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WIKI ANALYSIS
Regal Entertainment Group manages the largest movie theater chain in the US. At the end of fiscal 2007, Regal Entertainment operated 6,388 movie screens in 527 theaters in 39 out of 50 states.[1] The movie theater industry is highly competitive due to the large number of players and the lack of control theater companies have on suppliers. In addition, Regal Entertainment's movie theaters must compete with in-home theater services, television movie providers and other forms of entertainment such as sporting events and music concerts.
To combat such competition, Regal Entertainment and other theater chains, such as AMC Entertainment and Cinemark USA , have moved to the megaplex theater format. Today, Regal Entertainment has an average screen/theater ratio of 12.1, which is about twice the industry average.[2] By providing a centralized location for multiple screens, Regal capitalizes on economies of scale by minimizing labor and concession costs.
Regal Entertainment’s revenues are directly tied to the success of the films that its theaters show. In fiscal 2007, it was helped by the success of large franchise movie sequels such as Spiderman 3, Pirates of the Caribbean: At World's End, Shrek the Third, and Harry Potter and the Order of the Phoenix. 2007’s box office success helped Regal Entertainment to increase its revenues to $2,661.2 million.[3] Regal Entertainment’s value is also contingent upon the financial wellbeing of National CineMedia, Inc., the largest digital in-theater advertising network in the US. Regal holds a 22.6% interest in the advertising firm, and NCM’s IPO in 2007 provided Regal Entertainment with $447.4 million in net cash flow.[4]
Business Overview
Geographic Breakdown
Regal Entertainment operates in 39 states and Washington, DC. The company has locations in the top 33 US designated markets and 44 of the top 50.[5] Regal specifically targets mid-sized metropolitan areas and high-growth suburbs of large metropolitan areas as locations for acquisition or development.[6]
Regal Entertainment decreased its number of theaters (539 to 527) and screens (6,403 to 6,388) during FY 2007.[7]
Financials
Theater chains have compensated for declining movie attendance in recent years by increasing ticket and concession prices. This has been successful in keeping revenues steady, as Regal Entertainment's revenues have continued to climb in the 2-3% range over the past 4 years.[9]
Revenues come predominantly from ticket and concession sales, which accounted for 67.8% and 27.6% of revenues respectively.[12]
| Revenue Source | 2007 Revenues (millions) | % of Total Revenues |
| Admissions | $1,804.5 | 67.81% |
| Concessions | $735.0 | 27.62% |
| Other | $121.7 | 4.57% |
| Total | $2,661.2 | 100.00% |
Like most theater companies, Regal Entertainment learned from massive industry losses in the early 2000s due to over-expansion. The company now grows primarily through acquisition, having added 17 theater circuits since 1995, rather than building new theaters and screens.[14] Most recently, Regal Entertainment purchased Consolidated Theaters, LLC, which operates 28 theaters in the Southeast and on the East Coast. The $210 million acquisition will take effect in 2Q 2008.[15]
Another contributing factor to Regal Entertainment's success in 2007 was the box office successes of blockbuster films. Because attendance comprises more than half of Regal Entertainment's revenues, the fluctuation of box office receipts are closely tied to revenues. In an effort to remain competitive, Regal Entertainment, along with other large theater chains, created National CineMedia, Inc., the largest digital in-theater advertising network in the US. Regal Entertainment is the largest investor (22.6%) in NCM, whose 2007 IPO netted Regal $447.4 million in net cash.[16]
Trends and Forces
Regal Entertainment's Revenues are Closely Tied to the Box Office Success of Movies
Movie theater companies' success is tied closely to the box office success of the films that it shows. Perhaps the best example of this was the 12% increase in box office receipts in 2002, which coincided with the release of the first Spider-Man, Lord of the Rings and Star Wars sequels, and another Harry Potter film. Regal Entertainment's EBITDA jumped 37% that year.[17] Again in 2007, box office successes boosted Regal Entertainment's revenues. Franchise films were helpful to the box office, as 4 of the 5 highest grossing films were sequels. (Spiderman 3, Pirates of the Caribbean: At World's End, Shrek the Third, and Harry Potter and the Order of the Phoenix).[18]
Sequels of high-grossing franchise films are often even more successful than their predecessors. 2008 also has a large number of sequels scheduled for release:
- The Dark Knight (July 2008) [20]
- The Incredible Hulk 2 (June 2008) [21]
- The Chronicles of Narnia: Prince Caspian (May 2008) [22]
- The Mummy: The Tomb of the Dragon Emperor (August 2008) [23]
- The Sisterhood of the Traveling Pants 2 (August 2008) [24]
