CPXGF - Cineplex April Results Promising As Summer Box Office Season Begins

2023-05-10 08:44:30 ET

Summary

• Cineplex, Canada's largest movie theater chain, reported record combined box office and concession revenue for the month of April 2023.
• Investors may be concerned about the company's ability to deal with debt incurred during the pandemic.
• The company's 2020 dividend cut and lower costs, along with more movie releases, including from big tech companies, may help it going forward despite higher debt.

Cineplex ( CGX:CA ), ( OTCPK:CPXGF ) is the largest movie theater chain in Canada, with a 75 percent market share.

Cineplex's Other Businesses

I have written extensively about Cineplex’s various businesses in prior articles, including its Rec Room location based entertainment venues which compete with Dave & Buster’s ( PLAY ).

The company reported Q4 2022 results that set company records for two business segments for a fourth quarter. Specifically, the company reported Q4 2022 adjusted store level EBITDAaL for its Location Based Entertainment segment of $9.3 million. The company's Player One Amusement business also reported Q4 2022 adjusted EBITDAaL of $5.4 million.

Cineplex also mentioned in a recent investor presentation that its media segment, which includes digital signage, and in-theater advertising saw revenue decline from $115 million in pre-pandemic full-year 2019 to $72 million in 2022.

As a company like Apple ( AAPL ) cautioned that digital advertising faces macroeconomic headwinds in its most recent conference call, Cineplex’s media business may be challenged in the short term depending on economic conditions in Canada.

As my last article discussed Cineplex’s location based entertainment business, this one will focus on its primary business: movie theaters. Film entertainment and content accounted for 69.5 percent of revenue for the fiscal year 2022.

April Combined Box Office and Concession Revenue Records

Cineplex stock closed at $8.81 Canadian on the Toronto Stock Exchange on Tuesday, May 9, 2023, which is 16 percent higher than the last time I wrote about Cineplex in April 2023. (All values in this article are in Canadian dollars unless indicated otherwise). Since then, on May 2, 2023, the company reported that its April 2023 combined theater food service and box office numbers were an all-time record for that month.

Specifically, Cineplex reported:

“April box office of $61 million, which amounts to 96 per cent of box office revenues generated during the same time in 2019.”

The company noted that Avengers: End Game , the second highest domestic grossing movie of all time was released in April 2019, creating a difficult comparison.

The company reported that the combined revenue exceeded $105 million, which means that theater food service accounted for at least $44 million of the combined revenue in April 2023.

Pre-Pandemic 2019 vs. Post Pandemic 2023

The World Health Organization declared an end to the global health emergency on May 5, 2023.

Cineplex, like many companies adversely affected by the COVID-19 pandemic has regularly offered comparable numbers to its last pre-pandemic full year, 2019.

Cineplex is scheduled to report first quarter earnings this Friday, May 12, 2023, yet the stock price is trading at about a quarter of pre-pandemic levels. This is a good time to consider what has changed at the company since the pandemic, and where the company may be heading given its record April 2023 combined box office and concession revenue.

More Wide-Releases To Be Released In Theaters This Summer Compared to Last Year

What is especially notable about the record is that in April 2023, according to Box Office Mojo , there were only 126 movies released compared to 220 in 2019. In other words, Cineplex was able to have a record April with 43 percent fewer movies released in theaters compared to the pre-pandemic benchmark.

As has been widely reported, COVID-19 related shut-downs delayed the production and release of numerous films. How does the summer box office look in terms of quantity of releases?

The summer schedule kicked off last weekend with Guardians of the Galaxy Vol. 3 . According to Deadline :

"Last summer, there were 22 wide releases that played in north of 2,000 theaters. This summer looks like 33, still down from summer 2019’s 42 titles."

That represents a 50 percent increase in movies to be released in over 2000 theaters this summer compared to last summer.

The Writers Guild of America writers are on strike at the time of writing this article. According to Deadline , this strike will may push movie release dates scheduled for 2024 if the strike lasts longer than four months. The LA Times reported the longest WGA strike in history lasted about the same length of time: 22 weeks in 1988. Hopefully for writers and all other production crew, the current strike is resolved much sooner than that.

Big tech and legacy media companies that provide streaming services such as Apple, Amazon ( AMZN ) and HBO owner, Warner Bros. Discovery ( WBD ), have reportedly committed billions of dollars to theatrical releases. As these companies control popular streaming content, I would expect that their focus on theatrical releases is a hint that content investors should focus on that in the long term, too.

If Cineplex can continue its April all-time box office and concession record into many months or years forward, that would bode well for it returning to and exceeding pre-pandemic levels for its long-term box office and concession revenues.

