Movie Attendance Wanes, Bonds Tumble For Carmike

After a disappointing Thanksgiving weekend at the box office, Carmike Cinemas announced it would not meet fourth quarter earnings projections and although the movie theater chain did not release specific numbers, its bonds initially fell more than 8% to 88 from 96 last week. They later rallied slightly to gain back a point or two and by late last week, they peaked at 89 to 90. However, analysts said they remained cautious over the near-term and adjusted revenue estimates for 2000.

"In most cases, it seems the Street's expectations of revenue in the fourth quarter were higher than we're seeing actually come to play," said John Smitley, Carmike's comptroller. "It was a warning to the Street that based on our estimations, we would not be hitting the analysts' consensus."

Bear, Stearns & Co., for example, revised its fourth-quarter revenue projections to $123.7 million down from $136.2 million and fourth quarter EBITDA to $20.9 million from $27.0 million. Bear Stearns also took a more conservative view of fiscal 2000 on the news, projecting revenue to be $550.0 million, down from $563.8 million, and EBITDA to be $104.0 million, down from $112.8 million.

While Smitley agreed that Bear Stearns' numbers were reasonable, analysts suggested that even the revised figures were overly positive.

"That EBITDA number is ridiculous. We were at $20 million and that was high. I think it'll probably fall to $16 million to $18 million," said one movie theater sector analyst. "[Those numbers] are not accounting for enough interest on the debt, and I don't think they're accounting for the fact that newer screens are costing much more than equity analysts expected."

Carmike, like rivals United Artists Theatre Circuits and AMC Entertainment, has been hit hard by higher-than-expected costs in completing the buildout of new megaplexes and a weak movie product over the past several quarters. The company also has been saddled with a heavy debt burden created by heavy construction and the recent hike in interest rates.

Carmike is nearing the end of an aggressive expansion into more small- to mid-sized communities, many in North Carolina and Tennessee. The Georgia-based movie theater chain currently operates approximately 470 theaters with more than 2,600 screens in 36 states.

"Newer screens are costing more than people expected - it's a bigger box, with 12 or 14 screens, rent's higher, they're signing new terms at the market rate for the most part, and there's the cost of running a brand new screen with stadium seating," said one analyst. "It makes a lot of sense that operating expenses are higher."

And investors have been wary of the industry since the summer, when the sector hit a slump and UAC's bonds were trading at near-bankruptcy levels.

"We haven't been big on the whole theater sector for a while because of concerns about the over-build and capital expenditures going on," said portfolio manager Jerry Paul of the Invesco High Yield Fund.

Lower Spending, Higher Cash Flow

In the coming fiscal year, Carmike is expected to reduce its capital expenditures to $55 million from $175 million in fiscal year 1999. The company's focus, Smitley said, is to complete the construction deals it already has signed and committed to. It will not begin any new projects unless they are of major strategic importance.

"With that reduced capital expenditure on construction we'll be able to start using the free cash flow to be generated by the new builds that have gone up in the last few years to start reducing debt," said Smitley.

Carmike's new theaters should begin reaching maturity over the next 12 months to 16 months and begin generating positive revenue early in 2001.

Still, the company needs a stronger movie product to entice people back into theaters.

"The thing to worry about with these guys is that they're in rural markets - they're not seeing so much competitive overbuild, they're not seeing the decay that the others are in older theaters. But when the movie product stinks, people are not going to go to the movies," said one analyst.

"It's impossible to predict...there are so many pictures that are hyped that do nothing; so many pictures that you've never heard of that come out of nowhere and do extremely well," said Alan Gould, analyst with Gerard Klaurer Mattison & Co.

Carmike, however, is not banking on a strong holiday season at the box office.

"We're not expecting any major increases over last year's numbers. That's one reason we went ahead and gave the warning," Smitley said.