Why Cinemark's Strategy Is on the Mark
The third quarter was very good for the motion-picture business in the U.S. as box- office receipts rose 10.1% compared to the same quarter a year ago, according to BoxOfficeMojo.com. Today we spotlight one major theater operator, Cinemark Holdings , and see how it is performing compared to two of its competitors: Regal Entertainment Group) and Carmike Cinemas
Cinemark Holdings operates more than 500 theaters and nearly 6,000 screens in the U.S., Brazil, Mexico, Argentina, and 10 other Latin American countries.
In the third quarter, the company reported a 19.6% increase in revenue compared to the same quarter last year. Admissions revenue grew 19.2% and patrons scarfed down 21.1% more concession snacks in dollar terms. Attendance at the company's theaters soared 16.2%.
The total cost of operations as a percentage of revenue dropped by a remarkable 300 basis points, bringing about net income that was nearly 70% higher than the same quarter last year, reaching $80 million. The net income margin was greater than 10%.
Cinemark was equally efficient with its domestic and international operations. Adjusted earnings before interest, taxes, depreciation, and amortization as a percentage of revenue was an impressive 25.1% in the U.S. and 24.8% in its international operations.
The company's international segment accounted for 30% of total revenue even though it represented only 23.7% of the average screen count.
Cinemark is the largest movie exhibitor in Brazil, Argentina, and Chile and the most geographically diverse American operator in Latin America. The company sees significant opportunity for further growth in its number of screens there. Cinemark's international box-office receipts grew at a compound annual growth rate of 18.2% between 2007 and 2012.
Technology and innovation to the rescue
A risk factor that has emerged in recent years is video-on-demand and Internet delivery platforms enabling consumers to view a film at home rather than going out to the theater.
Theater operators are addressing this risk by investing in state-of-the-art technology to enhance the quality of the viewing experience. Cinemark now features digital-projection technology in 100% of its first-run U.S. theaters and will have 100% of the international theaters digital in 2014.
Other innovations the company is testing include self-service concessions, lobby bars serving beer and wine, and the Cinemark "Movie Bistro" concept that features luxury seating and an upgraded food menu with items such as gourmet pizza.
To keep competitors -- and competing forms of entertainment -- at bay, Cinemark is striving to stay connected with its customers. Its smartphone app has now been downloaded by 3.2 million customers.
Two consecutive outstanding quarters for a major competitor
Regal Entertainment Group has the largest theater circuit in the United States, with 7,334 screens in 575 theaters. Regal theaters are located in 42 states.
For the third quarter, Regal reported a 17.3% jump in revenue compared to the same quarter last year, to $813.1 million. Adjusted EBITDA for the quarter was $177.3 million, a 32.6% increase versus 2012's third quarter.
Both the revenue and EBIDTA numbers were a company record for a third quarter and continued the trend established with the company's excellent second quarter results when revenue also exceeded $800 million and EBITDA was above $175 million.
Regal's EBITDA as a percentage of revenue, 21.8%, was very close to the high mark set by Cinemark.
The winner in terms of quarterly revenue growth
Smaller but equally successful as the first two companies, Carmike Cinemas has 247 theaters and 2,521 screens in 36 states, with 2,418 of these screens equipped with digital technology and 954 with 3-D capability.
Carmike has a strategic goal of using acquisitions to build its theater circuit, and recent acquisitions were a primary driver of the company's excellent 30.2% revenue increase in the third quarter compared to the year-ago period. But the larger number of screens was only part of the story: per-screen attendance rose 10.5% year over year.
Earnings before interest, taxes, depreciation, and amortization for the quarter soared 46.4% to $28.4 million. The EBIDTA margin of 17.2% was a 190 basis point improvement over last year's third quarter. Management cited the positive effect of having a larger base of theaters over which to spread administrative costs -- that always reliable concept of economies of scale.
What we learned
The companies we looked at today are wizards at operating their theater circuits efficiently and controlling costs. One thing out of their control is whether the motion-picture studios will produce films that are popular with audiences. Comfy theater seats and yummy food can't make up for wasting two hours watching a film that's a dud.
As a result of this risk, box-office receipts fluctuate wildly by quarter. In 2013, for example, U.S. receipts were down 21.6% in the first quarter compared to 2012's first quarter, rebounded 3.2% in the second quarter, and then had the wonderful third quarter.
In any given quarter, the success or failure of one important film can cause industry results to vary significantly. The fourth quarter of 2009 was a banner period for the industry, with box-office receipts soaring 20.8% -- but one film, Avatar, was the driver of that success, accounting for 21.3% of the total.
When you invest in theater chains, you have to accept the risk that Hollywood may not meet theater goers' needs and expectations regarding the type of entertainment they want to see.
But Hollywood's film development brain trust probably won't disappoint us and neither should any of these companies. Offering customers an ever-improving viewing and even food experience -- with higher pricing to match -- allows theaters to achieve greater per-patron spending, which protects performance results when attendance temporarily dips.
Although each of these companies could be a great addition to a portfolio, my appreciation for Cinemark is increasing because of its international growth potential, tremendous operating efficiency, and willingness to try innovations in customer service such as the Movie Bistro concept -- three factors that combine to make it the picture of continued success.
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The article Why Cinemark's Strategy Is on the Mark originally appeared on Fool.com.
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