The Marcus Corporation: Reading Beyond The Headlines

| About: Marcus Corporation (MCS)
This article is now exclusive for PRO subscribers.

I was originally considering featuring a couple of opportunities in the biotech sector that my friend Hatim Zariwala was helping me analyze but decided to hold off until we had completed our research and explored these investments in detail. Instead of these biotech stocks, I figured it would be a good idea to discuss the first quarter earnings conference call of movie theatre and hotel operator Marcus Corp (NYSE:MCS) that I featured in the blog entry Time To Revisit Marcus Corp. I started a position in Marcus for my personal portfolio a few days after posting that blog entry by buying half the position before earnings were announced and the second half after listening to the earnings conference call.

Marcus reported first quarter 2008 earnings on September 25th with revenue rising 20% to $112.1 million when compared to $93.4 million in the first quarter of 2007. However earnings dropped to $11.7 million or 38 cents per share when compared with $13.7 million or 45 cents per share in the prior year period and it was this drop in earnings that most of the headlines focused on, leading to a drop in the price of Marcus. Earnings at Marcus were lower due to the following unfavorable events that had little to do with operating results,

  1. The tax rate in the first quarter of last year was much lower than their standard tax rate of roughly 40.6% because of historical tax credits related to the renovation of one of their hotels.
  2. The prior year quarter included the important Memorial Day holiday weekend, while the theatre division of Marcus did not benefit from the holiday this year as it fell in the fourth quarter of 2007 instead of the first quarter of 2008.
  3. Marcus did not have to expense stock options last year.
  4. Marcus acquired a chain of 11 theatres last quarter and this increased the debt and interest payments for Marcus when compared to last year where the company had more cash on its balance sheet and less debt.

Marcus will face similar increases in interest expense for the next two quarters but their debt to capitalization ratio was actually 42.4%, down from 44.5% in the fourth quarter due to strong cash flows in the summer. As Douglas A. Neis, the CFO of Marcus put it in the conference call:

Pretty good quarter for us at many levels despite what headline writers may be tempted to say given that our net earnings were down compared to last year. Operating income was up 11% for the quarter despite an unfriendly calendar and a couple of specific circumstances in our hotel division.

Hotel Division:

Revenues were up 15.7%, benefiting from two new hotels but did not include the Westin Columbus as Marcus sold a majority stake in that hotel last year. Both average daily rate and occupancy increased 4.5% and 1% respectively. However this did not translate into higher operating income and margins because of renovations and seasonal changes at two properties that will not occur in future quarters.

Steve Marcus, the Chairman and CEO of Marcus, later in the conference call repeated that it was a "pretty good quarter". The new Hilton hotel in Oklahoma city, which has been open only 6 months, has been ramping up much faster than expected. The company added 6 new management contracts in fiscal 2007 and expect to add more properties this year. The company had $7 million in hotel pre-opening expenses in the second, third and fourth quarters of last year. Since Marcus does not expect similar expenses this year, comparisons are likely to be favorable in coming quarters.

The key negative thing I heard on the conference call was the 16 unsold units the company holds in their Las Vegas condo property. According to management the market in Las Vegas is "pretty soft right now".

Movie Theatre Division

Box office revenue increased 23.8%, concessions revenue increased 22.4% and total attendance increased 20.2%. These numbers include the newly acquired chain of 11 theatres. Average admission prices increased 4.4% and concessions revenue per person increased 5.2% partly due to their new Majestic Theatre. Operating margins increased 26.6% from 26.4% last year. Higher concession revenue per person combined with higher operating margins is a good sign as it shows that their premium theatre strategy is indeed able to command premium prices.

The company is rapidly assimilating the newly acquired theatres "without missing a beat" and they are "performing exactly as expected". The Majestic had a great summer and the company has been able to expand upon the type of content and programming by successfully showing Green Bay football games in High Definition at the Majestic.

According to 21st Century Equity Research analyst Robert Damron, the drop in share price and the lower-than-expected results were just a blip on an otherwise well-performing company. He went on to say "I look at the lower stock price today as a buying opportunity" and I could not agree more.