MEDIA REPORTER
The movie industry knew this spring that it was potentially looking at a good box office this summer - as the first of the big blockbusters hit screens in Canada, ticket sales were unusually buoyant despite the soft economy.
But Ellis Jacob admits he didn't expect to be setting any records in the midst of a recession.
Now industry officials like Mr. Jacob, the chief executive officer of Canada's largest theatre chain, Cineplex Galaxy Income Fund, are wondering just how strong 2009 will finish. Like any good popcorn thriller, few can tell how it's all going to end.
The Canadian box office turned in its best July in recent memory, led by Transformers: Revenge of the Fallen, which has made $34-million in Canada since it opened in June, and a $27-million box office take by Harry Potter and the Half-Blood Prince over the past two weeks.
"Going back, it's hard to find a period where July has been that big," Mr. Jacob said yesterday as Cineplex reported a $19.9-million profit for the quarter ending in June - more than three times what it made in the second quarter last year.
Revenue was $249-million, the best quarter the company has ever seen.
The story of the movie industry of the past year has been one of resilient results, despite constrained consumer spending.
Mr. Jacob attributes this to Canadian theatres keeping ticket prices stable compared to exhibitors in the U.S., who have increased prices to make up for shortfalls in other areas, such as concession sales.
Analyst Ben Mogil at Thomas Weisel Partners told investors in a research note yesterday that a 16.2-per-cent increase in attendance at Cineplex during the quarter was due to conservative ticket pricing that led to more ticket sales. By comparison, the North American industry saw attendance increases of about 12 or 13 per cent on average, he said.
Cineplex has been aggressive over the past few years in finding new sources of revenue within its theatres, including concessions, alcohol, games and fast food, along with advertising sales. This year, Cineplex got rid of three theatres from its complex in Newmarket, Ont., to build the first Xscape Entertainment Centre, a 10,000-square-foot area that includes a lounge, a stage, a games area, party suites and virtual bowling.
While the company and other theatre chains have dabbled with this strategy since the 90s on a smaller scale, Mr. Jacob said the plan is to find certain theatre complexes where too many theatres have been built and convert that space into revenue-generating real estate with larger-scale activity centres.
So far, the concept has been profitable; however the summer is usually a busier time at theatres, so Mr. Jacob said he will wait to decide how big the firm wants to go on the idea. It will only be used in complexes where theatres are not being filled on a regular basis.
"For us, it's more about selected locations where these screens were slightly overbuilt for the marketplace. And I would say at most there may be half a dozen across the country," he said. "We don't want to jump until we know how successful this thing is. That's why I'm not going out there and saying we're going to do another five of them, until we see how this one works out."
Exhibitors such as Cineplex are depending on consumers wanting to see movies on the big screen rather than watch them at home on DVD or through video-on-demand on cable. Branding themselves as a movie experience, rather than simply a movie theatre, is an effort to compete with home theatres and the Internet, which has taken market share.
The biggest impact is being seen at movie rental chains. Contrasting with Cineplex's earnings yesterday was a $40-million (U.S.) loss at Blockbuster Inc. during the second quarter. Once a giant of the DVD rental market that posed a serious threat to theatre chains, Blockbuster's revenue slid 23 per cent to just over $1-billion in the quarter.
CINEPLEX (CGX.UN)
Close: $15.64, down 36¢
BLOCKBUSTER (BBI)
Close: 86¢ (U.S.), up 2¢
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Cineplex Galaxy
Q2 2009 2008
Profit $19.9-million $6-million
EPU 63 cents 40 cents
Revenue $248.6-million $209.3-million
Source: Company reports
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Playing the movie biz
There's nothing like escapism to get you through a recession - especially if you're an investor who has placed a big bet on the movie business.
Cineplex Galaxy
Canadian attendance revenue at Cineplex theatres jumped 16.2 per cent for the quarter. Profit was 231 per cent higher. This year, the company's units have matched the S&P/TSX's gains with a 20-per-cent run higher. But unlike companies in the broader economy, it didn't suffer a steep fall when the markets tanked - it was holding steady. Like many of the fund's movies, the units have a bonus feature - a yield of 7.9 per cent. Yesterday, the fund declared quarterly cash distributions of 31.5 cents a unit, up from 31 cents a year ago. Seven analysts follow the units with an average price target of $18.04; Cineplex closed yesterday at $15.65.
Regal Entertainment Group
Regal, one of the largest cinema operators in the U.S. with 558 theatres, declared a similar bump in earnings in the second quarter. It saw revenue increase to $789.2-million (U.S.) from $675.8-million a year earlier, and profit was $40.5-million, up from $24.3-million. Its shares are also up 20 per cent this year. Nineteen analysts follow the firm with an average price target of $14.77. Regal closed yesterday at $12.
Cinemark Holdings Inc.
This U.S. theatre chain operates all over North and South America. It pulled through the second quarter in a similar fashion, posting a 20-per-cent gain in profit. Cinemark's profit increased to $18.7-million (U.S.) from $15.5-million a year earlier. Its shares have been on an even better run - up 35 per cent in 2009. Unlike Cineplex, however, they did fall substantially during the market crash; they are down 35 per cent in the past year, and are yielding 7.1 per cent. Once again, analysts see room for growth. Average target is $12.67; Cinemark closed yesterday at $10.03.
Steve Ladurantaye
Grant Robertson