The Marcus Corporation — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks and 39 weeks ended September 27, 2018, compared with the comparable periods ended September 28, 2017. Marcus operates two primary segments: Theatres and Hotels/Resorts. Fiscal 2018 is a 52-week year ending December 27, 2018.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | First 39 weeks 2018 | First 39 weeks 2017 |
|---|---|---|---|---|
| Total revenues | $170.6 million | $162.4 million | $532.1 million | $488.0 million |
| Operating income | $22.4 million | $21.9 million | $68.5 million | $59.5 million |
| Operating margin | 13.1% | 13.5% | 12.9% | 12.2% |
| Net earnings attributable to Marcus | $16.2 million | $11.0 million | $44.7 million | $30.6 million |
| Diluted EPS — Common Stock | $0.56 | $0.39 | $1.56 | $1.08 |
| Net cash from operating activities | Not presented for the quarter | $77.1 million | $50.9 million |
Q3 net margin increased to approximately 9.5% from 6.8%; year-to-date net margin increased to approximately 8.4% from 6.3%. The effective income tax rate was 13.9% for Q3 and 21.5% year to date, compared with 38.6% and 37.8%, respectively, in the prior-year periods, primarily reflecting the Tax Cuts and Jobs Act and additional tax benefits.
- Theatres revenue increased 5.2% in Q3 and 12.4% year to date. Theatre operating income declined 8.9% in Q3 but increased 13.2% year to date.
- Hotels/Resorts revenue increased 4.9% in Q3 and 3.9% year to date. Segment operating income increased 24.5% in Q3 and 22.9% year to date.
- Comparable company-owned hotel occupancy was 84.1% in Q3 versus 82.0%; ADR was $168.58 versus $164.47; and RevPAR was $141.81 versus $134.85.
- Cash capital expenditures were $45.1 million year to date, compared with $87.3 million in the prior-year period.
- Cash, cash equivalents and restricted cash totaled $12.6 million at September 27, 2018, including $7.3 million of unrestricted cash and $5.3 million of restricted cash.
- The company reported approximately $108 million of unused credit lines at quarter-end.
- Long-term debt and current maturities totaled approximately $272.2 million, excluding $30.1 million of capital lease obligations. Debt-to-capitalization, excluding capital leases, was 0.36 versus 0.40 at December 28, 2017.
Material changes versus the prior comparable period
- Revenue increased $8.2 million, or 5.1%, in Q3 and $44.1 million, or 9.0%, year to date.
- Q3 theatre profitability weakened despite higher attendance and revenue because of higher film costs, increased depreciation and several one-time costs. Year-to-date theatre results benefited from a stronger film slate, new theatres, higher average ticket prices and increased concession spending.
- Hotels/Resorts profitability improved because of higher room, food and beverage, management-fee and other revenue, improved cost controls and the absence of the prior-year preopening and startup losses associated with SafeHouse Chicago.
- Operating losses from corporate items increased because of higher legal, pension, 401(k), incentive compensation and charitable foundation expenses.
- Interest expense declined in Q3 because of lower borrowing levels but increased year to date because of higher average interest rates on variable-rate debt.
- Financing activities used $39.1 million of cash year to date, compared with $37.0 million provided in the prior-year period. Revolving-credit borrowings decreased by $18.0 million during 2018.
- The company increased its regular quarterly dividend by 20% beginning in March 2018; year-to-date dividends paid were $12.3 million versus $10.1 million.
- Fiscal 2018 results reflect adoption of the new revenue-recognition standard using the modified retrospective method. The adoption reduced retained earnings by approximately $2.6 million and changes presentation of loyalty-program and internet-ticketing revenue, without a material effect on cash flow or net earnings from internet-ticketing presentation.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2018 capital expenditures of approximately $55 million to $65 million, excluding potential growth opportunities.
- Management indicated that the final-quarter effective tax rate will likely return to approximately 25%–26%, excluding changes in unrecognized tax benefits, tax rates or other one-time benefits.
- Management expects modestly favorable hotel revenue trends and noted that group bookings for the remainder of fiscal 2018 and fiscal 2019 were ahead of the comparable prior-year pace.
- The theatre division remains dependent on the availability, appeal and timing of motion pictures, studio marketing and release windows. Q4 film comparisons may be challenging because of the strong prior-year performance of Star Wars: The Last Jedi and Jumanji: Welcome to the Jungle.
- Other risks include economic conditions, competition, hotel supply, weather, interest-rate movements, property renovations, capital requirements, acquisitions and the effect of violence or terrorism on entertainment and travel demand.
- On November 1, 2018, Marcus agreed to acquire substantially all assets of Movie Tavern’s 22 dine-in theatres for $30 million in cash, subject to adjustments, plus 2.45 million Marcus common shares. Closing was expected in the first quarter of fiscal 2019, subject to customary conditions and regulatory approval. Management expects the acquisition to be accretive to earnings, EPS and cash flow during the first 12 months after closing, but integration and transaction risks remain.
- Marcus plans to adopt the new lease standard in fiscal 2019. Management expects a material increase in reported assets and liabilities but no material effect on results of operations or cash flows.
Important facts for investors to verify
- Confirm the closing status, financing and share dilution associated with the Movie Tavern acquisition.
- Assess whether theatre film costs and one-time expenses continue to pressure quarterly theatre margins.
- Monitor cash generation, planned capital expenditures and available revolving-credit capacity after the acquisition.
- Review exposure to variable-rate debt despite the company’s $50 million of interest-rate swaps.
- Evaluate the sustainability of the unusually low 2018 tax rate and management’s expected 25%–26% fourth-quarter rate.
- Review the full lease commitments and balance-sheet effects upon adoption of the new lease accounting standard.