The most confounding factor of Wall Street’s recent lunacy around stocks like GameStop, Nokia, and Blackberry is the disconnect between each volatile share price and future prospects of the business. The inside jokes seem to be that everyone knows they’re destined to fail, relics of a consumer market that has long since moved on from their products. Is AMC Entertainment, caught up in the mess created by feuding Redditors and hedge funds, any different? Investors are looking at AMC, wondering if it’s simply a dying company or one of the first giants to fall in a dying industry.
Movie theaters have been a ubiquitous part of the American diaspora for decades, representing more than just a place to see a film. A local cinema meant your town was on the map, a movie theater was a symbol of place and prosperity for a community. Closing the local cinema was a death knell, poignantly explored in the Academy Award-winning film The Last Picture Show. Without a movie theater, the town of Anarene, Texas had little reason to exist and residents had even fewer reasons to remain. A reckoning wrought by a global pandemic has hundreds of towns across America staring down a similar fate.
The nation’s largest movie theater chain, AMC Entertainment, with 636 locations and 8,094 screens, is flush with new cash, riding one of Wall Street’s wildest waves. Burning through money at an astonishing rate to stay afloat, it’s unclear how AMC will make it out of the storm. Investors aren’t sure either, shorting roughly 70 percent of AMC’s total shares. The fate of the cinema titan will send ripples through retail portfolios and malls backed by traffic from moviegoers who aren’t there.
“Any talk of an imminent bankruptcy for AMC is completely off the table,” CEO Adam Aron said in a statement. Aron’s answer to skeptics came after months of speculation in the form of a $917 million cash infusion. AMC spent nearly $400 million in the final quarter of 2020. That’s on top of the debt AMC is servicing. Already in debt to the tune of nearly $5 billion before the pandemic started, the company has borrowed more to stay afloat, often at high rates, a sign of lenders’ skepticism. The interest expense alone on the company’s debt has outpaced its peak operating income in a single year.
Wall Street offered a brief lifeline as day traders pumped the stock, quadrupling its value, peaking at $20.36 a share. The company said it raised just over $300 million selling stock at $4.80 but it’s unclear how many, if any, shares the company sold at peak prices. Authorizing additional shares to be sold on such volatile swings to capitalize on the fervor takes time. AMC may have already missed its opportunity. The movie-theater chain’s price per share fell by 55 percent on Tuesday, sliding alongside all the other ‘meme stocks’ Redditors have been pushing. The retail trader revolution appears to be losing steam. Weeks of headlines and talking heads discussing AMC will have gained the company next to nothing.
“Consumers have a sentimental connection to movies. They will come back. People are starved for the outside world and will come out in massive hordes to watch movies,” Reddit user u/my-time-has-odor said in the original post that sparked Reddit’s run on AMC. Redditors are intent on holding their shares to beat the short sellers driving the price down, making a case for AMC’s long term prospects. A nationwide vaccine rollout leading to an influx of moviegoers and detailed ways in which AMC can service its debt made a convincing case to the ‘degenerates’ that inhabit the now-infamous WallStreetBets sub-Reddit.
Parsing out what is inherent to the movie-theater chain industry and which are of AMC’s making is the multi-million dollar question. AMC’s two biggest issues are declining attendance and mounting debt. The former is an industry’s problem, the latter is an AMC’s problem. “In the current health crisis, where movie theatres are shuttered or attendance is drastically limited because of the global pandemic, I still have hope bordering on certainty that when it’s safe, audiences will go back to the movies,” three-time Academy Award winner Steven Spielberg wrote in a recent op-ed.
No one is saying movie theaters are going away, but it’s likely there will be far fewer going forward. Tickets sales peaked in 2002, which the industry has compensated for by raising the average price of a ticket by more than 50 percent. Before the pandemic, revenue was up across the movie theater industry thanks to ballooning concession and ticket prices, but it all obfuscates the fundamental issue of declining attendance. Pushing prices may be a short-term solution but ultimately it’s driving moviegoers away who scoff at the thought of paying $50 in tickets and snacks to see a movie. The big screen used to be a cheap date that teenagers could afford with an allowance. In 2021, that pricing model seems quaint.
Streaming platforms and movie studios have left theater operators with few options. Disney +, HBOMax, Netflix, Apple TV and others are working with studios, many of which they operate, to cut movie theaters out of the equation, delivering the newest films directly to audiences at home. AMC was able to negotiate an exclusivity window with Universal Studios before new movies hit Peacock, owned by Universal’s parent company Comcast. AMC wanted 75 days of exclusivity, they got 17. That’s only one major studio. To the studio’s credit, most have opted to keep delaying major releases rather than release them directly to streaming services. A few thousand additional streaming subscribers is nothing compared to making tens of millions from a nationwide release. For theater operators, margins on ticket sales aren’t that good to begin with, most of the ticket price is going to the studio. It’s the concession stand where movie theaters actually profit. In a good year, concessions end up representing around 40 percent of movie theaters’ profits while only accounting for 20 percent of revenue. But concession stands are closed, even if movie theaters are open.
