The exhibition industry is taking a shellacking on Wall Street this morning following AMC Entertainment’s startling announcement last night that its Q2 results will come in lower than expected — with industrywide domestic box office sales likely to also disappoint.
AMC, Imax, Regal Entertainment, and National CineMedia touched 52-week lows. AMC’s down 24.8% in morning trading followed by cinema ad sales company National CineMedia (-13.2%), Imax (-8.2%), Cinemark Holdings (-5.7%), and Regal (-5.0%).
In announcing multiple initiatives to cut costs, AMC said it anticipates “a very challenging” Q3 and predicted that industrywide North American box office sales will come in at $11.2 billion — down 1.8% vs last year.
The disclosures added to the skepticism investors already felt. Q2 domestic box office sales disappointed. And many are concerned that Hollywood studios will introduce premium video on demand, offering movies to home viewers within the 90-day period when theaters traditionally have them exclusively.
AMC, owned by China’s Dalian Wanda Group, had hoped to beat the pack by installing plush recliner seats in many venues (justifying premium ticket prices) and by acquiring Carmike Cinemas and Europe’s Odeon and UCI Cinemas. The deals made AMC the world’s largest exhibition chain.
How worrisome are AMC’s prospects? Here’s a sampling of analysts’ early reactions as most dropped their target price forecasts for its shares over the next year. From most bullish to most bearish:
PiperJaffray, Stan Meyers (Price target: $35.00, NC)
We remain upbeat on AMC shares as we expect improved growth driven by recent acquisitions and high return initiatives. In particular, we continue to forecast high returns for its “re-seating” plans across its Carmike and international footprint, as well as enhanced food and beverage investments and data insights from AMC’s rapidly expanding Stubs loyalty program.
B. Riley, Eric Wold ($32.50, -23.5%)
Although relatively weak Q2 results were somewhat expected given the disappointing box office trends in the period (as we lowered our estimates on 7/31), we are surprised by the magnitude of the revenue and adjusted EBITDA miss – especially given what was reported by Regal last week…We were also surprised that AMC chose to pre‐announce Q2 results just four business days before the previously‐scheduled Q2 conference call – especially when there was no Q2 guidance to address. …[W]e wonder if this move is related to a planned sale of [National CineMedia] shares or a sale of AMC shares by the Dalian Wanda Group.
RBC Capital Markets, Leo Kulp ($30.00, NC)
The news does not change our fundamental view given our already low expectations around 2Q. With higher costs and a weaker 3Q box outlook now baked in as well as a positive outlook on the 2018 box office, we believe we could be near a bottoming out. However, we see the risk that AMC will be a “show me” story until negative newsflow subsides.
MKM Partners, Eric Handler ($28.00, -12.5%)
While it is certainly extremely disappointing to see AMC’s subpar performance, we believe the risk/reward profile still appears attractive… Reflecting disappointing box office levels in 2Q and 3Q, AMC is moving to reduce its domestic cost structure while also moving forward with new revenue strategies.
Wedbush Securities, Michael Pachter ( $22.75, -36.8%)
We must admit that we were caught by surprise when AMC preannounced Q2 results over 30 days after the close of the quarter, and were further surprised by the magnitude of the top and bottom line miss. …Something doesn’t sound right, and we can only surmise that the company had some unusual expenses during the quarter that it plans to eliminate in the next six months.
CreditSuisse, Omar Sheikh ($14.00, -17.7%)
AMC’s underperformance of the US box office in Q2 raises important questions for investors. The industry declined by 4.4% in Q2, implying attendances were down around 6%. On a per screen basis, AMC’s attendance was down 19%. Even allowing for 10 percentage points of dilution from last year’s acquisitions, this suggest the Carmike circuit (roughly 26% of screens) could now be a significant drag on AMC’s operating performance; and the legacy AMC circuit is seeing limited benefit to attendance from the $1.6bn spent on reseating since 2012.
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