- Saw 5 (October 2008) [25]
- High School Musical 3 (October 2008) [26]
- Harry Potter and the Half-Blood Prince (November 2008) [27]
- Indiana Jones and the Kingdom of the Crystal Skull (May 2008) [28]
However, with increased competition from non-movie theater industries, growing concern about declining attendance has arisen in recent years. Though Regal Entertainment's revenues have grown by 2.4% (FY 2007), 3.2% (FY 2006), and 2.0% (FY 2005) in the last three years, a decline in overall box office receipts would adversely affect the movie theater industry. [29] However, the US box office has grown by 3.5% (2006) and 5.4% (2007) in the last two years as a result of recent high-grossing film releases.[30]
Success of National CineMedia, Inc. Impacts Regal Entertainment
Regal Entertainment has a 22.6% interest in National CineMedia, Inc., the largest digital in-theater advertising network in the US. NCM IPO'ed in 2007, selling 38 million shares of common stock for $21 per share.[31] Despite the selling of shares to the public, Regal Entertainment retained its position as the largest corporate investor in NCM (more than AMC Entertainment and Cinemark USA).
Regal Entertainment has contractual agreements with NCM that will impact Regal Entertainment's revenues in the future. For instance, NCM pays Regal Entertainment an $800 per digital theater and $0.07 per patron access fee. These figures will rise following fiscal 2007, with the fixed $800 fee rising by 5% annually and the patron fee rising by 8% every 5 years. [33]
Rising Movie Prices Will Add Revenues per Ticket but may Drive Away Customers
The prices of movie tickets and concession items have been rising dramatically. This may be to compensate for declining ticket sales and other revenue-generating factors. The price increases are also due to higher transportation costs (due to rising oil prices), pressure to remain competitive in the industry, and rising inflationary pressures.[34] Ticket price increases have offset revenue-losses due to declining attendance. However, too much of a price increase will cause attendance to decline to the point of revenue losses.
Digitization of Theaters will Improve the Movie-Going Experience
One of the primary ways that Regal Entertainment and other industry leaders are attempting to corner larger market share is through investment in digital projection theaters. Regal Entertainment will begin digitizing its theaters in the second quarter of 2008. Two new theaters have already successfully been built with digital projection capabilities and Regal Entertainment hopes to be finished upgrading to digital technology within three to four years. To finance this investment, Regal Entertainment, AMC Entertainment, and Cinemark USA have set up a joint venture called Digital Cinema Implementation Partners, LLC. DCIP is still in the process of finalizing finance plans. Regal Entertainment sees the upgrade to digital projection theaters as a growth opportunity through both increased quality and the compatibility of digital projection with 3D and IMAX format movies. Regal Entertainment has increased its 3D theaters to 135 and IMAX auditoriums to 18 in FY 2007.[36] Since both AMC Entertainment and Cinemark are also upgrading theaters, installing digital theaters is a capital expense that will not differentiate Regal Entertainment's brand from others. Though the investment will not provide additional value from an enhanced product, it will keep Regal Entertainment competitive, thus protecting against a deterioration of market value.
Regal Entertainment's $0.30 Quarterly Dividends Positively Affect Earnings per Share
Regal Entertainment has a policy of paying quarterly cash dividends to its stock holders. It paid out abnormally high dividends for Q4 2006 as a result of the IPO of National CineMedia, Inc. Regal Entertainment, which has a 22.6% interest in NCM, received $447.4 million in net cash proceeds and paid its investors $2.00 per share of Class A and Class B common stock (totaling about $302 million of these proceeds).[37] The $2.00/share dividend was in addition to Regal Entertainment's $0.30 quarterly dividend, which affected basic earnings per share in FY 2007.
| Year | Basic Earnings Per Share | Total Dividends |
| 2005 | $0.63 | $1.20 |
| 2006 | $0.58 | $1.20 |
| 2007 | $2.39 | $3.20 |
Competition
Regal Entertainment, along with other theater chains, faces substantial competition from other theater chains, in-home movie services, television movie providers and from other forms of entertainment. Because the theater industry is so competitive, individual theater companies have little influence over suppliers. Even Regal Entertainment, the largest theater chain, had only 16% market share in FY 2007.[39] The movie theater industry is top-heavy: the largest 5 companies (Regal Entertainment, AMC Entertainment, Cinemark USA, Carmike Cinemas, and National Amusements) control 45% of the market share while the next 5 only control 8%.[40] National Amusements is a private company.
