Stock investment – Dragging Movie Theaters Down With Retail Is a Big Mistake — The Motley Fool



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The month of May was brutal for retail. Earnings revealed a sharp secular decline in apparel and accessories, and store closures in the first quarter set a pace exceeding even that of the 2008 recession.

Another casualty was movie-theater companies — AMC Entertainment Holdings (NYSE:AMC), Regal Entertainment Group (NYSE:RGC), and Cinemark Holdings (NYSE:CNK) — which sold off by double digits between late April and the end of May.

The sell-off wasn’t due to their performance, as all three beat earnings expectations in the first quarter. Therefore, it’s likely investors are grouping theater chains in with brick-and-mortar retail. Basically, many appear to believe Netflix (NASDAQ:NFLX) will do to theaters what Amazon is doing to retail.

I think that’s a mistake, and could be an opportunity.

Image source: Getty Images.


People still spending on experiences

While Americans are spending much less on apparel, we’re still spending mightily on “experiences.” According to the U.S. Bureau of Labor Statistics, spending on apparel and accessories declined 4.8% last year. However, spending on entertainment rose 4.5%.

Retail traffic declined by mid- to high single digits across the country, while movie theater traffic was essentially flat in 2016. Actual box-office dollars actually hit an all-time high, thanks to rising ticket prices.

Theaters, like physical stores, offer a unique experience. But while many no doubt love the experience of shopping, many also view it as a chore, and prefer to use e-commerce. As opposed to when people go to the movies, everyone is there for the entertainment experience.

Theater experience still better than home

Recently on CNBC, PwC partner Todd Supplee said that research shows people still value the moviegoing experience, and theater owners aren’t standing still.

Chains are aggressively investing in luxury recliner seats, which AMC’s CEO Adam Aron claims provide 25% cash-on-cash returns. That means when AMC invests $100 in a recliner, it earns $25 more revenue per year from that seat, and those returns tend to stay at that level. Regal and Cinemark are following suit.

AMC is also adding seat-heaters, while Regal is countering with “butt-kicker,” a built-in sub-woofers that vibrate your seat, leading to even more sensory overload during those franchise action movies.

Booze is the new popcorn

Theaters are also upping their game in food and beverages. AMC now has four flavors of stone-fired pizza (four-cheese, pepperoni, barbecue chicken and buffalo chicken), a sriracha hot dog, a chicken-and-waffle sandwich, and healthier choices, including gluten-free items.

Theater chains are also serving alcohol wherever allowed. Thirty-two states recently relaxed their laws regarding alcohol sales at the theater, and these companies are taking advantage. At the end of 2016, AMC had 178 theaters with bars, Regal had 175, and Cinemark 100. New York, one of the most populous states, still doesn’t allow alcohol in theaters (curious, since Broadway shows have full bars).

Theaters are using new releases to make movie-themed cocktails, such as the Fifty Shades Darker espresso martini, the Wonder Woman Gauntlet (vodka and blue curacao), and the Baywatch Banana Hammock. Anticipate that these drinks will command the hefty markups that popcorn and soda currently get.

The alcohol opportunity is so large that AMC recently hired a new VP of government affairs, a job the company had never staffed before.

Considering that these companies only serve alcohol in about 30% of their theaters, alcohol seems to be a big opportunity.

Earlier VOD window an overblown threat

Finally, investors are also likely jittery about a potential deal to move up the first-run video-on-demand window from 90 days to 45 days (or less). Studios are trying to adapt to the rise of streaming, and Netflix’s recent move into feature films is making waves. Studio chiefs don’t want Netflix doing to films what it’s done to the cable bundle.

One can imagine how this might hurt theaters, which want to retain exclusivity for new releases. However, the fears may be overblown.

First, studios have an incentive to keep the theater business going. Theaters generate huge amounts of money, and promote the glamour and spectacle beneficial to the industry.

Second, theater companies are large and powerful, and are negotiating as a group with the studios. As Adam Aron stated on AMC’s recent conference call, exhibitors will likely get a cut of any profits that go to the expedited first-run window. This is in contrast to retail; it’s not as if Macy’s gets a percentage of every shirt sold on Amazon.

The new VOD window will also be pricey. One source indicated that streaming new films could cost $30 to $50 — essentially the price of theater admission for three or four family members. For that price, why not just go out to the theater, with all the aforementioned amenities?

Foolish final thought

Theater stocks have sold off mightily recently amid the retail carnage, but their businesses are more stable. New investments should keep elevating the theater experience, and experiences seems to be what consumers want today.

– Stock investment

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