Cineplex breaks the $5 food barrier, but profits fail to make the leap

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While Cineplex Inc.'s moviegoers spent a record amount on snacks and drinks in the first quarter of 2014, hot-selling concessions weren't enough to avoid cooling profits at the company.

The average Cineplex customer spent $5.05 on concessions, the first time that figure has topped $5. The increase is due mostly to a "zoning" strategy that reduces wait times in lineups and the expansion of specialty food stations such as Poptopia, which sells flavoured popcorn, that get customers spending more at the register.

More people passed through Cineplex theatre turnstiles in the quarter, due largely to last year's $200-million acquisition of 24 Empire theatres in Atlantic Canada. But the harsh weather that battered the East Coast this past winter pulled box office returns down nearly 10 per cent in the company's newest market, and earnings were already hampered by a slate of U.S.-centric movies the company says failed to catch on with Canadians.

"The stars weren't as aligned as we would like them to have been, and that's what hurt," Ellis Jacob, president and CEO of Cineplex, said in an interview. He cited theatres closed due to power outages as an example of the challenges encountered this past quarter.

The main challenge for Cineplex remains finding ways to bring more people to its theatres, which in turn helps its growing advertising business, where revenue grew 49 per cent in 2014 thanks in large part to last year's acquisition of digital signage firm EK3 Technologies Inc.

The cinema giant is also expanding a variety of premium experiences such as 3-D, UltraAVX and VIP theatres, which offer benefits from larger screens with better sound to more comfortable, reserved seats. Viewers love these new perks, Mr. Jacob said, but they have yet to have a major effect on revenues as they remain a comparatively small part of the market. Cineplex has 10 VIP and nearly 60 UltraAVX theatres across the country, as of Friday.

Cineplex reported first-quarter earnings of $5.1-million, or 8 cents a share, a decline of more than 42 per cent from $8.8-million and 14 cents a share a year earlier.

Revenue was $280-million, up nearly 13 per cent from $248-million in the first quarter of 2013. The company also raised its dividend 4.2 per cent to $1.50 a share.

In spite of the quarter's weaker results, Raymond James analyst Kenric Tyghe came away with a stronger conviction that the Cineplex model is appealing. He said much of what hobbled earnings was "literally beyond their control," and the 2014 film lineup has some stronger titles.

"The broader premiumization of product, both in the box office and at the concession stand, has significant runway left," he said. "It absolutely hasn't played out."

Yet the sky-high concession numbers are unlikely to get a substantial boost from sales of alcohol and more substantial food at VIP theatres. "I wish it moved the needle significantly, but from an attendance perspective, it's very, very small," Mr. Jacob said in a conference call with analysts on Thursday.

Cineplex executives did not point to competition from online services like Netflix as a source of concern, noting they have launched their own digital platforms for renting and buying movies, and signed up 300,000 new people to the SCENE loyalty program, which now has 5.6-million members.

As for further acquisitions, Mr. Jacob said the company will be "extremely disciplined," looking to dampen ongoing speculation. He said the company is "always" looking at opportunities, but cautioned that "to be bigger is not always better."