New COVID-19 cases are dropping, but the pandemic's impact on the movie theater business is not receding as quickly.
Both AMC Entertainment Holdings Inc. and Cinemark Holdings Inc., two of the country's largest theater operators, experienced continued growth in attendance, revenue and profits in the third quarter. But the results were still well behind those from pre-pandemic years. Furthermore, analysts are unsure when theaters will return to normal operating metrics, but they agree it will not likely happen in the fourth quarter.
Instead, analysts are looking to 2023.
"AMC and its competitors will continue to consolidate while pushing deeper into alternative content to drive attendance, and add premium large format screens and more dynamic ticket pricing in order to drive average ticket [prices] higher overall as the film slate shifts toward more blockbuster content," Wedbush Securities analyst Alicia Reese said in a Nov. 9 note following AMC's Nov. 8 earnings results. "Taken together, we think AMC and others that do this well could return to 2019 attendance and revenue, or higher, by 2023."
B. Riley Securities analyst Eric Wold shares a similar view.
"While we acknowledge the domestic box office has faced numerous uncertainties in recent months — concerns with the Delta variant, potential film slate shifts, and the impact of day-and-date releases and piracy — our focus remains on the expected return to pre-pandemic box office by 2022/2023," Wold said in his own AMC note.
Increasing revenues
Increased vaccination rates, fewer capacity restrictions, an improving film slate and more commitments from studios to release certain films exclusively in theaters were among the factors that improved Cinemark's performance during the third quarter, CEO Mark Zoradi said during the company's Nov. 5 earnings webcast.
Pointing to Cinemark's 61% year-over-year growth in third-quarter attendance, Zoradi noted that COVID-19 rates have dropped 73% since the delta variant peaked in September. Vaccination rates are improving in Cinemark's primary markets of the U.S. and Latin America, and the approval of vaccines for children 5 and over bodes well for further adoption. Government restrictions applying to theaters have effectively disappeared, and more U.S. moviegoers are expressing comfort with returning to theaters, he said.
In terms of film supply, he pointed to third-quarter releases like Walt Disney Co.'s "Shang-Chi and the Legend of the Ten Rings," "Black Widow," "Jungle Cruise" and "Free Guy;" AT&T Inc.'s Warner Bros. title "Space Jam;" and second-quarter carryover film "F9" from Comcast Corp.'s Universal Pictures.
However, the third quarter highlighted just how far there is to go before a full rebound materializes. Cinemark admissions were 30.7 million during the third quarter, down from 73.3 million in the pre-pandemic third quarter of 2019. AMC admissions came to 40.0 million in the just-ended quarter, down from 87.1 million in the third quarter two years prior.
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"We'd not normally be smiling at an attendance level that was not even half of what it was two years ago. But again, this attendance count of 40 million in Q3 of this year is so very much larger than the 22 million guests we had with us in Q2 of this year, or the 7 million guests we had in Q1 of this year," AMC CEO Adam Aron said on the Nov. 8 earnings webcast.
Investors were less inclined to smile at the result. AMC shares took a steep 9.0% drop on Nov. 9 following its earnings results. Comparatively, Cinemark gained about 6.0% between its Nov. 5 earnings day and the following trading day, Nov. 8.
New revenue streams
Both Cinemark and AMC have discussed launching alternative content options in their theaters. Given the rise in popularity of esports and third-party gaming content online, Cinemark will add a new executive to oversee gaming content hosted in its theaters, the company said. The company also highlighted success with other content offerings, like professional wrestling, concerts and live events.
AMC is also launching alternative content strategies, offering musical events, and WWE and UFC programming. It will also enter the retail popcorn trade in 2022, selling AMC's namesake kernels through mall kiosks, grocery stores and to-go in theaters.
AMC has also differentiated itself on public markets through a meme stock phenomenon in early 2021, when a new wave of retail investors piled into the ticker. The company has responded by providing more open communications with investors, like taking pre-submitted shareholder questions on earnings calls and considering input from its broadening investor base. Some suggestions have included things such as accepting or even launching cryptocurrencies and partnering with Hollywood studios to create themed nonfungible tokens, or NFTs, digital images that cannot be replicated and that trade like pieces of art.
However, Aron made clear on the company's earnings webcast that its foray into cryptocurrencies and NFTs remains uncertain.
Debt and equity
The company's new investor base has helped AMC manage its massive debt load and avoid bankruptcy following the potentially disastrous pandemic period.
"AMC made the best of its 'Meme Stock' status ... by selling shares at a premium, raising significant capital by doing so, and using the capital infusion to pay down debt, acquire several quality screens and return to expanding its footprint in Europe and the Middle East," Reese said.
However, the meme stock phenomenon has also run up AMC's valuation to untenable heights, according to some analysts. Both Wold at B. Riley and Reese at Wedbush said the company exceeded third-quarter expectations, but they still have "neutral" and "underperform" ratings on the stock, respectively. The average rating on the stock among seven analysts lands in "underperform" territory, according to S&P Global Market Intelligence.
"Volatility in shares of AMC is likely to continue, driven by trading momentum unrelated to AMC's fundamentals by retail investors whose time horizons remain unclear," Reese said.