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Sluggish Box Office Revenue and Cinema Attendance Weigh on Theater Stocks

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Underwhelming box office receipts will affect margins at Regal and Cinemark.

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MINYANVILLE ORIGINAL Cinema operators are feeling the heat after a very disappointing summer at the domestic box office.

Despite the boost coming from mammoth hits such as Disney's (DIS) The Avengers and Warner Bros' (TWX) The Dark Knight Rises, Hollywood witnessed its lowest summer cinema attendance figures in two decades, with 533.5 million tickets sold this season, a 4% drop from a year ago.

Even with the help of inflated 3D movie ticket prices, summer box office, at $4.278 billion, was also down from 2011's record $4.4 billion.

Some notable bombs of the summer include Universal's (CMCSA) Battleship and Warner Bros' Rock of Ages and Dark Shadows.

If Hollywood is hoping that a change in seasons will improve things, last weekend's box office numbers will have changed their minds. The top 12 films of last weekend combined for a sad $51.9 million, the lowest top 12 number since September 5 - September 7 in 2008. Not one movie crossed the $10 million mark.

The sluggish domestic box office, while worthy of concern, is less troubling for movie studios, which can rely on growing international box office revenue -- especially in emerging markets like China and Russia -- to cushion the blow. Fox's (NWS) Ice Age: Continental Drift, for example, earned a sub-par $156.1 million at home but was lifted by a buoyant $672 million haul overseas.

Theater exhibition chains like AMC, Regal (RGC), and Cinemark (CNK), on the other hand, will feel the pain of declining domestic box office attendance more.

With little in the fall film slate expected to break out, Nomura's Robert Fishman and Michael Nathanson, in a report released Tuesday, have cut their fiscal third quarter earnings forecasts for Regal and Cinemark, because they calculate that box office for the quarter will fall 8% compared to 2011, which is "worse than we expected," as Deadline notes.

Nomura slashed Regal's Q3 earnings nearly 49% to $0.16 a share, which is lower than the Wall Street consensus of $0.22 per share. They cut Cinemark by 22% to $0.35 a share, which is $0.07 below the consensus of their peers.

In spite of the gloomy Q3 forecast, Nomura says there is a strong opportunity to theater chains to rebound; fourth quarter cinema attendance (from October to December) in 2011 was weak, so there is a chance for a 7% increase in Q4 sales this year.

Several high-profile franchise properties are expected to lead this rebound, including Lions Gate's (LGF) final Twilight movie, Breaking Dawn, Part 2, the first in two parts of an adaptation of JRR Tolkien's The Hobbit: An Unexpected Journey, and the latest James Bond film from Sony (SNE) and MGM, Skyfall.

For Regal, Nomura says it maintains its Neutral rating and $15.50 price target on the stock. It retains its Buy rating on Cinemark with a price target of $27.00.

Twitter: @sterlingwong
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No positions in stocks mentioned.
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