The Marcus Corporation (NYSE:MCS) Q3 2023 Earnings Call Transcript

The Marcus Corporation (NYSE:MCS) Q3 2023 Earnings Call Transcript November 1, 2023

The Marcus Corporation misses on earnings expectations. Reported EPS is $0.31 EPS, expectations were $0.34.

Operator: Good morning, everyone, and welcome to The Marcus Corporation Third Quarter Earnings Conference Call. My name is Alex, and I’ll be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President and Chief Executive Officer; and Chad Paris, Chief Financial Officer and Treasurer of The Marcus Corporation. At this time, I would like to turn the program over to Mr. Paris for his opening remarks. Please go ahead.

Chad Paris: Thanks, Alex, and good morning, everyone. Welcome to our fiscal 2023 third quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, all of which we intend to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act. Our forward-looking statements may generally be identified by our use of words such as we believe, anticipate, expect or words of similar import. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected. Listeners are cautioned not to place undue reliance on our forward-looking statements.

The risks and uncertainties, which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading Forward-Looking Statements in the press release we issued this morning, announcing our fiscal 2023 third quarter results and in the Risk Factors section of our Fiscal 2022 Annual Report on Form 10-K, which you can access on the SEC’s website. We will also post all Regulation G disclosures when applicable on our website at marcuscorp.com. The forward-looking statements made during this conference call are only made as of the date of this conference call and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. In addition, we routinely post news releases and other information regarding developments at our company that impact our investors, customers, vendors and other stakeholders.

You should look to our website marcuscorp.com as an important source of information regarding our company. We also refer you to the disclosures we provided in today’s earnings press release regarding the use of adjusted EBITDA, a non-GAAP measure used in evaluating our performance, and its limitations. A reconciliation of adjusted EBITDA to the nearest GAAP measure is provided in today’s release. All right. With that behind us, let’s begin. This morning, I’ll start by spending a few minutes sharing the results from our third quarter with you and discuss our balance sheet and liquidity. I’ll then turn the call over to Greg who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We’ll then open up the call for questions.

This morning we reported another quarter of year-over-year revenue and earnings growth in both of our divisions. In theatres, a blockbuster movie slate that drove higher attendance combined with continued increases in average ticket price and average concession revenue per customer to deliver the division’s 25% revenue growth. In our Hotel division, comparable hotel revenues continue to grow with improvement in both occupancy and average daily rates. Turning to the numbers. I’ll start with our consolidated results. Total revenues were $208.8 million in the third quarter of fiscal 2023, an increase of 13.7% compared to the third quarter of fiscal 2022. Operating income was $20.9 million in the third quarter, an increase of 133.9% compared to the prior year quarter.

Net earnings for the third quarter were $12.2 million compared to $3.3 million in the third quarter last year. And finally, adjusted EBITDA for the third quarter was $42.3 million, a nearly 52% increase from the prior year’s third quarter. We provided a breakdown of our third quarter numbers by segments in our press release and as we will discuss today, our earnings growth in the quarter was driven by strong results from both of our businesses, partially offset by the fact that we had sold one of our hotels late last year, impacting our comparisons this year. Turning to our segment results. In Theaters, our third quarter fiscal 2023 total revenue of $126.6 million, increased 25% compared to the prior year third quarter. Comparable theater admission revenue increased 29.8% over the third quarter of 2022 with comparable theater attendance, right, increasing 15.6%.

The increase in attendance primarily resulted from stronger performances from the top three blockbuster films during the third quarter of 2023 which were Barbie, Oppenheimer, and Sound of Freedom. While the film slate for the quarter included only one more wide-release film compared to the third quarter of 2022, it featured a release calendar and box office that went deeper into the summer and it was more spread across the quarter, allowing films to perform better. According to data received from Comscore and compiled by us to evaluate our fiscal 2023 third quarter results, United States box office receipts increased 37.6% during our fiscal 2023 third quarter compared to U.S. box office receipts during the third quarter of fiscal 2022, indicating that our comparable theater admission revenue growth lagged by approximately 7.8 percentage points.

