First Quarter 2011 was Weak as Expected
Carmike Cinemas (CKEC) reported first quarter 2011 earnings Tuesday and they were exactly what investors should have expected. It was a difficult quarter. Total revenue was $96.2 million, a 22% decline versus the first quarter of 2011. Adjusted EBITDA was also down materially year-over-year which, given that the industry has significant fixed costs, is no surprise. The cause of the weakness is simple. The overall industry box office was down 22% versus the first quarter of 2010. As outlined in my previous articles here and here, Carmike was up against the historic success of Avatar and Alice in Wonderland. Based on boxofficemojo.com data Carmike’s admission revenue in the quarter of $62.3 represented 3.24% of the box office total revenue of $1.89 billion. This is consistent with its 2010 industry index of approximately 3.3%.
The Second Quarter Will be Strong
Now that first quarter results are in we can finally shift our focus to the second quarter. In 2010, the first five weeks of the second quarter made up 29.3% of the total second quarter box office as the summer movie season tends to start in mid to late May.
If the first 5 weeks of Q2 2011 follow this pattern and account for approximately 30% of revenue for the quarter, then this implies total Q2 2011 box office of $2.66 billion. Applying Carmike’s indexing of 3.2% to the total quarterly box office estimate results in $85.1 million of admission revenue for Carmike. This is a 38% increase versus the first quarter of 2011, and is slightly above the second quarter of 2010, which had admission revenue of $84.8 million. Also note that this is admission revenue only, for total revenue we also have to include concession revenue and Carmike has been steadily migrating up the average concession spend per patron. This is further upside to the increased box office.
However, the most significant upside to this estimate is linked to the 2011 movie slate. It is also crucial to the analysis to take a look at the movie slate coming to theaters over the next eight weeks. Table 1 below shows the key tent pole release(s) each week for the rest of the quarter.
Table 1: Second Quarter 2011 Movie Releases
· Pirates of the Caribbean (3-D)
· Hangover Part II
· Kung Fu Panda
· X-Men First Class
· Super 8
· Green Lantern (3-D)
· Cars 2
This feels like a superior movie slate, which would provide upside to our Carmike admissions revenue estimate of $85.1 million. Further, in addition to the tent pole films listed in Table 1 above, any “sleeper” hits that perform well will add to the overall box office.
In the first quarter of 2011, Carmike experienced a loss from unconsolidated subsidiaries of approximately $800,000. This represents Carmike’s profit (or loss) share in Screenvision. Screenvision is a seasonal business and based on its competitor National Cinemedia (NCMI), which also was not profitable in the first quarter, is expected to be profitable on an annual basis.
Carmike also paid down $15 million of debt, which it told the market on the fourth quarter 2010 earnings call. This puts the company close to its goal of reducing bank debt to $200 million.
While the first quarter was weak for the entire movie exhibition industry the second quarter will be strong. Further, the movie slate for the balance of the year feels very exciting. At the end of the first quarter the box office was down 22% versus 2010. As of May 5, the box office was down 16% versus 2010. Therefore, in the first five weeks of the second quarter the box office reduced the to-date annual decline by almost 30%. This trend should continue over the balance of the year. Finally, Screenvision continues to be an imbedded asset that is not reflected in Carmike’s valuation. With Carmike trading down post-earnings it is an excellent entry point.
Disclosure: I am long CKEC.