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Theater stocks get pummeled as 2017 box office struggles

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Theater stocks get pummeled as 2017 box office struggles

Domestic box office sales have been floundering in 2017, and the country's biggest theater chains are paying the price.

Each of AMC Entertainment Holdings Inc., Cinemark Holdings Inc. and Regal Entertainment Group recently reported earnings, and investors did not seem pleased. Regal shares are down about 5.0% since its July 26 earnings release detailing a decline in revenue to $764.2 million from $785.9 million in the year-ago quarter and GAAP EPS of 15 cents compared to a consensus forecast of 17 cents.

Under market pressure from Regal's results, AMC on Aug. 1 posted an earnings preview that forecast a net loss of about $1.35 per share against an S&P Capital IQ consensus estimate of a $1.13 per share loss. AMC shares tumbled precipitously after the results were posted.

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"We are ... extremely disappointed by AMC's financial and operating results for the second quarter of 2017," AMC President and CEO Adam Aron said in prepared remarks included in the company's Aug. 4 earnings release, as the company shed over 20% of its market cap.

The AMC and Regal reports weighed on Cinemark, which gave up over 4% on the market between Regal's earnings and Aug. 2. However, Cinemark managed to impress investors with its own Aug. 4 earnings release, at least relative to its peers, outpacing the industry with 0.9% revenue growth and 1.4% EBITDA growth, aided by an 8.9% increase in concessions revenue per patron. From Aug. 2 to Aug. 7, Cinemark shares climbed back up almost 4%. Bullish analyst Michael Pachter of Wedbush Securities on July 26 upgraded the company to "outperform" on the pullback in shares after Regal's report.

"Clearly, summer box office has been disappointing relative to initial expectations, and August faces the most difficult comparison. Share price volatility could remain through the quarter. However, Cinemark effectively navigated a difficult box office," the analyst said in a Aug. 7 note reflecting on the company's results.

Domestic ticket sales were down 16.8% for the year through July 30, according to Kagan research, with the summer box office off by 8.1% so far. For the same period in 2016 the box office gross was up 3.1% on blockbusters like "Finding Dory," which collected $469.1 million domestically, "Captain America: Civil War," which grossed $406.9 million, and "Deadpool" at $363.1 million. Meanwhile, where 2017 box office has seen some successes like "Beauty and the Beast" at $504.0 million and "Wonder Woman" at $395.2 million, studios have not managed the same volume of major blockbusters.

The theater companies urged investors that this is a cyclical trend, not a secular shift in consumer patterns.

"Our industry has always experienced and will continue to experience short-term fluctuations in revenue, primarily related to the commercial appeal of the content available in any given period. Recent quarters are no exception. But against the backdrop of quarterly ups and downs, the long-term box office remains remarkably stable," Regal Entertainment Chairman and CEO Amy Miles said during the company's July 26 earnings conference call.

Besides just the troubled box office, investors are also concerned about the potential for a digital window encroaching on the theatrical window, long exclusive to exhibitors. Companies like Screening Room are proposing an in-home pay-per-view model for theatrical releases, while startups like XCINEX are developing technology the movie studios can use to launch their own premium video-on-demand platforms.

One analyst on Regal's earnings call described the PVOD issue as a "rain-soaked cloud" hanging over all three public theater companies. Miles responded that there are several conflicting opinions on the matter across the industry that have yet to be resolved, so the issue has not progressed much from its original conception and no change is imminent.