As AMC seeks to add more theaters to its portfolio, insiders warn that the market already has too many screens

AMC Entertainment's revitalization plan hinges on adding new theaters, but former Regal Entertainment CFO David Ownby told Jefferies there are too many screens in North America.

Box office experts agree that moviegoing is not going to disappear. The pastime is inexpensive, enjoyable and can drive billions of dollars in ticket sales. In the last two weeks, the domestic box office has set ticket sales records for the pandemic era, a welcome sign of recovery for the industry.

It's a particularly promising signal for AMC, which raised around $2 billion in cash over the last six months and plans to use some of the fresh funds to acquire more theater locations. Its best-case scenario is that the public will continue to turn out to see films on the big screen, and with more market share, AMC will reap the benefits of those ticket sales.

As AMC moves to add more theaters, it's searching for high-performing locations that were abandoned during the pandemic, it may also need to shed some of its underperforming cinemas.

Speaking with Jefferies, Ownby said America is "over-screened." Before the pandemic, there were around 40,000 screens. The bottom 15% of those locations generated only around 5% of the box office, Jefferies said in a research note Monday.

Ownby, who worked for Regal from 1999 to 2018, suggested that a healthy screen count would be 32,000 to 35,000.

His thesis matches others in the industry who have noticed a decline in moviegoing even before the pandemic. These analysts foresee that trend continuing.

"I don't know if we can sustain the kind of attendance we had in the past," said Doug Stone, a box office consultant and former theater operator. "I personally don't think we'll ever get back to the [levels] in 2019."

In the last two decades, the highest number of tickets sold was 1.6 billion. That happened in 2002. In 2019, attendance hovered around 1.2 billion. Cinema owners have kept ticket revenue high by raising prices.

"I think you are going to see a reduction in the number of seats, if not screens," Stone said. "I think you are going to see more luxury-based entertainment. I think you are going to see these giant 30-screen complexes dry up, either get reduced or turned into some sort of luxury venue."

In the last decade, movie theaters have increasingly retrofitted their locations with recliner seats in an effort to make the moviegoing experience more appealing to audiences. With these improvements, cinema owners are also able to charge more per ticket.

These seats are much larger than the stadium seating that is being torn out. So, as these refurbishments are happening across the industry, theater chains are actually decreasing the number of available seats per showing.

AMC's CEO Adam Aron said some of the money raised from recent stock sales will go toward theater improvements. These upgrades would likely be paid for in cash, meaning AMC wouldn't be adding to its more than $5 billion debt pile. The same would be true for any new theater leases or purchases.

While some box office analysts see a long-term payoff for this strategy, others feel AMC should make debt repayment a top priority.

"AMC should focus on debt reduction rather than acquisitions," MKM Partners' Eric Handler said in a research note Tuesday. "In our view, with a stabilized balance sheet, AMC would be best served by using its newly raised capital to reduce its sizable $5.5 billion debt load rather than pursue acquisitions."

Insiders including Ownby and Stone have questioned whether AMC will be able to generate positive cash flow in the near term. They say paying down debt now, even if the majority of it isn't due for three to five years, could be a better use of AMC's funds.

"Management has been gifted an unforeseen opportunity from the recent wave of (fanatical) retail investor momentum, which has pushed the shares far above historical valuation levels," Handler said. "We believe shareholders would be best served through debt repayment."

Shares of AMC have spiked more than 478% in the last month and are up 2,600% this year as AMC's surge forces short sellers to give up their bearish positions. The stock was up 9% in early trading Tuesday.

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