Cineplex (TSX:CGX) is Canada’s biggest movie theatre chain. Its stock has fallen over the last year, declining in price when the broader markets have risen. The reason for the stock’s poor performance is poor earnings from the company. In the trailing 12-month (TTM) period, Cineplex’s revenue grew 64%, but its earnings and free cash flow remained negative. A big part of the problem was debt. In the previous quarter, CGX had $15.8 million in operating income. A $39 million interest charge alone was enough to turn net income into a loss.
So, CGX’s recent quarters haven’t been good. Revenue is climbing, but debt is keeping profitability just out of reach. However, that could change. Just recently, the Barbie movie hit theatres, rapidly becoming one of the highest-grossing films of the year. The movie came out alongside Oppenheimer, another big hit. Together, these movies could drive a lot of revenue for Cineplex. The question is, will it be enough to make the company profitable and cash flow positive?
Barbie’s likely revenue impact
To gauge how big of an effect Barbie is likely to have on Cineplex, we need to start with how well the movie is doing overall. The film has grossed $800 million worldwide as of writing. $394.5 million of that was in the U.S. and Canada.
Unfortunately, the ticket sales data available lumps Canada and the U.S. into one market. There is no separate data for Canada, but if the viewership was proportionate to population numbers, then about $40 million of the $394.5 million was from Canada. Cineplex has a 75% market share in Canada, so we’d expect $30 million in Barbie revenue going to Cineplex, less royalties to the producers. So, CGX may get a $20-$30 million revenue bump from Barbie.
Cineplex’s recent results
To determine what kind of effect a $20-$30 million “Barbie Boost” would have on Cineplex, we need to look at the company’s most recent results. $30 million sounds like a lot of money, but whether it will move the needle or not depends on how much money CGX is already earning each quarter.
In its most recent quarter, CGX delivered the following:
- $340 million in revenue
- About $15 million in earnings before interest and taxes
- -$26.5 million in earnings before taxes
- A $30 million net loss
These results suggest that Barbie could make Cineplex profitable for the current quarter. $30 million in Barbie revenue would be enough to erase the $30 million net loss, resulting in $0 earnings, if it were not accompanied by any extra expenses.
However, promoting movies in theatres does incur some expenses, such as staffing for peak showings, hanging posters, and more. So, the absolute best-case scenario for Cineplex’s Barbie earnings is a very slight profit, provided the company exercises significant cost discipline.
A risk to watch out for
As we’ve seen, Barbie has the potential to generate a small profit for Cineplex in the third quarter. That’s significant. However, Cineplex is financially stressed, with a large amount of liabilities and about $40 million in interest and lease expenses each quarter. Barbie could hand the company one profitable quarter, but it looks unlikely to remain profitable in the medium term.