I will now look at what has been happening with the company that may impact earnings, including outstanding share count, debt, and other expenses.

Outstanding Shares Constant Since 2019

As I have previously written, Cineplex’s share count has not changed since 2019. At the end of 2019, the company reported 63.3 million shares outstanding.

In its most recently reported year ending December 31, 2022, the company had 63.4 million shares outstanding.

So unlike some peers south of the border, Cineplex has not had a meaningful change in share count since the pre-pandemic era.

Long-Term Debt Has Increased

At the end of 2019, the company reported $625 million in long-term debt. In contrast at the end of 2022, the company reported $825 million in long term debt.

That is an increase of long term debt of $200 million since prior to the pandemic.

The question on many investors’ minds is whether the company will be able to meaningfully reduce its debt.

Dividends vs. Interest

Prior to a COVID-related failed takeover bid by Cineworld, the company announced that it would stop paying dividends following its February 2020 dividend payments.

For the 2019 year the company paid approximately $112.7 million in dividends, or $1.78 per share.

That means that the company, if we are to compare it to 2019 is saving $112.4 million per year in dividends.

In 2019, the full year interest expense of the company was reported at $84.7 million (including non-cash interest expense). This compares to total cash interest paid of $127.8 million in the most recent year ended of 2022.

The company is currently paying approximately $43.1 million more per year in interest compared to the pre-pandemic period but is saving $112.7 million in dividend payments. If Cineplex is able to return to pre-pandemic profitability or better and start paying down some of its debt, I presume this would alleviate concerns of some of the company's investors.

Box Office and Concession Margins

Movie theaters do not keep 100 percent of the revenue at the box office. In 2019, Cineplex’s film costs were 52.4 percent of box office revenues. This compares to a slight decline of 51.8 percent at the end of 2022.

In Q4 2022, concession costs were 22.8 percent of concession revenue, and concession margin per patron was $6.89 per patron.

In comparison, in Q4 2019, concession costs were 22.0 percent of concession revenue, and concession margin per patron was $5.31.

As can be seen above, concession margin per patron increased $1.58 since prior to the pandemic.

Cineplex’s Other Costs

Cineplex has a line item it calls “other costs”. This includes theater operating costs, other operating expenses, and general and administrative expenses.

As mentioned, the company is about to report first quarter earnings. Comparisons of any metric to the same quarter in 2022 would be meaningless as movie theaters across Canada were fully or partially locked down during that quarter due to the Omicron COVID variant surge.

Accordingly, I am going to compare the costs of the most recently reported quarter, Q4 2022 to the same quarter in 2019. In 2022, other costs for the quarter were $187.6 million. In 2019, other costs for the 4th quarter from continuing operations were $214.9 million.

That means other costs declined 13 percent since 2019. All three categories of other costs declined, most notably general and administrative expenses were cut by 45 percent from $29 million in Q4 2019 to $16 million in Q4 2022. The cut to general and administrative costs is most meaningful as theater occupancy costs may increase as Cineplex revenues increase, depending on the extent that Cineplex pays a portion of revenues or gross profits to its landlords.

Conclusion

Since re-openings last year, Cineplex has been providing investors with information comparing its recent results with pre-pandemic results. The company’s current and historical financial statements, and media reports, show the following:

1. Share count has not been meaningfully diluted since prior to the pandemic.
2. Long term debt has increased about $200 million.
3. Interest expense has increased about $43 million.
4. Dividends paid have declined $112 million.
5. General and administrative expenses declined 45 percent in the most recent quarter compared to the same pre-pandemic quarter.
6. Wide movie releases are planned to increase by 50 percent this summer compared to last summer.

The above numbers suggest that dividend cancellation, cost reduction, and increased movie releases could help Cineplex be in a position to reduce its pandemic-related debt.

As I mentioned above, share count has not been significantly diluted since prior to the pandemic. Cineplex earned $0.58 EPS from continuing operations in 2019 and $1.35 from continuing operations in 2018. This works out to an average of $0.97 over those two years.

If the company could achieve average pre-pandemic results of $0.97, at an average S&P 500 multiple of 15, this stock could reach $14.48, a 65 percent increase over current levels.

That said, this was a $24 dollar stock prior to a December 2019 takeover announcement by Cineworld, that ultimately failed. With movie releases on an upward trend this summer and over the long-term, any related growth in revenue could result in a higher stock price due to higher earnings, a higher multiple, or some combination of both.

Investors interested in Cineplex may want to weigh the company’s ability to reduce its pandemic related debt versus its recent record box office and concession combined numbers, along with the trend back toward theatrical releases by big tech and legacy media companies.

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