AMC Entertainment (NYSE:AMC) stock had quite the Memorial Day weekend at the box office thanks to Tom Cruise’s revival of the Top Gun franchise 36 years after the original first appeared in theaters.
According to the company, out of nearly 4 million tickets sold over the holiday weekend at its theaters, 3.3 million were for Top Gun: Maverick. Not surprisingly, AMC stock has taken off due to the movie’s success.
If you’re AMC CEO Adam Aron, you’re happy with the action it received over the holiday weekend. It’s a sign Americans are ready to rebuild the box office lost during the pandemic.
There is no question this is good news for AMC and other movie theater chains. However, this benefit will be in the near term. In the long run, Top Gun: Maverick could have done double the box office over the holiday weekend, and it still wouldn’t change the fact AMC’s business is not economically sound.
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AMC Stock and Future Box Office
You would have to have been dropped on your head as a kid to think Top Gun: Maverick was going to do anything over the Memorial Day weekend but sell lots of tickets.
Not only has it been 36 years since Tom Cruise’s character last took to the sky, but the film’s been in the can and ready to go for two years; its screening was delayed because of Covid-19 and the pandemic.
So, the studio had two years to build anticipation for the film. There was only one possibility for the film’s release: boffo box office.
AMC’s business succeeds by growing three key metrics: attendance, average ticket price, and food and revenue per patron.
In 2018, the best year for box office revenues in the U.S. and Canada in the past decade, the three figures were 358.9 million, $9.34, and $4.66 per patron. In 2021, they were 128.5 million, $10.85, and $6.67, respectively.
So, if AMC can get back to attendance figures anywhere close to 2018, it’s got a shot at making decent money in 2023 and beyond.
However, there’s a little thing called stagflation that should have AMC and any other business that relies on discretionary income quaking in their boots.
Stagflation’s Effect on AMC’s Business
Stagflation, for the uninitiated, is a combination of stagnant growth and high inflation. Consumers across the country are already making choices about what stays in the budget and what goes.
A one-time concession to the budget to take in the sequel makes total sense. Going to the movies weekly when gas is over $5 doesn’t seem very realistic.
A recent article from Skift, a leading travel industry magazine, discussed what stagflation would mean to the hotel business.
“[I]f stagflation emerges, so will fresh challenges. Some hotel companies will prove more resilient than others. Key factors could be hotel company profitability, their cost structures, the types of guests that they mostly serve, and the nature of their debt burdens,” stated Skift contributor Sean O’Neill.
Sure, it’s an apples and oranges comparison, given a night in a luxury hotel is much higher than the cost of a movie outing, but if stagflation carries into 2023, AMC doesn’t have a hope of getting back to the good old days of 2018.
It’s also important to remember that AMC has a tremendous debt burden. At the end of the first quarter, it was $10.78 billion. This figure includes operating lease liabilities, etc. In 2018, it was $5.28 billion, half what it is today.
AMC can ill-afford to have stagflation rear its ugly head. Unfortunately, it might not have a choice.
The Bottom Line
Aron can talk about investing the company’s billion-dollar war chest, but the reality is that it’s unlikely to change the economics of the movie business. It’s not great. You have high fixed costs – movie theaters aren’t cheap to lease – and a company whose success relies solely on movie studios putting out stuff that people want to see.
As I’ve said in the past when talking about AMC, it’s got to create additional revenue streams beyond theater admissions, food and beverage, and in-theater advertising. Otherwise, 2018 was as good as it’s going to ever get.
In the meantime, interest rates are going up, the prices on nearly everything are going up, and wage increases aren’t keeping up. That’s a terrible recipe for success if you’re America’s largest movie chain.
Tom Cruise can’t save AMC. The numbers don’t work.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.