Movie Industry Update: April Box Office Sucked

Key Redbox (NASDAQ:CSTR) releases this year (with domestic box office total in millions from www.boxofficemojo.com):

o 5/8: The Vow ($125), Underworld Awakening ($62), New Year’s Eve ($54), Joyful Noise ($31)

o 5/15: The Devil Inside ($53), One for the Money ($26)

Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):

o 5/10: Harry Potter and the Deathly Hallows ($296), Justin Bieber: Never Say Never ($73)

o 5/17: Gulliver’s Travels ($43), The Roommate ($37), The Mechanic ($29)

*estimated release date

In the upcoming two-week period, there are two notable releases compared to two last year, classifying notable releases as those that grossed over $50 million in domestic box office. We expect the upcoming two-week period to narrowly underperform the same period last year as Redbox’s biggest release in the upcoming period is Contraband. This compares to Gnomeo and Juliet, which performed better at the box office in the comparable period last year.

On May 16, we attended Coinstar’s Analyst Day, during which, management provided details regarding the impending coffee rollout, the Verizon (NYSE:VZ) JV, and other new ventures. We believe the coffee kiosk opportunity could generate as much as $0.65/share when fully penetrated, and potentially even more. With respect to the Verizon JV to be launched in 2H:12, we are encouraged that Coinstar limited its exposure by requiring the JV to pay it for DVDs rented, suggesting that the company will not lose money over the long run. Coinstar also mentioned a “new Redbox venture”, specifying only that the venture would be entertainment-oriented. We suspect it will involve movie ticket kiosks.

On April 23, Netflix (NASDAQ:NFLX) reported better-than-expected Q1 earnings with an improved earnings outlook for 2012, but shares weakened on back-end-loaded subscriber growth, declining 33% since April 20. The company’s 2H net adds guidance is unrealistic, in our view, and will likely come in closer to 6 million than 7 million for the full year.

Exhibitor Industry

April domestic box office ended down 9.0%. The Hunger Games (NYSE:LGF) was the number-one movie in April, earning an additional $139 million during the month, after its late March release. It has earned $392 million domestically at the box office to date. The re-release of Titanic in 3D was the third-highest-grossing movie in April, earning $57 million. We expect studios to continue re-releasing mega-blockbusters in 3D due to the lift they provide to typically slower periods.

May month-to-date box office is tracking up 34.7%, although we expect it to end up around 15%. The Avengers has been the runaway blockbuster so far in May, breaking the opening weekend record and surpassing expectations. However, with big releases in the end of May last year (Pirates of the Caribbean: On Stranger Tides and The Hangover Part II) and only Men in Black III remaining in May this year, we expect the month to end up closer to 15%.

We expect Q2 box office to be up 1.9%. Quarter-to-date box office is tracking up 8.8%. We expect a negative April, and the potential for a small decline in June due to a tough comp from June 2011, we expect Q2 to be up around 1.9%.

The solid start to 2012 alleviates any pressure we earlier feared with respect to Regal’s (NYSE:RGC) cash position. Regal reported earnings above expectations on May 1. The earnings beat was a combination of admissions revenue per average screen in excess of industry trends, as well as impressive cost control.

We believe that Cinemark’s (NYSE:CNK) international segment will perform similarly in Q2 as it did in Q1. We have concerns regarding recent Brazilian box office performance, given its size in relation to Cinemark’s international segment, but note that the company’s smaller international markets are performing well and will likely offset any weakness in Brazil.

We expect Carmike (NASDAQ:CKEC) to continue performing ahead of the industry. Over the previous four quarters Carmike’s earnings have become more and more impressive. We expect the company to continue to outperform the industry in attendance, while maintaining superior cost control. We also expect meaningful contribution from Screenvision.

Chinese real estate group Wanda purchases AMC Entertainment for $2.6 billion. Wanda plans to invest $500 million to pay down AMC’s debt, update theaters, and fund operating initiatives. AMC is the second-largest domestic theater chain behind Regal. We believe this is positive for the industry in general.

Michael Pachter is an analyst at Wedbush Morgan.