However, we believe what looks like underperformance is mostly a reflection of exhibitors and other parts of the country, playing catch up in 2023, following our earlier recovery last year in our primarily Midwestern markets where we saw audiences return sooner. We believe this is illustrated by the recovery in our admission revenues relative to pre-pandemic periods in fiscal 2019 compared with the recovery of the U.S. box office. During the third quarter of fiscal 2023, our comparable theaters’ admission revenues were 93.4% of admission revenues in the third quarter of fiscal 2019, which compares to a 93.5% U.S. box office recovery during the same period. During the first three quarters of fiscal 2023, our comparable theaters’ admission revenues were 85.2% of admission revenues in the first three quarters of fiscal 2019, which compares to an 83% U.S. box office recovery during the same period, indicating that our recovery in admission revenues has been in line with and outperformed the recovery of the industry during 2023.

We also believe our performance in the quarter was partially attributable to an unfavorable film mix this year that was more appealing to audiences in other parts of the U.S. outside of our primarily Midwestern markets compared to a favorable film mix during the third quarter of fiscal 2022 that included Top Gun: Maverick and Minions: The Rise of Gru, two films that drove our theater circuit to outperform the national results last year in the third quarter. Our average admission price increased by 12.8% during the third quarter of fiscal 2023 compared to last year. The increase in average admission price in the quarter was primarily driven by the favorable impact of full schedule pricing actions taken in the last year in response to inflation, the impact of the changes to our Value Tuesday promotion effective at the end of the first quarter of this year, and by a film mix featuring more films for adult audiences at higher ticket prices.

Our average concession, food and beverage revenues per person at our comparable theaters increased by 6.5% during the third quarter of fiscal 2023 compared to last year’s third quarter. Higher check averages, including the impact of higher menu prices, drove the increase in our concession, food and beverage per caps as we are still seeing the impact of inflationary price increases implemented during the last year and the favorable impact of changes to our Value Tuesday promotion. Our top 10 films represented approximately 75% of the box office in the third quarter of fiscal 2023 compared to 83% for the top 10 films in the third quarter last year. This more balanced film slate combined with our industry-leading PLF penetration, resulted in a decrease in overall film cost as a percentage of admission revenues.

Theater division adjusted EBITDA of $26.7 million during the third quarter of fiscal 2023 increased approximately 114% compared to the prior year third quarter on our higher revenues. Finally, during the quarter, we closed three underperforming theaters as part of our ongoing evaluation of individual theater performance and our footprint. The closure of these locations is accretive to earnings and cash flow and the results of these theaters are excluded from our comparable theater financial metrics discussed today. Turning to our Hotels & Resorts division. Revenues were $82.1 million for the third quarter of fiscal 2023 and were nearly flat compared to the prior year. The sale of The Skirvin Hilton late in the fourth quarter of fiscal 2022 had a $4 million negative impact on revenues in the third quarter of fiscal ’23 compared to the third quarter of fiscal 2022.

On a comparable hotel basis, we continued our trend of revenue growth with total revenues in the third quarter of fiscal 2023 increasing $3.8 million or 4.9%. Total revenue before cost reimbursements at our seven comparable owned hotels increased over $2.8 million or 4.1% over the third quarter of fiscal 2022. RevPAR for our comparable owned hotels grew 5.5% during the third quarter compared to the prior year. According to data received from Smith Travel Research, comparable upper upscale hotels throughout the United States experienced an increase in RevPAR of 3.2% during our third quarter compared to the third quarter of fiscal 2022, indicating that our hotels outperformed the industry by approximately 2.3 percentage points. When comparing our RevPAR results to comparable competitive hotels in our markets, the comparable competitive hotels experienced an increase in RevPAR of 4.7% for the third quarter of fiscal ’23 compared to the third quarter of fiscal 2022, indicating that our hotels outperformed their competitive set by nearly 1 percentage point.

Breaking out the third quarter numbers for the comparable owned hotels more specifically, our overall RevPAR increased during the fiscal 2023 third quarter compared to the third quarter of last year was due to a 2.7% increase in our average daily rates or ADR and an overall occupancy rate increase of 2 percentage points. Our average fiscal 2023 third quarter occupancy rate for our owned hotels was 76.5%. Finally, our Banquet and Catering operations continued to perform well. Food and beverage revenue at our comparable owned hotels was up 1.8% in the third quarter of fiscal 2023 compared to the prior year quarter and was negatively impacted by approximately 1 percentage point due to the ballroom renovations at The Pfister Hotel during the quarter.

