Marcus Corporation (The)

Good morning, everyone, and welcome to Marcus Corporation's third quarter 2026 earnings conference call. My name is Jonathan and I will be your operator for today. At this time, all participants are in listen only mode. We will host a question and answer session towards the end of this conference. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. If at any point during this call you require assistance, please press star 0 and an operator will be happy to assist you. As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President, and Chief Executive Officer, and Chad Paris, Chief Financial Officer and Treasurer of the Marcus Corporation. At this time, I would like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Good morning, and welcome to our fiscal 2026 third quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, which may be identified by our use of words such as believe, anticipate, expect, or other similar words. Our forward-looking statements are subject to certain risks and uncertainties which may cause our actual results to differ materially from those expected or projected in our forward-looking statements. These statements are only made as of the date of this conference call and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. The risks and uncertainties which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading forward-looking statements in the press release we issued this morning announcing our fiscal 2026 third quarter results. And in the risk factors section of our fiscal 2025 annual report on Form 10-K, which you can access on the SEC's website. Additionally, we refer you to the disclosures and reconciliations we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP financial measure, in evaluating our performance and its limitations, a copy of which is available on the investor relations page of our website at investors.marcuscorp.com. All right, with that behind us, let's begin. I'll start this morning by spending a few minutes sharing the results from our third quarter. and then discuss our balance sheet, liquidity and capital allocation. I'll then turn the call over to Greg who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We'll then open up the call for questions. This morning we reported another record quarter with results that exceeded our expectations and broke third quarter revenue records in both divisions. In theaters, a strong film slate led by blockbuster hits kept audiences coming to the movies deep into the summer to deliver the highest total revenue for the summer movie season in Marcus Theatre's history. In hotels, we continued to see strength in leisure demand during our seasonally busiest quarter that drove record third quarter revenue. The record third quarter revenue in both divisions combined to deliver the highest quarterly revenue for any quarter in company history. I'll start with a few highlights from our consolidated results for the third quarter of 2026. Consolidated revenues of $238 million were up 13.1% compared to the prior year quarter. Operating income for the quarter was $30.3 million, an increase of $7.6 million or 33% to the prior year quarter. Adjusted EBITDA for the third quarter was $49.1 million, a 21% increase over the third quarter of fiscal 2025. And net earnings for the quarter were $18.8 million, or $0.60 per share, compared to prior year third quarter net earnings of $13.2 million, or $0.42 per share, excluding the impact of a non-recurring gain on property insurance settlement of $3 million, or $0.10 per share net of tax. Turning to our segment results, I'll begin this morning with our theater division. Third quarter 2026 total revenue of $145 million increased approximately 21% compared to the prior year third quarter, primarily due to the strong performances from Spider-Man Brand New Day and the Odyssey, as well as stronger carryover of films that released in the second quarter compared to last year's carryover. comparable theater admission revenue for the third quarter increased 21.8% and comparable theater attendance increased 16.8% compared with the third quarter last year. Based on data from Comscore, US box office receipts increased 27% during the 2026 third quarter compared to US box office receipts during the third quarter of 2025. There are three factors that impacted our admissions revenue growth when compared to the reported national box office growth. First, based on our review of box office data, it is important to note that our admissions revenue in the third quarter of 2025 included box office revenues from two films with national grosses that were not reported by certain streaming content providers to Comscore. The exclusion of the grosses for these films from the prior year resulted in higher national box office growth. And our admission revenue growth rate was negatively impacted by 2.8 percentage points when compared to the national box office growth rate. Second, during the third quarter of 2026, we made the strategic decision to not play two films due to distributor terms, which we believe negatively impacted our admissions revenue growth by approximately one percentage point. While these decisions to pass films are never easy, we are committed to achieving competitive market terms for film rent, and we were pleased to reach a resolution with the distributor going forward. When adjusting for the impact of these two factors, our admissions revenue for the third quarter grew 25.6%, indicating that our admissions revenue performance trailed the industry by approximately 1.4 percentage points. We believe that our slightly lower box office performance relative to the nation during the third quarter was primarily attributable to an unfavorable film mix that included the number two film in the quarter, The Odyssey, that played stronger in other parts of the US where we do not have a presence and in premium formats with significantly elevated average ticket prices. Our average admission price