Business Context and Reporting Period
The Marcus Corporation operates movie theatres and hotels/resorts. This unaudited Form 10-Q covers the 13 weeks ended September 26, 2019, and the first 39 weeks of fiscal 2019, compared with the periods ended September 27, 2018. Fiscal 2019 is a 52-week year ending December 26, 2019.
On February 1, 2019, Marcus acquired Movie Tavern, adding 22 dine-in theatres and 208 screens in nine states. The transaction was funded with approximately $30.0 million of cash and 2.45 million common shares, for a total purchase price of approximately $139.5 million.
Financial Performance and Position
| Metric | Third quarter 2019 | Third quarter 2018 | First 39 weeks 2019 | First 39 weeks 2018 |
|---|---|---|---|---|
| Total revenue | $211.5 million | $170.6 million | $614.0 million | $532.1 million |
| Operating income | $22.4 million | $22.4 million | $54.8 million | $68.5 million |
| Net earnings attributable to Marcus | $14.3 million | $16.2 million | $34.2 million | $44.7 million |
| Diluted EPS, Common Stock | $0.46 | $0.56 | $1.10 | $1.56 |
| Operating margin | 10.6% | 13.1% | 8.9% | 12.9% |
- Third-quarter revenue increased 24.0%, while first-nine-month revenue increased 15.4%. The acquisition was the principal driver of theatre revenue growth.
- Third-quarter operating income was flat year over year; first-nine-month operating income declined 20.0%. Net earnings attributable to Marcus declined 12.0% in the quarter and 23.4% year to date.
- Theatre revenue was $136.8 million in the quarter and $414.1 million year to date. Theatre operating income was $16.8 million and $57.7 million, respectively, versus $14.5 million and $66.3 million in the comparable periods.
- Hotels/resorts revenue was $74.6 million in the quarter and $199.6 million year to date. Segment operating income declined to $10.6 million and $11.4 million, respectively, primarily because of the Saint Kate renovation, preopening expenses and startup losses.
- Net cash provided by operating activities was $86.0 million for the first 39 weeks, compared with $77.1 million in the prior-year period. Capital expenditures were $50.1 million, and total investing cash outflow was $86.2 million.
- Cash, cash equivalents and restricted cash totaled $12.5 million at September 26, 2019, including $7.5 million of unrestricted cash, compared with $21.9 million of combined cash and restricted cash at December 27, 2018.
- Long-term debt was $235.8 million and current maturities were $10.0 million. Excluding lease obligations, the debt-to-capitalization ratio was 0.28, down from 0.33 at year-end 2018. The company reported approximately $110 million of unused credit lines.
- Operating lease right-of-use assets and liabilities were $229.1 million and $234.0 million, respectively, following adoption of ASC 842. Total finance and operating lease liabilities were approximately $258.0 million.
- The effective income tax rate was 25.3% in the quarter and 23.4% for the first 39 weeks, compared with 13.9% and 21.5%, respectively, in the prior-year periods.
Material Changes Versus the Prior Comparable Period
- Movie Tavern increased total screens by approximately 23% and drove substantial growth in admissions, concessions and attendance. Excluding Movie Tavern, comparable theatre attendance increased 0.2% in the quarter but decreased 8.2% year to date.
- Comparable theatre admission revenue increased 6.3% in the quarter but declined 5.7% year to date; comparable concession revenue increased 9.4% in the quarter but declined 1.7% year to date.
- Theatre operating margin declined to 12.3% in the quarter from 15.2% and to 13.9% year to date from 19.9%. Lower-margin leased Movie Tavern locations, higher film costs and weaker year-to-date attendance contributed to the decline.
- Theatre average ticket price increased 9.2% in the quarter and 5.2% year to date. Average concession revenue per person increased 31.8% and 28.0%, respectively, substantially reflecting Movie Tavern’s dine-in model.
- Hotels/resorts operating margin declined to 14.2% in the quarter from 15.9% and to 5.7% year to date from 7.9%. Management stated that the Saint Kate conversion accounted for the decrease in segment operating income.
- Marcus adopted the new lease standard prospectively on December 28, 2018. The adoption materially increased reported assets and liabilities but did not materially affect earnings.
- Net interest expense declined $0.4 million in the quarter and $1.0 million year to date, primarily because of lower borrowing levels. Income taxes were higher in the quarter because the prior-year period benefited from tax accounting adjustments.
Guidance, Outlook, Commentary and Risks
- Management expects the Movie Tavern acquisition to be accretive to earnings, EPS and cash flow during the first 12 months after closing; performance to date generally met expectations after adjusting for the weaker 2019 film slate.
- Management expects a fiscal 2019 effective tax rate of approximately 24% to 26% for the remaining quarter, excluding potential changes in federal and state tax rates.
- Fiscal 2019 capital expenditures are expected to total approximately $60 million to $70 million, excluding additional growth opportunities. First-nine-month spending was $50.1 million.
- The Saint Kate hotel received favorable initial guest and community reaction, but management expects continued ramp-up costs and approximately $1 million of additional initial startup losses in the fourth quarter compared with the prior-year hotel operation.
- Fourth-quarter theatre results may benefit from favorable film releases, including Frozen II, Jumanji: The Next Level and Star Wars: The Rise of Skywalker; management noted that early fourth-quarter film performance had started slightly below the prior-year period.
- Key risks include film availability and audience appeal, shortened theatrical release windows, economic conditions affecting travel and entertainment spending, competition, weather, hotel supply, execution and integration of Movie Tavern, renovation and startup costs, and access to capital.
- Management stated that no material change occurred in the risk factors reported in the 2018 Form 10-K and that there were no material changes in market-risk exposures.
Important Facts for Investors to Verify
- Verify the pace of Movie Tavern integration, revenue contribution, attendance trends and whether the acquisition achieves the expected accretion.
- Monitor comparable-theatre attendance, ticket pricing, concession spending and the sustainability of theatre margins after acquisition-related expenses subside.
- Assess the Saint Kate’s occupancy, ADR, RevPAR, group-booking pace and progress toward profitability as the property ramps up.
- Reconcile cash generation with planned capital expenditures, acquisition spending, dividends and revolving-credit borrowings.
- Review total debt together with the substantial operating and finance lease obligations and the company’s available credit capacity.
- Consider the effect of higher effective tax rates and the expiration of prior-year tax benefits on fourth-quarter and full-year earnings.
- Confirm the final purchase-price allocation for Movie Tavern, which remained preliminary at the filing date, including goodwill and lease-related amounts.