Exhibitors eagerly saw moviegoers return to their local theaters in the second quarter after many months of closures and false starts. But with a resurgence of pandemic-era health risks and new distribution strategies on the part of studios, there remains little certainty about the business of tomorrow.

Film exhibitors AMC Entertainment Holdings Inc. and Cinemark Holdings Inc. and cinema technology company IMAX Corp. recently reported earnings that beat expectations in many metrics, inspiring AMC CEO Adam Aron to say that it is time "to start playing on offense again." That outlook is supported by other hopeful signs, like the recent outperformance of The Walt Disney Co.'s sci-fi comedy "Free Guy."

Early this year, pent-up demand from home-weary consumers and pent-up supply from studios sitting on a backlog of films were expected to drive a strong second half. But those bullish forecasts are now threatened by rising COVID-19 cases in many parts of the country and alternative distribution strategies, analysts say.

"It's pretty clear that if you're in a state where large groups of people ... aren't vaccinated, there is concern with going out to theaters. And if there is an option to see it at home, they will see it at home," B. Riley Securities analyst Eric Wold said in an interview.

Throughout 2020, major studios repeatedly delayed the openings of their largest films as guidelines around theater reopenings and public health evolved. The unreliable film slate left exhibitors in an existential lurch: When they could open, they had virtually no supply of new films to show. Now with new coronavirus variants resurfacing many of those guidelines, "you're starting to see some of that risk creep back into the landscape," Wold said.

Exclusivity windows

The pandemic is also forcing studios to experiment with release strategies. When Disney's "Black Widow" and Warner Bros.' "Suicide Squad" were released in theaters, they opened simultaneously on the Disney+ and HBO Max streaming platforms, respectively. While both titles saw reasonable opening weekends at the box office, their revenues dropped off dramatically in subsequent weekends as fans opted to take any repeat viewings at home, Wedbush Securities analyst Alicia Reese said in an interview.

There are signs that studios and theater owners are starting to hammer out a new model, with AMC recently announcing a new windowing deal with Warner Bros. that will keep the studio's 2022 films exclusively in theaters for 45 days before they are released on HBO Max. While this is only half the length of the traditional 90-day exclusivity window for new blockbuster films prior to the pandemic, AMC in 2020 agreed to a 17-day minimum theatrical window with Comcast Corp.

There are also signs that models remain in flux. Sony Group Corp. recently sold the rights to its animated feature "Hotel Transylvania: Transformania" to Amazon.com Inc.'s Prime Video, according to multiple reports. The film will skip a theatrical window entirely and head straight to the streaming platform. That arrangement is particularly troubling since Amazon has so far been dedicated to theatrical exclusivity and it is currently in the process of acquiring MGM Holdings Inc., Reese said.

As the industry settles on new standards, it seems windowing will become a much more flexible arrangement between studios and exhibitors than it used to be, and that could create more flexibility in pricing, Reese said. The analyst noted that theaters could charge more for big blockbuster releases that have a very dedicated audience, and then offer less expensive tickets for smaller-budget films that make a short pit stop in theaters before going to streaming.

Reasons for hope

Still, there are some positive signs for theater operators. The $1.34 billion collected by domestic theaters during the summer season through Aug. 8 is incomparably higher than the $8.1 million scraped out during the same period of 2020, according to data from Kagan, a media research group within S&P Global Market Intelligence.

That comeback was reflected in recent theater operator earnings. AMC saw its bottom line rebound from a $5.38 loss per share in the 2020 second quarter to a 72 cent loss per share in the second quarter of 2021.

Of course, that EPS figure also reflects the fact that the company diluted its equity by almost 5x to raise survival capital through the pandemic. AMC ended the second quarter with 513.3 million common shares outstanding, versus only 104.3 million at the end of June 2020.

Cinemark entered the pandemic with a much more forgiving balance sheet and more available cash, so it was able to weather the closures without leaning as heavily on financial engineering. Its second-quarter recovery was not nearly as dramatic as AMC's, with its second-quarter EPS loss narrowing to $1.19, versus a loss of $1.45 per share a year ago.

But the quarter still represented a "turning point" for Cinemark, Reese said in a recent note.

"The bottom line for Cinemark, in our view, is that it has not materially worsened its debt position, and we expect it to come out of the pandemic unscathed and ready to run," Reese said in the note.

And despite Cinemark only having about 56% of the screens in its network that AMC has, it still almost matched AMC on attendance levels in the second quarter, with 19.1 million customers versus AMC's 22.1 million.