increased 4.3% during the third quarter of 2026 compared to last year. Our admission per caps were favorably impacted by strategic pricing changes, a higher percentage of our attendance on PLF screens, and a decrease in the percentage of attendance coming on Value Tuesday compared to last year's quarter due to one additional Tuesday that fell in last year's calendar third quarter compared to this year's third quarter. We also grew our average concession, food, and beverage revenues per person at our comparable theaters. which increased by 3.8% during the third quarter of 2026 compared to last year's third quarter and was driven by an increase in movie themed merchandise sales and menu pricing. Our top 10 films in the quarter represented approximately 80% of the box office compared to 72% for the top 10 films in the third quarter last year. The more concentrated film slate weighted towards blockbuster films compared to the less concentrated slate in the third quarter last year resulted in a less than one percentage point increase in overall film cost as a percentage of admission revenues. Finally, theater division adjusted EVA during the third quarter of 2026 was 46.3 million and over 46% increase over the prior year quarter, primarily due to the higher attendance volumes. Turning to our hotels and resorts division, Total revenues before cost reimbursements were $82 million for the third quarter of 2026, a 2% increase compared to the prior year. REVPAR for our owned hotel portfolio increased 2.1% during the third quarter compared to the prior year, which resulted from a 3.3% increase in our average daily rate, or ADR, partially offset by an overall occupancy rate decrease of just less than one percentage point. Our average occupancy rate for our owned hotels was 77.5% during the third quarter of 2026. For our comparable owned hotels, which excludes the Mark Hotel that opened in early 2026 as a new independent hotel with a new competitive set, RevPar grew 7.4%. According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced an increase in rev par of 6.2% for the third quarter of 2026 compared to the third quarter last year, indicating that our hotels outperformed their competitive set by 1.2 percentage points. We believe our outperformance resulted primarily from strong transient demand and slightly improved business travel while we experienced a somewhat softer group demand environment. Group Business as a percentage of our total business mix was approximately 39% compared to 43% in the third quarter last year. When comparing our REVPAR results to comparable upper upscale hotels throughout the United States, the upper upscale segment experienced an increase in REVPAR of 7.8% during the third quarter compared to the third quarter last year, indicating that our hotels underperformed the industry by approximately 5.7%. We believe our underperformance to the industry nationally this quarter primarily relates to transient demand related to major events, particularly the World Cup that occurred in other markets where we do not have a presence, as well as softer group demand in our markets. With the softness in group business and events, our banquet and catering operations decreased modestly with food and beverage revenues down 1.4% in the third quarter of 2026 compared to the prior year quarter. Finally, hotels adjusted EBITDA decreased $600,000 in the third quarter of fiscal 2026 compared to the prior year quarter and was negatively impacted by increased repair and cleanup expenses following severe storm damage at Grand Geneva Resort and Spa, which occurred on July 3rd leading into the Independence Day holiday weekend. While our team worked incredibly hard to recover and serve resort guests that weekend, The storm event resulted in operational challenges, cancellations, golf course closures, and incremental cleanup and repair expenses. We expect the damage to the resort to be recovered by property insurance, and we expect the event led to an approximately $500,000 negative impact on adjusted EBITDA due to incremental cleanup costs and lost revenue during the holiday weekend. When excluding the impact of the storm, our adjusted EBITDA was essentially flat. In addition, adjusted EBIT in the third quarter compared to the prior year was also negatively impacted in hotels by adverse property tax assessments and quarterly shifts in timing of annual maintenance projects compared to when those projects occurred in fiscal 2025. Shifting to cash flow in the balance sheet, our cash flow from operations was $38.4 million in the third quarter of 2026 compared to Cash flow from operations of $39.1 million in the prior year quarter with a slight decrease in cash flow primarily due to differences in the timing of various working capital payments. Total capital expenditures during the third quarter of 2026 were $10 million compared to $20.9 million in the third quarter of fiscal 2025 with CapEx in the quarter primarily going to maintenance projects in both businesses. our capital expenditures for the year are progressing as planned and we continue to expect capital expenditures for fiscal 2026 of 45 to 50 million. The timing of several projects will impact our final capital expenditure number for the year. We ended the third quarter with approximately 60 million in cash and over 219 million in total liquidity with debt to capitalization ratio of 24% and net leverage of 0.8 times. We are well positioned with a very strong balance sheet, which coupled with confidence in our businesses gives us the ability to continue pursuing growth investments while returning capital to shareholders through our quarterly dividend. We will continue to allocate capital with a balanced approach that supports an appropriate level of reinvestment in our existing assets, pursuing shorter term payback EBITDA enhancing investments that provide attractive returns and investments in our long-term strategic growth priorities. With that, I'll now turn the call over to Greg.