Hotel division adjusted EBITDA of $19.4 million for the third quarter of 2023 increased $400,000 or approximately 2%. The sale of The Skirvin Hilton had a $500,000 negative impact on adjusted EBITDA in the third quarter of fiscal ’23 compared to the prior year third quarter. Excluding this impact, comparable hotel adjusted EBITDA in the third quarter of fiscal 2023 increased $900,000 or 4.7% on higher revenues. Shifting to cash flow and the balance sheet. Our cash flow provided by operations was $21.3 million in the third quarter of fiscal 2023, an increase of $16.2 million or more than three times our prior-year third quarter cash flow from operations. Total capital expenditures during the third quarter of fiscal 2023 were $9.9 million compared to $11.1 million in the third quarter of fiscal 2022, and were impacted by timing of cash payments for projects when compared to the prior year.

A large portion of our capital expenditures during the third quarter were invested in the guest rooms and meeting space renovation at the Grand Geneva Resort & Spa and the meeting space renovation at The Pfister Hotel, with the balance of capital expenditures going to maintenance projects in both businesses. Based on our current expectations for the timing of capital projects, we expect capital expenditures of $35 million to $40 million for fiscal 2023 with our lower estimate for the year due to changes in timing of projects. We ended the third quarter with $36 million in cash and over $256 million in total liquidity with a debt to capitalization ratio of 27% and net leverage of 1.3 times net debt to adjusted EBITDA. Subsequent to the end of the third quarter, we announced that we completed the refinancing of our revolving credit facility.

This new $225 million five-year facility will extend our maturities until October 2028 and is an example of our proactive approach to maintaining our strong balance sheet. Our new revolver, which is currently undrawn, ensures that we have significant liquidity and financial flexibility to move quickly when opportunities to invest in future growth arise. I would like to thank our lender group for our strong long-term relationships and for their continued support. With that, I will now turn the call over to Greg.

Greg Marcus: Thanks, Chad. Good morning, everyone. As I shared in our last quarterly call, the third quarter got off to a strong start in July. In Theaters, a string of blockbusters drove huge audiences to see movies on the big screen. And we had a deeper slate of films for the rest of the summer than we did a year ago. In Hotels, favorable weather and solid leisure demand continued to support strong rates and improving occupancy. I’m happy to share that the positive trends we saw in July continued through the end of the summer, and we had a great third quarter with both of our businesses contributing to our revenue and earnings growth. Our teams executed really well, serving our customers with excellence during our seasonally busiest quarter of the year.

The third quarter that we are reporting today once again continues our trend of year-over-year improvement and we’re very happy to share these results with you. I’ll start with Theaters. This quarter, both higher attendance and strong growth in per caps drove our results. While the second quarter this year included a few films that missed the mark and third quarter included a few films that exceeded expectations in a big way. Strong performances from the cultural phenomenon known as Barbenheimer and Sound of Freedom drove customers out the theaters for these must-see films, while a steady cadence of movie releases continued into late summer and supported the habit of movie going, resulting in attendance growth over 15%. The impressive performance of these films underscored an audience appetite for a variety of narratives and it was a great reminder to all of us in the entertainment industry of the power of theatrical exhibition and building awareness of great movies.

We continued our trend of significant increases in per person revenues with our admission revenues per person growing nearly 13% year-over-year and our concessions, food and beverage per caps growing over 6%. As we previously shared, our strategic pricing initiatives including our Value Tuesday promotion changes, continued to favorably impact both admissions per caps and concession, food and beverage per caps. We also have been successful driving admission per caps by leveraging our expansive footprint of premium large format screens. During the third quarter, nine of the top 10 movies were on PLF screens on opening weekend, where eight of these nine films opening on PLF screens during the quarter, 40% or more of our opening weekend box office came from PLF showings, with four films grossing more than 60% of our opening weekend box office on PLFs. In addition, according to Comscore data, on opening weekend, Marcus Theatres led the industry in gross box office PLF percentage on all nine of the films opening on PLFs in the third quarter.

