AMC's aggressive post-pandemic strategy could pay off as moviegoers flock back to cinemas

A sign hangs outside of an AMC theater on June 01, 2021 in Skokie, Illinois.

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People are finally returning to cinemas. In back-to-back weekends, the domestic box office has lured moviegoers with a wide range of film titles, setting ticket sales records during the pandemic era.

These box-office receipts suggest that movie theaters are heading for a recovery a year after they were forced to shutter. The news is welcome industrywide, but it may be particularly good for AMC Entertainment, which has made a number of bold moves in an attempt to lay the groundwork for its own renaissance. AMC's ultimate success hinges on its bet that the public will continue to turn out to see films on the big screen, rather than watch the many streaming services that became popular over the past year.

The world's largest movie theater company has raised around $2 billion in cash over the last six months, predominantly from stock sales. With fresh funds, AMC's CEO Adam Aron said, the company plans on looking at several acquisitions, including buying ArcLight and Pacific theaters that will not reopen after the pandemic. It will also consider paying down some of its $5 billion in debt, reducing its interest costs and paying millions in unpaid rent.

Aron has been able to raise the cash because of continued volatility in its stock, which has become a favorite among retail investors trading so-called meme stocks. Shares of AMC were up more than 18% on Monday, adding to last week's rally. The company's stock has risen nearly 2,600% since January, as AMC's surge forces short sellers to give up their bearish positions. By midday Monday, AMC was the most active stock being traded in the market.

If consumers continue to head out to the movies, AMC will be able to turn more locations into larger sales. However, these same theaters could become a big burden on its cost structure if ticket sales dry up as pent-up demand to get out of the house is satiated.

'Let's run the table'

"I think AMC is doing the right thing," said Tom Nunan, a lecturer at the UCLA School of Theater, Film and Television and founder of the production company Bull's Eye Entertainment.

"The reason I say that is there's no question in my mind that Americans want to maintain the option of going out to the movies," he said. "So, having the moviegoing experience run by experienced movie theaters like AMC is a good thing. And I think AMC has made the wager ... that in the immediate term, 'Let's run the table, let's be by far the biggest theater owner and possibly an even larger theater tenant.'"

Prior to the pandemic, the industry was raking in $11 billion in ticket sales in North America.

With just a few weeks remaining in the second quarter, the domestic box office appears to be on track for a decline of about 75% compared with the same quarter in 2019, wrote Eric Wold, senior analyst at B. Riley Securities, in a research note published Monday.

The first quarter saw a decline of around 90% compared with 2019, he wrote. Wold reiterated a projection for third-quarter sales to be down 35% and fourth quarter to fall 20% compared with 2019 levels.

"More importantly, after the domestic box office was jump-started by a handful of action-oriented films, we are pleased to see similar demand levels and better-than-expected box office results from both horror films and family films," he wrote. "We have emphasized the box office strength needed to be broad-based across all film genres to drive box office back to pre-pandemic levels and higher."

Over the weekend, the domestic box office tallied $66 million in ticket sales, the second-highest Friday through Sunday haul since the pandemic began, according to data from Comscore. The previous weekend, which saw the debut of "A Quiet Place Part II" and "Cruella," is the current record holder, with $80.2 million in receipts.

Between the two weekends, the total number of open North American theaters rose to 75%, up from 70%, Comscore reported.

Next week, "In the Heights" and "Peter Rabbit 2: The Runaway" arrive in theaters. Box-office analysts and movie theater owners have high hopes that these two features will drive significant traffic to cinemas, especially as coronavirus restrictions continue to loosen.

"The theater chains that go 'all in' by investing millions in upgrades, acquisitions and innovations are banking on the future of the big screen experience," said Paul Dergarabedian, senior media analyst at Comscore. "And right now that appears to be a good bet."

He said these unique in-theater experiences are essential for cinemas to thrive, especially because of the growing competition raised by streaming services who are offering "great content for consumers."

Beloved theaters

Theaters are at the center of AMC's strategy. While other companies in AMC's situation might make debt repayment their top priority for the next year, Aron is turning back to M&A, which is how the company became the nation's largest theater chain. Aron added Carmike, Odeon and Nordic shortly after taking the role of CEO in 2015.

To be sure, AMC does not plan on purchasing the companies that used to run the ArcLight and Pacific screens. It is working with landlords that were leasing some of the locations to those theaters. The only purchases AMC would make is if Decurion, which owns ArcLight and Pacific, were to sell properties that it owns outright.

Nunan said this is a good start for AMC. Those chains are beloved, particularly in California, and landlords are actively seeking movie theater tenants to fill these spots.

Since AMC would likely be paying for any acquisitions with cash, it wouldn't add to its debt. That was part of the company's strategy, Aron said during an interview Thursday with Trey Collins, host of the Trey's Trades channel on YouTube.

Representatives for AMC declined to comment further, pointing CNBC to the company's previous securities filings and recent interviews.

A change in habits

Of course, it's unclear if audiences' eagerness to return to movie theaters will be short-lived.

"Everything comes down to content, though," said Shawn Robbins, chief analyst at BoxOffice.com. "There may be a short-term burst driven by pent-up demand, but audiences and theaters need more than one tentpole per month. The build back to normal box office levels will take more and more consistent releases from major studios, something we'll have a chance to see develop this summer and hopefully build momentum deep into the second half of the year."

"2022 has a robust slate of films that could easily break records once this year has done the necessary legwork of recovery," he said.

The dynamic between movie studios and theaters also is in flux. Streamers who got a taste of blockbuster traffic during the Covid-19 pandemic have started making acquisitions, too. Netflix bought the rights to the next two "Knives Out" sequels, and Amazon is now the owner of MGM, which owns the James Bond franchise.

"We have, basically, over the last year, trained people not to go to the movies," said Doug Stone, a box-office consultant and former theater operator.

Still, the economics of big blockbuster films only works through the box office. That's why studios postponed so many films during the pandemic. Disney's "Black Widow" and "Eternals," Warner Bros.' "The Suicide Squad" and Universal's "F9" are just a few of the features that were rescheduled until moviegoers could return to theaters in droves. These film franchises have generated billions of dollars at the global box office in the last decade.

Nunan said he expects it is inevitable that movie studios will look to control more of the box office directly. Last year, a law that banned movie studios from owning theaters was rescinded.

"AMC is making the bet that they will be the primary theater owner monopolist," he said. "'You're going to have to work through us if you want to get your hands on quality theaters.'"

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

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