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Nordstrom Exit Of Canada Creates Need For New Mall Tenants
In 2015, I questioned on this web site, whether Nordstrom (JWN) would be able to successfully enter Canada. I noted that Nordstrom would be competing against Canadian privately held luxury retailer Holt Renfrew, and that it would have to find a way to differentiate itself from Holt Renfrew and other Canadian luxury retailers.
On March 2, 2023, Nordstrom announced that it was exiting Canada. After investing $775 million (US dollars), the company never made a profit in Canada. (All values in this article are in Canadian dollars unless indicated otherwise). As a result, 13 prime retail spaces occupied in Canada by Nordstrom and Nordstrom Rack will soon be vacant.
Some analysts think those spaces may be taken by another department store retailer like Saks Fifth Avenue.
I disagree. Saks is owned by the privately held Hudson Bay Company, which also owns the Canadian department store, the Bay. At the arguably most premium mall in Toronto, Yorkdale, the Bay is currently operating with store hours that close two hours before the rest of the mall on weekdays. The mall web site shows that the Bay is not even open on Mondays. It simply does not sound like another department store is what is needed to successfully occupy traditional anchor spaces and attract customers.
Location Based Entertainment (aka "LBE") Is An Attractive Alternative To Department Stores
Rather, it is safe to assume that the impacted mall operators would prefer tenants that provide entertainment or services that can consistently attract consumers to their shopping centers. In America, mall operators were able to fill shuttered Sears "anchor" space with Dave & Buster's (PLAY) locations.
However, Dave & Buster's only has two locations in Canada. Which leads me to the theme that began this article. Is there a well-established Canadian entertainment company that can benefit from some of these spaces?
Cineplex Has A Fast Growing Location-Based Entertainment Business
I believe Cineplex (OTCPK:CPXGF) is that company. I have written about Cineplex on this site before, noting that in addition to being Canada's dominant movie theater chain, it also has a growing location-based entertainment business. Its location-based entertainment businesses operate under brand names including the Rec Room, Playdium, and the newly launched Junxion.
For the most recent quarter ended December 31, 2022, Cineplex reported "all-time record annual revenues of $110.8 million, an increase of $66.1 million or 147.6% compared to the prior year period" for the location-based entertainment segment.
At the end of 2022, Cineplex operated 13 location-based entertainment locations. The company also reported that these locations recorded fourth quarter adjusted store level EBITDAaL (which I will just refer to as "EBITDAaL") of $9.3 million.
That works out to EBITDAaL of $715 thousand per location on the quarter.
The $9.3 million in 2022 Q4 EBITDAaL compared to $5.1 million reported for the pre-pandemic 2019 Q4 quarter. That represents 82 percent growth since the comparable pre-pandemic quarter, in which the company had 9 locations, compared to 13 locations at the end of 2022.
How Much Could A Handful Of Location-Based Entertainment Stores Increase Earnings?
As there are many factors that have influenced prior quarters including COVID-19, seasonality, and changes in store counts, if I were to guesstimate that Cineplex could lease part of 5 Nordstrom locations, that could increase EBITDAaL by $3.5 million in a fourth quarter, which could equal approximately $14 million dollars per year.
If we also annualize the current locations, which had $9.3 million of EBITDAaL, that works out to $37.2 million. If we were to add that to the $14 million guesstimate above, that would exceed $50 million in annual EBITDAaL just for location-based entertainment.
To put this in perspective, Cineplex reported $113,000 in net income for the year ended December 31, 2022. That positive earnings number was helped by a gain of disposal of assets reducing costs by $57.8 million.
So a growing location-entertainment business that could potentially add $50+ million to EBITDAaL could help keep Cineplex at full-year profitability if all of its other businesses did not grow compared to a COVID impacted 2022. To make it clear, I am only speculating that Cineplex and landlords would consider adding Cineplex to these spaces. The sudden existence of these spaces I am sure has Landlords and other potential companies that may benefit from leasing them evaluating the situation carefully.
That said, Cineplex seems like a good fit should it pursue some of these spaces as Dave & Buster's did in former Sears stores in America, so this kind of similar move toward entertainment north of the U.S. border does not seem far-fetched to me. Further, even if it does not follow the Dave & Buster's road map, and target any of these locations, the LBE segment has already been growing at an impressive rate.
Cineplex Has Major Advantages Over Dave & Buster's
Cineplex already has movie theaters in some of the impacted malls, such as Yorkdale in Toronto. Mall owners accordingly have a relationship with Cineplex, and as movie theaters in malls are already drawing customers to malls, mall owners already have an incentive to work with Cineplex to both parties' mutual advantage.
Further, Cineplex has a few things that Dave & Buster's does not have in Canada. For starters, it has movie theaters showing commercials, which can include commercials for Cineplex's location-based entertainment venues.
Even better, as a part owner of the SCENE+ program, with over 11 million loyalty members, Cineplex can use the rewards program to drive theater goers to its location-based entertainment locations.
Further, Cineplex owns Player One Amusement Group, a segment with $165.7 million in revenues in 2022. That company supplies gaming machines, including carnival-like games, used at location based entertainment locations. This type of vertical integration may be helpful versus potential competitors.
What About The Movie Business And Cineplex Stock?
As I have written before, Cineplex has about a 75 percent market share in Canada for its movie theater business.
Since I last wrote about Cineplex, it obtained the rights to distribute Lionsgate (LGF.B) movies across Canada for the year 2023. As Lionsgate is scheduled to release the latest John Wick sequel this month, that may provide an opportunity for Cineplex to earn revenue from competing Canadian movie theater owners.
On March 14, 2023, Cineplex announced its February 2023 box office results. Box office revenues were $37 million, which was 88 percent of the 2019 numbers for the same month. The company noted that international films accounted for 5 of the top 20 films in its press release. The company also noted that "These results combined with Cineplex's content broadening strategy enabled the Company to outperform the February North American box office recovery compared to 2019 levels by nearly 13 per cent."
In other words, investors who are looking at domestic box office numbers (which include the sum of Canadian and US sales) on web sites like Box Office Mojo, may have overlooked Cineplex's press release indicating Cineplex's significant outperformance to other North American theaters.
The company previously reported that January 2023 box office revenues were also 88 percent of January 2019 results. These two months trended in the right direction, after Q4 2022 achieved 66 percent of Q4 2019 results.
All of this said, the market does not seem impressed by these results. At the time of writing, the stock is trading just below $8 on the Toronto Stock Exchange. As I have mentioned in other pieces, this was a $20+ stock in 2019, prior to a takeover offer that never consummated in a deal. I have also mentioned that the company has not significantly diluted its stock since 2019, however it has increased its long term debt. With no significant dilution and improving box office numbers, the current stock price seems surprising to me, and perhaps some investors are overlooking the LBE business growth.
Conclusion
Despite the negative market sentiment, the company is making progress to return to pre-pandemic box office levels, including by showing international films. The company also has a rapidly growing location-based entertainment business. I will leave it to investors to speculate where this business may grow in the future. If lessons learned in America hold true here, some soon-to-be vacant Nordstrom locations may be worth keeping an eye on for investors in the entertainment space. Even if Cineplex does not expand into any of these spaces, investors may want to keep an eye on its growing location-based entertainment business, in addition to box office numbers.
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