Our proprietary UltraScreen and SuperScreen provide us with significant flexibility in scheduling multiple films on our PLF screens, particularly in theater locations where we have multiple PLFs. As we look ahead, the fourth quarter in our Theater division is once again off to a good start with growth over last year, led, of course by Swift Eras, Taylor Swift: The Eras Tour, a constant film that debuted as the second highest October opening weekend of all time for any kind of movie and continues to play well in our circuit with our market share of total box office growing each week. Going to see Eras wasn’t just going to see a movie, it was an experience that became a pop culture event. Once again, we are leveraging our PLF screens to present the film the way our customers want to see it most, dancing in the aisles in front of a giant screen with immersive Dolby Atmos sound.

In fact, we are leading the industry with over 50% of Eras’ gross box office coming from PLF screens for each of the three weekends since opening. While Taylor Swift isn’t a class Rome, we do believe that Eras is an example of the breadth of content we can play. Another big music icon will leverage the appeal of theatrical experience to connect with fans through a concert film in early December with Renaissance, a film by Beyonce. As we look ahead to the rest of the year, the holiday film slate includes Trolls, band Together, Wish, Wonka, Aquaman and The Lost Kingdom, and Migration, a strong set of family films that should play well to our Midwest audiences. The film slate is rounded out with a healthy dose of content targeting adult audiences that we’re excited about, including The Marvels, Hunger Games, Ballad of Songbirds and Snakes, Napoleon and The Color Purple.

Last quarter, I provided some thoughts on the strikes in Hollywood, and our view on this topic remains largely the same. The disruption from the strikes is not helpful. As expected there have been some shifts in the release calendar, and we will not have better visibility to the ultimate impact on the 2024 film slate until the strike is settled and film production resumes. At the end of the day, this remains a short term supply chain disruption. The product isn’t going away or skipping theatrical exhibition, it’s getting moved around and shifted out. With the writer’s strike settled, the beginning of the supply chain is working again restocking the script inventory. We are encouraged by the very active negotiations in the last week between the Screen Actors Guild and the studios, and while we have no insight into the discussions, we are cautiously optimistic for a resolution in the near term.

Shifting to our hotel and resorts division, you’ve seen the segment numbers and Chad shared some additional detail, including the bridge from our reported results to our comparable hotel results following the sale of the Skirvin Hilton Light last year. This quarter is typically our strongest with the summer travel season at its peak, and this year was no different. As you may recall, last year the hotel division posted record results for any third quarter, either pre or post pandemic. This year, our hotels team broke that record again with 19.4 million of adjusted EBITDA. Despite having one less hotel. This level of success speaks to both the high level of execution by our team and the quality of our hotel assets. There are a few hotel division highlights in the third quarter that I’d like to point out.

Overall revenue before cost reimbursements at our comparable properties grew over 4.1% compared to the prior year. We outperformed both the national upper upscale RevPAR growth and RevPAR growth of our competitive sets. We continue to see strong average daily rates and improving our occupancy. RevPAR grew at six of our seven of our comparable owned hotels, with average daily rate growth at five of our seven hotels and occupancy growth at four out of seven hotels, resulting in overall RevPAR growth of 5.5%. Occupancy grew on both weekends and weekdays with weekends almost back to pre-pandemic levels. While the trend of leisure demand returning to pre-pandemic levels continues following record demand in fiscal 2022, overall leisure demand remains healthy and our properties continue to capture our share of leisure travel.

Group demand in the quarter continued to increase with weekday and weekend growth increasing our Group rooms revenue to approximately 41% of our total rooms revenue in the third quarter of fiscal 2023, compared to approximately 39% in the third quarter last year. This compares to our pre-pandemic Group mix of approximately 44% in the third quarter of 2019. Group booking trends remain positive with our Group room revenue bookings for the remainder of fiscal 2023 or group pace in the year – for the year running approximately 11% of where we were at the same time last year. Group pace for fiscal 2024 is running approximately 14% of where we were at the same time last year for fiscal 2023. In addition, Banquet and Catering pace for the remainder of fiscal 2023 and fiscal 2024 is similarly running ahead of where we were at this time last year.