“Yes, streaming is around. Yes, some people will watch movies on streaming services instead, but we’re very confident that the appeal of cinemas are great,” Aron told CNN Business. “People enjoy the communal experience of laughing together, crying together, howling hard together. And people have written off movie theaters since the creation of radio and then television and then VCRs and then streaming. AMC is a hundred years old this year. We believe our second century will be just as bright as our first.”
Redditors defending AMC point to the company’s increasing revenue and slim losses. In 2012, AMC made $811 million. In 2019, they made $5.47 billion, an impressive number considering declining attendance. Still the company is losing money, but not much. Net income is negative but by hundreds of thousands, not millions, the Redditors say. With a debt-to-equity ratio over 10 to 1, survival will require major gains, not slim losses.
Declining attendance bottomed out during a global pandemic that prevented concession sales and caused studios to delay major releases or skip them altogether. There’s few reasons to go to the movies and even fewer ways for theater operators to profit from those few customers that do. With dwindling options for revenue and debt obligations mounting, AMC’s chances of survival remain bleak but not impossible. Spending nearly $400 million a quarter operating during a pandemic means the company’s new cash will buy time but how much time the company needs is unclear.
The pandemic is far from over. It’s hard to see any return to normalcy before the summer, which means AMC will continue to tear through its cash accounts for another quarter at least, likely two. Other major theater operators, like Cinemark, the second-largest operator in the US, are in better financial shape but still facing strong headwinds putting its future in doubt. A big summer movie season would give AMC a lifeline and bolster the prospects of a full recovery to generate another round of interest on Wall Street but there’s no guarantee consumer behavior will revert back to normal even with a full vaccine rollout. Time will tell if movie-going habits have changed.
“COVID didn’t introduce new trends to entertainment, but it did accelerate what was already happening,” Jim Wuthrich, president of Warner Bros. Home Entertainment, told Variety.
Where does that leave the thousands of business and retail operators who rely on movie theaters and AMC in particular as an anchor? Tied to a boat that is taking on water. Movie theaters have been blue-chip anchor tenants for decades. New movies kept potential customers coming back. Malls and shopping centers have spent years chasing the next major cineplex, building some of the best retail and mixed-use projects around them. Now these movie theaters are redefining the term ‘anchor’ as stunted traffic drags business and the businesses that rely on them down. Movie theaters were seen as safe anchor tenants among a field rife with bankruptcies. Shopping center owners have been coping with anchor closures like Sears, JC Penny, Macy’s and others for years. Some were hoping to fill those spaces with a movie theater. That option doesn’t seem so promising now, especially considering the typical length of movie theater leases.
Replacing anchors is part of doing business in the world of retail. “Every night I go to sleep thinking about who’s not going to survive tomorrow,” Ami Ziff, the director of national retail for Time Equities, told Commercial Property Executive.
To be clear, AMC and the cinema industry are far from done. Experts say AMC can dilute shares further to raise additional funds needed for survival, but the company would need to generate four times the profit it had made prior to the pandemic for those shares to be worth the same after so much dilution that’s already taken place. That option may be preferable to bankruptcy. In China, where the pandemic has subsided, moviegoers are returning in droves, setting a new single-day record on New Year’s Day. Almost all of AMC’s theaters are in the US, so the boost wasn’t felt, but the prospect of a robust 2021 after a vaccine rollout is gaining traction among AMCs investors and creditors. AMC’s great hope is the company stays solvent long enough to make it to the other side of the pandemic, where major releases like Dune and the latest James Bond film promise a return to glory. Ironically, AMC’s survival chances now rely on a movie titled No Time To Die.
AMC CEO Adam Aron says the company now has enough cash to make it all the way through 2021 based on a very detailed set of assumptions outlined in the company’s latest SEC filings. America’s largest movie theater operator is on a knife’s edge, any deviation from those assumptions could spell disaster for AMC and the tenants that rely on them as an anchor.
For many businesses, it’s already too late. Many of the retail locations that relied on AMC as an anchor didn’t have the same financial options as the movie theater giant. Few retail operations can afford to burn through a billion dollars in a single year. Landlords, like their tenants, are trying to hang on. The full extent of the damage from the pandemic will take time to understand. Experts expect more bankruptcies this year than in 2020 as cash reserves run dry. Coresight Research, a retail research and advisory group, predicts as many as 10,000 stores could be closed in the United States this year, an all-time record. By the time theaters make a comeback, how many stores will be left for them to anchor? The pandemic has forced retail portfolios to reconsider the term ‘anchor’ altogether as owners and portfolio managers search for answers that aren’t there.
AMC’s moment of Reddit-induced Wall Street mania was a flash in the pan. In Hollywood, they call it a red herring. Declining attendance and mounting debt were pre-existing conditions for AMC before the pandemic started. Soon the movie theater industry might find out what we all have learned during the pandemic: pre-existing conditions and COVID-19 are a deadly combination.