Thanks, Chad. Good morning, everyone. As we shared with you on our last quarterly call, the summer was off to a strong start, and with the film slate ahead of us, we saw the potential for our best summer box office in years. What's played out since our last update has been truly historic. breaking many records for both the industry and our company. In our theater division, a robust film slate that appealed to a wide variety of audiences kept moviegoers coming back to our theaters deep into the summer. In our hotels and resorts division, strong leisure travel supported the steady trend of average daily rate and rev par growth that we've seen all year. Although there were a few surprises that we had to navigate in the quarter, our team responded and executed well. Today, we are thrilled to report the highest quarterly revenue in our company's history and the quarter in which both of our businesses achieved their highest third quarter revenue ever. I'll start with our theater division, and as this quarter wrapped up the summer movie-going season, which runs from the first Friday in May through Labor Day, I would like to begin with some perspectives on just how strong this summer was, as this was one for the history books. For the season, with our highest attendance since 2019, Marcus Theaters recorded its highest total revenue in company history with new records for highest box office, concessions, food and beverage, and merchandise sales. We also set new records for both per capita admissions revenue and per capita concession merchandise and food and beverage spend for the summer movie going season. As an industry, we saw four consecutive months from May through August that each topped $1 billion in domestic box office. This sustained performance only happens when we have a deep film slate that gives audiences a reason to return week after week. In the third quarter, we had a strong carryover of films that opened in the second quarter combined with two blockbuster films in Spider-Man Brand New Day and The Odyssey that broke opening weekend records and more importantly, held strong week after week deep into the summer. When you combine these massive tentpoles with such a diverse array of counter-programming, You get a theatrical ecosystem firing on all cylinders. Beyond the blockbuster films, we also had a more balanced slate that included family films such as Minions and Monsters, Moana, and strong carryover from Toy Story 5 that played well in our markets. Horror continues to draw audiences with Resident Evil making a meaningful contribution to the third quarter. Not only did the top films perform better this quarter than last year, but we had more movies with 32 wide releases compared to 30 in the quarter last year. Chad discussed the puts and takes that made comparisons to the reported national box office growth. A bit more challenging this quarter, but when you cut the noise and look at the numbers on an apples-to-apples basis, there were really two things that drove our underperformance to the national box office growth. First, we intentionally passed a couple of smaller films this quarter as we worked to achieve competitive film terms with a distributor. While we never liked to do this, this was a strategic decision as we are committed to controlling our costs at sustainable levels for the long term. This ability to make decisions for the long term is just another example of the benefits of our strong balance sheet. Others with a short-term focus may not have that option. Second, the number two film in the quarter, The Odyssey, played stronger in other regions of the country, particularly the West Coast, where we do not have a presence. Exhibitors in these markets were also realizing significantly elevated ticket prices, particularly with 70-millimeter showings of the film around the clock. While we achieved solid market share within our markets and also had a couple of 70mm prints of the film, the film did disproportionately well outside of our markets. Conversely, I want to highlight that we did very well with the biggest film of the quarter, Spider-Man Brand New Day, which played on all of our PLF screens immediately on opening weekend, with PLF showings representing 49% of the box office over the entirety of its run. We believe that on a relative basis we have the highest percentage of PLF penetration in the industry, Allowing us to take advantage of times just like this Looking ahead, the fourth quarter is off to a good start with solid domestic box office growth in October and a few positive surprises including you can see everything The holiday film slate ahead features the highly anticipated Avengers Doomsday and Dune Part 3 and advance ticket sales for Avengers Doomsday are incredibly strong Beyond these tent poles, the fourth quarter slate includes several other exciting films including The Cat in the Hat Godzilla Minus Zero, The Hunger Games, Sunrise on the Reaping, Fokker and Law, Hexed, and Jumanji Open World Looking even further ahead, the 2027 film slate also looks strong with major franchises including Shrek 5, Star Wars Starfighter, Minecraft 2, Frozen 3, Sonic the Hedgehog 4, Spider-Man Beyond the Spider-Verse, Man of Tomorrow, The Legend of Zelda, Avengers, Secret Wars, and many more There are many more great films coming noted in today's earnings release. In summary, we are thrilled with the year that has taken shape for our theater business. More importantly, this isn't just a post-pandemic recovery anymore. This is a recognition of the importance of the theatrical model to the overall content ecosystem. We see more opportunities ahead of us as we continue to get more film