AMC Entertainment’s (NYSE:AMC) second-quarter results strongly indicate it is being badly victimized by slowing consumer spending and the continued decline of the U.S. movie theater sector. Although AMC’s financial performance could improve somewhat in the medium term, the firm still in all likelihood won’t generate the strong profits needed to stave off eventual disaster for investors.
Disaster is the most likely outcome for shareholders because the company’s balance sheet continues to be in atrocious shape. That situation is very unlikely to change for the foreseeable future.
As a result of the latter situation, combined with AMC’s likely inability to generate large profits, the company will almost definitely either have to massively dilute AMC stock or declare bankruptcy. Given these points, I advise all investors to sell their shares.
A Weakened Consumer Is Hurting AMC
Even earlier this year when consumer spending was generally stronger than it is now, movie theater attendance was down sharply from its pre-pandemic levels. That was in-line with my previously articulated thesis. For example, in January 2024, attendance at U.S. theaters fell 33% compared with 2019 levels.
But now the consumer situation has deteriorated as the labor market’s growth has decelerated and high inflation and interest rates have taken a bigger toll. Partly due to these macro trends, the year-over-year decline in AMC’s attendance greatly increased last quarter.
In Q1, attendance at the company’s theaters fell only 2% to 46,600 versus the same period a year earlier. On the other hand, Q2 visits to AMC’s theaters tumbled to 50,000, a 25% drop YOY.
Unsurprisingly, given the drop in attendance and the weaker economy, the company’s Q2 food and beverage sales also sank compared to the same period last year. Specifically, AMC’s revenue from those sources fell to $367 million from $488 million in Q2 2023.
And of course, AMC’s overall financial performance deteriorated sharply last quarter. Q2 sales sank 24% YOY to $1.03 billion and it reported an operating loss of $47.4 million. In the prior year, it reported operating income of $84.8 million.
Any Second-Half Improvement Probably Won’t Rescue AMC
On the firm’s Q2 earnings call, CEO Adam Aron blamed the company’s dismal performance on the 2023 strike by Hollywood’s writers and actors. And he reported that in June, the “domestic industry box office was 10% more than the January and February 2024 box office combined.” The CEO noted that many good movies had been released in June, helping to tremendously boost box office attendance. He predicted a multitude of more popular films would be released during the rest of the year.
But The Hollywood Reporter estimated recently that for the summer of 2024, total U.S. box office revenue would drop 10% YOY to $3.6 billion. So box office revenue is expected to decline meaningfully this summer despite the flood of popular movies cited by Aron. The poor outlook shows that the movie theater business continues to weaken and is exacerbated by the slowing U.S. economy.
Meanwhile, Aron reported he expects to see “sizable growth in industry-wide revenues and therefore most likely in AMC revenues in the second half of 2024.” The CEO made tremendous efforts to positively spin the company’s future. He said he was “euphoric” about the company’s “near term and medium term outlook.”
However, his use of the restrained term “sizeable” indicates any revenue increase in the second half of the year will not be very large. And in the second half of last year, the firm’s operations burned nearly $12 million of cash.
AMC’s debt load is also significant. Therefore, anything other than a miraculous improvement in its financial results will ultimately result in catastrophic days of reckoning for AMC and its stock. Aron’s comments, along with the ongoing structural weakness of the movie theater sector, make such a scenario extremely unlikely.
A Disaster Looms for AMC Stock
The company owes a gigantic $2.89 billion in 2026. It only had $770 million of cash at the end of the last quarter. Moreover, the firm’s operations burned $235 million of cash in the year ending in June. Finally, AMC owes $143.4 million between now and the end of 2025.
Importantly, I don’t expect banks to lend AMC additional funds or substantially delay its scheduled payments. Its high debt load, lack of profitability and poor outlook for its business will prevent this. I believe the company will, in an absolute best-case scenario, end 2025 with about $500 million of cash. That assumes it does not sell a great deal of AMC stock beforehand. Of course, in such a scenario, it will not come close to affording to pay the $2.89 billion it owes its lenders in 2026.
Consequently, I expect one of two outcomes. Either AMC begins preparing for bankruptcy next year or it sells more stock to obtain the funds necessary to meet its 2026 debt obligations.
If the company is heading for bankruptcy, the Street will see the writing on the wall. It will sell and short the shares, causing the stock to plummet further. And if more share sales are sold between now and 2026, AMC’s stock will continue sinking due to dilution.
On the date of publication, Larry Ramer did not hold (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.