Who Says Summer's Good for Theater Operators?

Justin Dini

The movie exhibition business took another body blow on Friday, when Loews Cineplex Entertainment (LCP Quote), the nation's second-biggest theater operator, warned that its second-quarter earnings would fall short of last year's and that it might not be able to comply with covenants on its principal bank loans. Investors pummeled the stock Monday, pushing it down 88 cents, or 30%, to 2.06.

The bad news from Loews is only the most recent in a string for the theater-operator sector. Last week, closely held Edwards Theatres Circuit confirmed that it seeking Chapter 11 bankruptcy protection, two weeks after Carmike Cinemas (CKE Quote) in Columbus, Ga., said it is doing the same. (On Friday, the New York Stock Exchange said it completed its review of the continued listing status of Carmike and decided the company's stock will resume trading under the ticker symbol QCKE. The Q denotes bankruptcy.)

Earlier this month, closely held Regal Cinemas, the biggest theater company, said it is in talks to avoid breaching its own loan covenants. Denver-based United Artists Theatre, also privately held, is talking to its bankers regarding declaring voluntary Chapter 11 bankruptcy as part of a restructuring.

Dark Days in the Theater Loews Cineplex, Carmike plunge

Source: BigCharts

Why all the problems? The short answer is overexpansion, analysts say. Since the mid-'90s, the big theatre chains have been building megaplexes -- huge theatres with 18 to 25 screens with "stadium-style" seating. But the expansion has come at great cost, around $1 million per screen, vs. $300,000-$500,000 per screen five years ago, says Chris Dixon, media analyst at PaineWebber.

"We are clearly in a situation where you have too many screens chasing too little attendance," adds Michael Florin, an analyst at Gerard Klauer Mattison. The big theater operators have been on a building binge, growing their number of screens at an annual rate of 8%-10% for the last several years. Florin says. Over that same period, annual attendance has largely remained flat, at around 1.5 billion admissions, says PaineWebber's Dixon.

And while the theater operators have given moviegoers the comforts they want with their newer megaplexes, they haven't shuttered their older multiplexes nearly fast enough, which has cut into profits, Florin says.

The facts that the summer box office numbers are off last year's pace by 5% and that 2000 box office numbers are basically flat with last year's don't help matters.

As a result, theatrical operator stocks have been taking a beating over the last several months. Entertainment Properties Trust (EPR Quote), a Kansas City, Mo.-based real estate investment trust leases the properties it owns to several of the big theater owners (and therefore is something of a broad-based indicator of the sector), has seen its share price fall more than 25% off its 52-week high of 16.25 last September. EPR shares were down 5/16, or 3%, to 11.19 in midday trading Monday.

The sector is due for consolidation, which would accelerate the shutdown of underperforming and aging theatres, Florin says. In the short term, the bankruptcies might speed up closings and belt-tightening overall, he says.

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