Revenue information for AMC Entertainment is not yet available for FY 2007. [41]
How is Regal Entertainment Different?
As the largest theater chain, Regal Entertainment operates with the greatest economies of scale and thus the highest operating margins of any theater company.
How is Regal Entertainment Similar?
Below the largest companies, the movie theater industry is fragmented and highly competitive. Few barriers to entry exist and studies have shown that consumers are not loyal to a particular company; instead, moviegoers base their decisions off of proximity, the films showing, and amenities.[43] For this reason, the movie theater industry lacks expansion opportunities, especially in the growth of internal operations. Regal Entertainment's growth potential lies primarily through acquisition, which will allow it to tap new markets.
Notes
- ↑ RGC 2007 10k, Item 1: Business, pg. 4
- ↑ RGC 2007 10k, Item 1: Business, pg. 4
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Resulting Operations, pg. 40
- ↑ RGC 2007 10k, Item 1: Business, pg. 4
- ↑ RGC 2007 10k, Item 1: Business, pg. 4
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg. 30
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg. 30
- ↑ RGC 2007 10k, Item 1: Business, pg. 6
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg. 26
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg. 27
- ↑ Credit Suisse, "Regal Entertainment Group," 4/24/07
- ↑ Pajiba.com, "The Ten Highest Grossing Films of 2007," 1/9/08
- ↑ National Association of Theater Owners, "Total U.S. & Canada Box Office Grosses," 2008
- ↑ The Internet Movie Database, "The Dark Knight," 2008
- ↑ The Internet Movie Database, "The Incredible Hulk 2," 2008
- ↑ The Internet Movie Database, "The Chronicles of Narnia: Prince Caspian," 2008
- ↑ The Internet Movie Database, "The Mummy: The Tomb of the Dragon Emperor," 2008
- ↑ The Internet Movie Database, "The Sisterhood of the Traveling Pants 2," 2008
- ↑ The Internet Movie Database, "Saw V," 2008
- ↑ The Internet Movie Database, "High School Musical 3," 2008
- ↑ The Internet Movie Database, "Harry Potter and the Half-Blood Prince," 2008
- ↑ The Internet Movie Database, "Indiana Jones and the Kingdom of the Crystal Skull," 2008
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25
- ↑ Motion Picture Association of America, "Theatrical Market Statistics," 2007
- ↑ RGC 2007 10k, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation, pg. 39
- ↑ Credit Suisse, "Regal Entertainment Group," 4/24/07
- ↑ RGC 2007 10K, Item 8: Financial Statements and Supplementary Data, pg. 71
- ↑ Seeking Alpha, "Inflation is Hitting the Entertainment Dollar as Well," 3/5/08
- ↑ National Association of Theater Owners, "Average U.S. Ticket Prices," 2008
- ↑ RGC 2007 10k, Item 1: Business, pg. 7-8
- ↑ RGC 2007 10k, Item6: Selected Financial Data, pg. 40
- ↑ Morningstar, "Regal Entertainment Group, Inc.," 2008
- ↑ Morningstar, "Regal Entertainment Group, Inc.," 8/31/07
- ↑ Morningstar, "Regal Entertainment Group, Inc.," 8/31/07
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25;AC 2006 10k, Item 7: Discussion and Analysis of Financial Condition and Results of Operations, pg. 45; CNK 2007 10k, Item 6: Selected Financial Data, pg. 25; CKEC 2007 10k, Item 6: Selected Financial Data, pg. 22
- ↑ RGC 2007 10k, Item 6: Selected Financial Data, pg. 25;AC 2006 10k, Item 7: Discussion and Analysis of Financial Condition and Results of Operations, pg. 45; CNK 2007 10k, Item 6: Selected Financial Data, pg. 25; CKEC 2007 10k, Item 6: Selected Financial Data, pg. 22
- ↑ RGC 2007 10k, Item 1: Business, pg. 1
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