product from new sources and theatrical windows extending out. While this industry has always had some years with huge hits and others with not as many, we see the long-term trends as very positive and we like where things are headed. Moving to our hotel and resorts division, you've seen the segment numbers and Chad shared some additional detail on the performance metrics, including our outperformance to the competitive sets. Once again, the hotel division achieved record third quarter revenue for the third consecutive year. and we were able to successfully navigate a few challenges along the way. There were several notable items in the quarter that I'd like to highlight. At a high level for our overall portfolio, rooms demand in the quarter remains steady and the overall travel environment appears to remain healthy. However, the dynamics continues to vary by market and there was some shift in our business mix compared with last year's quarter. In some markets, notably Chicago, we saw strength and higher demand due to an increase in the number of citywide events and convention business that drove very high occupancy and rates. This contrasts with our Milwaukee market where we saw some softness in group business with the weaker citywide event schedule compared with last year. And in some cases, lower attendance at group events resulted in some group room blocks not selling out. This softness resulted in a decrease in group business as a percentage of our rooms revenue. with stronger transient leisure and business travel growing as a percentage of our rooms mix. While this tends to help with average daily rate and total rooms revenue, we did see a decrease in food and beverage revenue tied to the decrease in banquet and catering business for group events. RevPar grew at six of our seven comparable hotels during the second quarter compared to the prior quarter with both occupancy and average daily rate growing at five of our seven comparable hotels. As Chad mentioned, Early in the third quarter, we navigated through the impact of a major severe storm event that hit our Grand Geneva property in July. First, I'm truly grateful that all of our associates and guests were safe and there were no major injuries from the storm, which was truly remarkable in light of the sudden approach of the storm, high winds and debris, and damage to the golf course. The July 3rd timing of the storm was especially challenging during what is always a busy holiday weekend, and I'm incredibly proud of the hard work and dedication of our associates to recover from the storm and continue to serve guests. While we were able to mitigate the revenue impact to the week following the storm, it did create a revenue and expense headwind in the quarter. Looking ahead, the fourth quarter in hotels is off to a strong start in October, and we benefited from the Milwaukee Brewers run to the World Series. As a lifelong Brewers fan, we were excited and proud to host visiting teams and fans, international media, and many Brewers VIPs to our hotels during this historic postseason run. Group bookings for the rest of the year look stable with our group room revenue bookings for 2026 or group pace in the year for the year running approximately 5% of where we were at this time last year. Looking a bit further ahead to 2027, group room pace is running approximately 10% ahead of where we were at this time last year for the next year out. Although this far out, the timing of bookings can vary significantly. Banquet and catering pace for the remainder of 2026 is running in line with where we were at last year at this time and is running approximately 14% ahead for 2027. Overall, the division had another good quarter and the current state of our hotel business remains stable and on track with our expectations for the year. While transient demand has remained healthy, volatility and key travel costs, including high gas prices and rising airfares have persisted. If market conditions change and we begin to see softness, we are prepared to react and adjust quickly. Finally, I'd like to close with a brief comment on our balance sheet. We continue to remain on track to deliver very strong free cash flow in 2026, and we're building cash in our balance sheet as dry powder for future growth investments. We are disciplined and patient when evaluating growth investments, and we continue to look for opportunities to deploy capital to grow both of our businesses with value of creative investments. Our strong balance sheet allows us to move quickly when we see good opportunities and we have a history of executing when they arise. And again, I want to add my congratulations to the Milwaukee Brewers, the world champions, the winners of the World Series last night in Tampa. Not only is it exciting for the city and for everyone involved with the team, and it is exciting for our entire community and for our company because it reflects so well on Milwaukee where we have significant investments. We are in the press around the world and that can't help but be beneficial to our community and to our company. Before we open up the call for questions, I want to conclude my remarks by saying thank you to all the hardworking associates of the Marcus Corporation. I especially want to thank our associates at Grand Geneva that worked so hard on a holiday weekend to recover from the storm and continue serving our guests with excellence to deliver great hospitality. I don't want to ever take for granted what each and every one of them does to contribute to the success of both of our businesses. With that at this time, Chad and I would be happy to open the call up for any questions you may have.