“I often compare movie theaters to theme parks. But theme parks control their own destiny,” says B. Riley FBR analyst Eric Wold
Theater chains AMC Entertainment and Cinemark Holdings have recently shown how the continued shutdowns amid the coronavirus pandemic have impacted their businesses. Both financially and operationally, however, things are about to look a lot worse.
AMC on Tuesday reported a loss of $2.2 billion for the first quarter, the three months ending on March 31. Cinemark reported a loss of $59.6 million for the same period. Both said COVID-19 had a significant impact on their financial results for the quarter, although that’s nothing compared to what’s to come when they report second-quarter results, which will include April through June.
“Nothing is in store for Q2. Revenue is a zero,” MKM Partners analyst Eric Handler said. “What matters right now is figuring out when business resumes and what the curve will look like as films are released and consumers return to theaters. Q2 is irrelevant to the story right now.”
AMC and Cinemark were forced to close theaters across the U.S. in mid-March, though AMC mentioned it saw some immaterial impact from overseas closures, prior to that. For the last three months, the cinema chains have generated no revenue.
B. Riley FBR analyst Eric Wold said there could be a future in which studios reevaluate how they make films and how much they spend and distribute them if crowds don’t come back in full force due to restrictions.
As theaters like AMC and Cinemark have to cut the capacity and showtimes of films, the question then becomes whether it makes sense for a studio to spend the millions they normally would to produce, market and distribute a middling film that might gross $60 million at the box office. It might start making more sense to put them on Disney+, HBO Max, Peacock, Netflix, etc.
“I think you’re going to have studios being very cautious about what they say right now since they still have finished films they need to distribute,” Wold said. “I often compare movie theaters to theme parks. But theme parks control their own destiny. They create the rides… there’s nothing anyone controls that they rely on. You can’t have a movie theater if there are no films.”
AMC and Cinemark have both have taken massive steps to cut costs and attempt to deal with any liquidity issues as they prepare to reopen for business in the coming weeks.
“While the theater closures are temporary, some of our cost saving initiatives will not be,” AMC CEO Adam Aron said during the company’s quarterly call with the Wall Street community on Tuesday.
During the three-month period, AMC drew down approximately $325 million under existing revolving credit facilities, and in April issued $500 million of 10.5% first lien notes due 2025, in attempts to increase liquidity and survive the pandemic shutdowns. The chain cut staff, furloughed employees and said it is even looking to permanently close some theaters.
Cinemark also laid off more than 17,500 hourly employees and furloughed 50% of its corporate employees while issuing $250 million worth of debt securities for general corporate purposes and to increase liquidity.
“Q2 is going to be close to a zero. The question becomes what do you get when you move into Q3… I’m still fairly cautious,” Wold said. “The stocks have come back some. It appears an eventual full return to operations, but we don’t even know what things will look like in the near term. There are still a lot of questions.”
AMC and Cinemark both plan to have all U.S. theaters open in July, and they’ve recognized the challenges of making sure theaters are clean, social distancing protocols are met and moviegoers feel safe returning.
Cinemark CEO Mark Zoradi told Wall Street analysts during the company’s quarterly conference call last week that in addition to requiring employees to wear masks and implementing physical distancing in its theaters, Cinemark will increase cleaning and sanitation measures, minimize physical interactions at the box office and concession stands, disinfect theater seats every morning and before each screening, provide hand and seat sanitizing for guests, screen employees before each shift, and stagger showtimes to minimize crowds.
On top of all of that, there’s the still looming concern that the pandemic has fundamentally changed Hollywood and the theatrical business in ways that aren’t fully realized yet.
“The worst case scenario is if some thing negatively happens with content,” Wold said. “That’s something that exhibitors have zero control over, and something that you probably won’t see until 2022.”