Cineplex (TSX:CGX) just reported its first-quarter 2024 earnings. It’s an earnings report that I would call underwhelming at face value yet interesting if we dig a little deeper. When I initially planned to write this article, I was ready to argue that even though Cineplex’s stock price has increased after the earnings release, there’s still much more upside. Yes, I wrongly anticipated a stronger result.
But Cineplex stock actually declined in response to its earnings release. So, now, I will write about why it’s not only not too late to buy the stock, but the timing has rarely been better. I think the weakness is short term, and that the long-term outlook is actually quite strong.
But let me present to you the balanced picture of Cineplex, so that you can see why I maintain my positive view of the company and the stock.
Cineplex: The good
There were quite a few bright spots in Cineplex’s first-quarter result. Firstly, Cineplex’s box office performance was better than its U.S. peers. In fact, Cineplex’s box office revenues increased 1.4% to $125 million, which compares to a 5.2% decline for its U.S. peers.
Secondly, Cineplex continues to perform well operationally. For example, its box office revenue per patron (BPP) hit a record $12.74. Similarly, its concessions per patron hit a record $8.95. This solid performance was in part driven by Cineplex’s strategy to diversify its box office revenue. In the quarter, international films made up 13% of box office revenue, and premium experiences, such as VIP, accounted for 41% of box office revenue.
Finally, at year end 2023, Cineplex had a long-term debt balance of $1.8 billion. During the quarter, the sale of its amusement business, resulted in a $155 million cash infusion and a gain of $67 million. While this is a one-time event, it’s important because it gave Cineplex the ability to pay down some debt and to complete a refinancing plan. This plan extended maturities, eased covenant restrictions, and lessened the potential dilution of convertible shares.
The bad
While March box office revenues were extremely promising, April’s were less pretty dismal. In fact, they came in at $29,183, 52% lower than last year, and a mere 46% of pre-pandemic levels. While this is discouraging, the company was signaling to the market that the writers’ strike continued to impact film content and that this would continue to hit the box office. On the bright side, this beat the company’s as well as analysts’ expectations.
The second weakness of the quarter was the fact that earnings before interest, taxes, depreciation, amortization, and losses decreased to $4.6 million from $11.4 million. This was a big hit that was attributed to minimum wage increases. Also, legal costs associated with the Competition Bureau’s lawsuit against Cineplex. The good news is the legal costs will be over with soon, as the case in nearing an end. With regard to the minimum wage increase, the company plans to mitigate this through the use of data and automation to drive down costs.
What’s ahead for Cineplex?
The most important and impactful change that Cineplex can look forward to is the return of film product accelerating in 2024. In fact, over 30 new films have been added to the pipeline for 2024 since December 2023. According to management, studios recognize the value of theatrical releases and they are committed to volume and quality of films. Cineplex sees the return to a consistent flow of films every week. This will impact box office numbers, as it did in March.
The bottom line
Cineplex’s stock price continues to reflect a very strong negative bias. The first quarter definitely had its issues, but in my analysis, I point out that many of the issues are temporary, while much is being done to change things for the better.
