and surplus real estate, given the company’s capital intensity and the filing’s impairment-related critical audit matter.