BRANCHING AWAY FROM HOLLYWOOD
Diversification strategy blamed for Cineplex’s stock dip, weak results
Canada’s largest movie theatre chain is paying a price — at least for now — to reduce its reliance on Hollywood.
For more than five years, Cineplex Inc. has been pursuing a diversification strategy that has seen it branch out beyond its core business, which hinges on box office receipts that can fluctuate from quarter to quarter.
As part of its pivot, Cineplex has ventured into a range of new areas, from microchip-assisted golf to non-traditional theatre content — including a highly anticipated upcoming boxing match — to entertainment complexes stuffed with bars and video games.
However, judging from the drubbing its stock has taken since the release of its most recent results, Cineplex’s diversification efforts could also be acting as a doubleedged sword. After posting weaker-than-expected second-quarter earnings on Wednesday, Cineplex shares tumbled, closing at $44.25 on Thursday, a 10-per-cent drop on the week and the stock’s lowest point since 2015.
“Although we are still big fans of the Cineplex management team, and its diversification strategy, weak Q2 results make it evident that it will take some time for this strategy to pay off,” said CIBC World Markets in a research note on Wednesday.
RBC Capital Markets said this is “an attractive entry point” into Cineplex, given the pullback in the stock and the “acceleration in EBITDA growth ...”
BMO Capital Markets dropped its target price on Cineplex shares to $48 from $58, but kept its outperform rating on the stock, saying in a research note that “we continue to believe the company will successfully transition to a diversified entertainment company.”
While a 2.2 per cent decline in second-quarter theatre attendance — to 16.5 million — dampened results, Cineplex said the diversification efforts are at least partly to blame for the squeeze on its profits, as it reported that “other” operating expenses, including those tied to running its media, amusement and leisure businesses, increased by 21.4 per cent for the quarter, to nearly $139 million. Cineplex’s adjusted earnings before interest, taxes, depreciation, and amortization were $38.1 million in the second quarter this year, down 11 per cent from 2016.
“The decrease as compared to the prior year period despite the revenue growth, was due to higher costs attributable to Cineplex’s emerging businesses as it continues to execute its diversification strategy,” said the company.
As part of that strategy, Cineplex announced last week that it was partnering with Dallas-based Topgolf to open up several of the latter’s venues in Canada. According to a release, the typical Topgolf location is very un-theatre-like, consisting of 65,000 square feet of “point-scoring golf games using microchipped balls,” as well as “a chef-driven menu, top-shelf drinks, big screen TVs and music in climate-controlled hitting bays for all-seasons comfort.” BMO said the plan is for five to seven Canadian locations, with the first expected to open in 2019.
Cineplex already operates two “Rec Room” complexes in Toronto and Edmonton, which are chock full of bars and games. Five other locations have been announced, with BMO expecting 15 to 20 to eventually open in Canada.
Cineplex’s box-office receipts only accounted for about 48 per cent of the company’s $758.3 million in total revenue for the first half of 2017. But, in the second quarter, Cineplex’s total amusement revenues increased to $45.7 million, up 85.9 per cent from 2016, “primarily due” to three acquisitions of gaming-related companies.
Some of Cineplex’s competitors remain more focused on the film business, which continues to have its ups and downs. AMC Entertainment Holdings, Inc., the world’s largest movie theatre chain, reported total second-quarter revenues of just over $1.2 billion on Friday. This included $761.4 million in admissions, making up around 63 per cent of its total revenues.
Cineplex still recorded box office revenues of $170.7 million in the second quarter, a 2.4-per-cent increase over last year. What’s more, in a research note on Thursday, Raymond James pointed out there is a “strong upcoming film slate,” including new Justice League and Star Wars movies, set to be released in the second half of 2017.
Cineplex also often shows “alternative programming” in its theatres, like World Wrestling Entertainment Inc.’s WrestleMania. “When you look at the overall movie business, it has been quite strong and significant, even though there’s been a lot of disruptions over the last 25 years in the business,” said Ellis Jacob, president and CEO of Cineplex Inc.