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The following is an excerpt from a report compiled by Michael Pachter of Wedbush Securities.
This biweekly newsletter lists key events in the movie rental and exhibition industries for the period between June 18 and July 1, including notable rental releases, box office figures and recent company-specific news.
Movie Rental Industry
Key Redbox releases this year (with domestic box office total in millions from boxofficemojo.com):
o 6/19: Sherlock Holmes: A Game of Shadows ($187), This Means War ($55), Jeff Who Lives at Home ($4).
o 6/26: 21 Jump Street ($138), Project X ($55), The Artist ($43), A Thousand Words ($19).
Key Redbox releases last year* (with domestic box office total in millions from www.boxofficemojo.com):
o 6/28: Beastly ($28), Season of the Witch ($25), The Warrior’s Way ($6), No notable releases the week of 6/21.
*estimated release date
Over the next two weeks, there are three notable releases compared to three last year, classifying notable releases as those that grossed over $50 million in domestic box office. We expect the upcoming two-week period to slightly outperform the same period last year. This year’s Fourth of July release slate includes Safe House, Wrath of the Titans, and Act of Valor, which together earned $280 in box office receipts. We estimate that last year’s notable Fourth of July releases included Rango, The Lincoln Lawyer, and Insidious, which together earned $234 in box office receipts.
On June 25, Coinstar (NASDAQ:CSTR) announced that it completed the acquisition of certain assets from NCR. Coinstar’s Redbox division will purchase DVD kiosks, certain retailer contracts, intellectual property and DVD inventory from NCR for $100 million. Additionally, NCR is guaranteed $25 million in total margin over five years in connection with an arrangement whereby Coinstar will purchase products and services from NCR. The company expects to incur $40 – 45 million in additional capital expenditures while Redbox replaces acquired kiosks with new Redbox kiosks. Coinstar expects this to impact EPS by $0.40 – 0.50 over the remainder of FY:12, but expects the acquisition to be accretive in 2013.
Netflix (NASDAQ:NFLX) shares weakened on forecast of back-end-loaded subscriber growth and continued negative press since Q1 earnings, declining 35% since April 20. Netflix’s 2H net adds guidance is unrealistic, in our view, and will likely come in closer to 6 million than 7 million for the full year. Negative press and mounting competition have also impacted shares.
April domestic box office ended down 9.0%. The Hunger Games was the number-one movie in April, after its late-March release. Also notable was the re-release of Titanic in 3D, having earned $57 million during April. We expect studios to continue re-releasing mega-blockbusters in 3D due to the lift they provide to typically slower periods.
May domestic box office ended down 1.3%. The Avengers was the runaway blockbuster in May, breaking the opening weekend record and surpassing expectations, with $532 million domestically during May. However, Pirates of the Caribbean: On Stranger Tides and The Hangover Part II both earned ≈ $150 million during the end of May last year, while Men in Black III earned only $83 million during the end of May this year (MIB3 has earned $170 million to-date).
Total Q2 box office came in down 1.3%, with June ending up 4.7%. June box office ended up 4.7% with Madagascar 3($176 million in June) in the lead, while The Avengers ($605 million in Q2) was by far the highest grossing movie during Q2. As expected, Disney’s (NYSE:DIS) Brave ($121 million in June 2012) outperformed last year’s Disney release, Cars 2 ($90 million in June 2011). Altogether, box office receipts in Q2 were slightly below our expectations (our models reflect up 1.9%).
We suspect that Regal (NYSE:RGC), Cinemark (NYSE:CNK) and Carmike may narrowly outperform the industry box office in Q2, although margins will likely be impacted by a high concentration of box office within the top 10 movies. Of our covered companies, we believe Carmike is the most likely to outperform the industry box office in Q2. Also, while we are comfortable with our models slightly above the industry for Q2, as each company likely drove incremental traffic during the quarter with special screenings (Regal and Cinemark) and matinee specials (Carmike), we expect reduced film rental margins.
Expect continued weakness in Brazilian box office to be offset by smaller Latin American markets. We have concerns regarding recent Brazilian box office performance, given its size in relation to Cinemark’s international segment, but note that the company’s smaller international markets are performing well and will likely offset weakness in Brazil.
Michael Pachter is an analyst at Wedbush Securities.
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