Investors’ enthusiasm for exhibition chains began to cool in April — and grew much chillier today after a Q2 report from Carmike spotlighted studios’ growing take of box office revenues, and raised concerns about 2016 sales.
Carmike shares are down 8.1% in morning trading — and touched a 52-week low of $22.91 — followed by AMC Entertainment (down 4.8%), Cinemark (down 2.6%), and Regal (down 1.6%).
The main concern: Carmike’s film rental costs, at 58.7% of box office sales, “were higher than we have ever seen them,” Wedbush Securities’ Michael Pachter says.
Studios get a larger slice of the pie from blockbusters, and a few films — especially Jurassic World and Avengers: Age of Ultron — dominated Q2. The five most popular films accounted for 55% of the total box office in Q2 vs 38% in the same period last year.
Looked at another way, last year’s top grossing film in the quarter, Captain America, grossed $257 million. But this year “the top three films were over $300 million each, and that is going to bring with it some higher film rent just because of the scale, and I guess we cry all the way to the bank when it’s all said and done,” CEO David Passman says.
The joke fell flat with analysts, who believe that movie sales increasingly will be driven by a few hits. RBC Capital Markets’ Leo Kulp dropped his price target for Carmike by $4 to $36 largely due to his concern that studios will take a bigger cut of sales in upcoming films including Disney’s Star Wars.
Piper Jaffray’s James Marsh says he’s “frustrated with cost growth and limited operating leverage” in Q2, although he still likes Carmike’s stock.
Passman added to Wall Street’s concerns by urging investors to “temper our thinking here a bit” about the 2016 movie slate. Although 2015 sales are expected to hit an all-time high of about $11.2 billion, “I don’t think it’s realistic to assume that that is a growth rate in overall box office that is going to straight-line into infinity.” He says a retreat to $10.95 billion is a “possibility for 2016” although plans through 2019 suggest that “there are going to be some great movie years ahead of us.”
Faced with these challenges, theater owners hope to please Wall Street by keeping a lid on other costs. That becomes harder to do as many states and cities boost the minimum wage, which the federal government in 2009 set at $7.25 an hour.
“We employ about 9,000 folks, 75% or so of those are high school and college or retired folks and the lion’s share of those, more than 50% of those are paid beginning wages at minimum,” Passman says. Carmike will “adjust our cost structure as necessary for government regulations and we adjust our pricing to compensate for that or to make-up for any of that increased cost.”