These Movie Theaters are Getting Downgraded Despite Higher Receipts

We are lowering our Q2 estimates for Carmike Cinemas (NASDAQ:CKEC), Cinemark Holdings (NYSE:CNK) and Regal Entertainment (NYSE:RGC) due to lower-than expected domestic box office receipts. According to www.boxofficemojo.com, Q2 domestic box office receipts were up 4% year-over-year, below the double-digit admissions revenue growth rates we had expected for each of our companies. Domestic box office was tracking roughly in-line with our expectations for the first two months of the quarter (April was up 5% and May was up 15%), but declined 5% in June. We attribute the June drop-off primarily to the strength of Toy Story 3 and The Karate Kid last year, and to a lesser extent, the underperformance of Green Lantern, Kung Fu Panda 2, and Mr. Popper’s Penguins this year.

We’re lowering our FY:11 and FY:12 estimates as well, as many of the factors driving Q2’s shortfall are likely to continue into the immediate future. In our view, a difficult domestic economy, rising movie ticket prices, a contracting release timeline, and the emergence of alternate (and cheaper) forms of entertainment (such as all-you-can-eat streaming) all had a
negative impact on movie attendance in Q2. We do not expect any of these overhangs to disappear over the next couple of years.

Despite our revised expectations for FY:11 and FY:12, we remain confident that the exhibitors can grow revenues over the second half of the year due to an abundance of high-profile releases and manageable comps (+5% in Q3 and -10% in Q4). Summer blockbusters expected to perform well in Q3 include: Captain America: The First Avenger, Conan the Barbarian, Harry Potter and the Deathly Hallows Part 2, Rise of the Planet of the Apes, Transformers: Dark of the Moon, and Winnie the Pooh, among others. High-profile Q4 releases are expected to include: The Adventures of Tintin, The Girl with the Dragon Tattoo, Happy Feet 2, Mission: Impossible – Ghost Protocol, Puss in Boots, Real Steel, Sherlock Holmes: A Game of Shadows, and The Twilight Saga: Breaking Dawn (Part One).

The effect of premium video-on-demand on the current release timeline remains a concern. We view the premium VOD window as a precursor to a compression of the current DVD window, which ranges from 120 – 150 days following theatrical release. We think that the studios are testing the waters with premium VOD, and fully intend to shrink the DVD window to something closer to 90 days in order to drive higher DVD sales and benefit from theatrical promotion budgets. While we don’t see this threat as imminent, we think it is inevitable, and we think that a shortened DVD window would have a greater impact on theatrical exhibition revenues. We understand that the exhibitors have some leverage in dealing with the studios, but in our view, a unified effort by the studios to compress the DVD release window will succeed, and will ultimately depress box office receipts.

Michael Pachter is the movie analyst at Wedbush Morgan.

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