Finally, I would like to recognize our hotels team for several awards that our properties recently received. As many in our hospitality industry know, the Conde Nast Traveler’s Readers’ Choice Awards are the longest running and most prestigious recognition of excellence in the travel industry. And in October, our properties won several of them. In Milwaukee, The Pfister Hotel was named the number two top hotel in the Midwest, and Saint Kate was named the number four top hotel in the Midwest. The Kimpton Hotel Monaco Pittsburgh was recognized as the number nine top hotel in the Mid-Atlantic and The Garland in North Hollywood, California was rated the number 16 top hotel in Los Angeles. In addition, The Pfister Hotel also recently received the USA Today Reader’s Choice Award as the number six best historic hotels in the United States.

We are incredibly proud of these awards won by our hotels, our part rooms and amenities, what truly makes a hotel special is the hospitality and experience our guests have while they stay with us. We win these awards because of the incredible effort and care that our associates deliver each day to make our guests stay extraordinary. I’d like to thank and congratulate the hotel team on a job well done. And while I’m tossing out congratulations, I also want to reflect on Chad Paris and his team’s great job with our banking facility. That was impressive work in this environment, and it speaks to our company’s long standing foundational belief in the managing the strength of our balance sheet. Before we open up the call for questions, I want to once again express my appreciation for our dedicated associates at The Marcus Corporation.

Their outstanding work and commitment to serving our customers is responsible for our success. We appreciate all that they do every day. So, on behalf of our Board of Directors and our entire executive team, thank you to all of our associates. And with that, at this time, Chad and I would be happy to open up the call for any questions you may have.

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Q&A Session

Operator: [Operator Instructions] Our first question for today comes from Eric Wold of B. Riley Securities. Your line is now open. Please go ahead.

Eric Wold: Hi, good morning, everybody. Thank you for taking my questions. A couple of questions, I guess one, following the three theaters that were closed in the quarter, anything left on that front to close? And then how is the acquisition or new build pipeline for theater shaping up at this point?

GregMarcus: I’m sorry. What – I didn’t hear. What did you say about the three that we closed? What was your specific? I lost..

Chad Paris: Any more…

Eric Wold: Just if there’s anything else that needs to be closed?

GregMarcus: Not that we know of. I mean, again, these were very special situations in a market that we’ve got, you know, very good coverage in, and, you know, that business is just going to be picked up in other theaters. And these theaters were – you know, one was a lease that was ending, and the other two were, you know, we just – we had made the decision that we weren’t going to make the investments that you need to have. You know, how we feel about having our fiscal plans in top shape and competitive. I think that – I think we were talking about I think it puts our recliner penetration, it’s got to be over 90% now because those didn’t have recliners.

Eric Wold: And then – new build or acquisitions.

GregMarcus: No new builds. And, you know, there is – I would say that, you know, we’re starting to see some stuff pop up. You know, nothing that we’ve had an interest in yet, but it feels like, you know, that the ice is breaking up a little bit, but I have nothing to report to you.

Eric Wold: Got it. And then shifting to the Hotel segment. Any update on the decision around, you know, Milwaukee Hilton? Can you remind us kind of what the – any deadline is with that and kind of maybe what ultimately needs to be done to that property to kind of get near to the convention center opening next year or the expansion opening next year?

Chad Paris: Yes, Eric, we’re continuing to work on it. You know, this is one that we hope to have some idea of the path forward by the end of the year and something to share on our next call in late February. But again, it’s one where we’re trying to make the returns make sense and with a hotel of that size, the capital investment is significant and, you know, we’re working on it. So no update right now, but hopefully we’ll have something next quarter.

Eric Wold: But that’s not something where a decision – where there’s a deadline looming. You’ve got time on that one, correct?

GregMarcus: Well, no. I mean we have to – we do have to make – there is no – we don’t have a deadline to report, but there is – look, there’s a lot of things that, you know, that we have to take into account, and, you know, that includes, you know, just the fact that we have – the community has just made a big investment in a new convention center and – or, you know, an addition to the convention center and refurbishing the older section. And, you know, it would be helpful to have this complement that.

Eric Wold: Understood. Thank you, both.

Operator: Thank you. Our next question comes from Mike Hickey of Benchmark Company. Your line is now open. Please go ahead.