Cineplex Galaxy benefits from tough economy, turns record $7.1-million profit

TORONTO - It seems Canadians hoping to take shelter from the black clouds on the economic horizon are turning to the silver screen in their search for a silver lining.

Cineplex Galaxy Income Fund, Canada's leading movie-house operator, posted blockbuster profits Thursday as recession-weary consumers in search of a little cut-rate escapism flooded cinema turnstiles during the last three months of 2008.

A lineup of marquee titles during the holiday season, like the latest James Bond effort "Quantum of Solace" and vampire romance "Twilight," lifted the theatre chain to a $7.1-million profit, up from a $2.8-million loss in the same period last year.

That capped a year that included popular hits like "The Dark Knight," "Iron Man" and "Indiana Jones and the Kingdom of the Crystal Skull," all of which helped Cineplex Galaxy post an annual profit of $34.6 million - a 30.6 per cent increase over last year.

If such numbers seem contradictory in a period of extreme economic turbulence, that's because they are, said Andy Nasr, an analyst with brokerage firm Raymond James.

"You'd assume that people would be spending less," Nasr said, "but they're not."

Last year's broad range of cinematic offerings helped the company set new records for all-important revenue benchmarks like attendance, box office and concession sales, Cineplex president and CEO Ellis Jacob said in an interview.

"We had a lot of product that appealed to different demographics."

The fourth quarter saw an overall increase in attendance of 16 per cent and total revenues that hit $211.4 million, up from $182.6 million in the same three months of 2007.

Concession revenues - from the sale of popcorn, drinks and snacks, a significant profit driver for exhibitors - increased 21.3 per cent to $61.4 million. The average concession revenue per patron rose to $4.03 from $3.87.

Investors on the Toronto Stock Exchange gave the numbers two thumbs up Thursday, pushing Cineplex Galaxy units (TSX:CGX.UN) 19 cents higher to close at $13.95, an increase of 1.4 per cent.

Analysts say cinema chains tend to thrive in a bad economy because they're considered a relatively cheap form of entertainment, even with the massive growth in sales of DVD players, flat-screen TVs and digital television in recent years.

Jacob said he's expecting equally strong results in 2009, based on the first six weeks of the year.

However, Cineplex has built its earnings on more than just tickets and snacks, and not all of its revenue streams saw improvement. Profits also come from "media revenue" like an advertising-heavy digital preshow and lobby ads at its theatres across Canada.

Quarterly media revenue slid 1.1 per cent to $19.9 million as fewer advertisers, affected by the economic recession, booked on-screen advertising.

Jacob said that advertisers have been tightening the lead time for booking their campaigns and are being very cautious about how they spend money.

For example, auto companies used to book their ads six to 12 months in advance, but now they're booking far later, partly because they're waiting for their budgets to be approved, a spokeswoman for the company said.

Nasr said advertising is one area that causes analysts some concern because the shorter booking times makes it tougher to predict revenues.

"If the economic conditions deteriorate, chances are they're not going to get the rate increase they're going after, or they're going to see a decline in demand, which could also translate into softer rates," he noted.

Nasr said Cineplex has longer-term deals with its two biggest advertisers - Coca-Cola and Scotiabank (TSX:BNS) - to keep advertising revenues relatively steady.

Cineplex's annual revenues climbed 5.5 per cent to $849.7 million, while overall media revenues were up 8.7 per cent to $61 million. Concession revenues were up seven per cent to $61.4 million.

Those results should be pushed higher this year when Cineplex addresses concerns about long lineups for popcorn and drinks, Jacob said.

Peak periods tend to dramatically extend the wait time in concession lines, a factor that deters some customers from spending any money on food.

"Once we let you walk by that concession stand, we've lost you for that day," he said. "Unlike other retailers, we have a very short window to service you."

Cineplex is the largest motion picture exhibitor in Canada, with ownership interests in 130 theatres with 1,331 screens from British Columbia to Quebec. The company has a workforce of more than 8,000 people and operates through such brands as Cineplex Odeon, Galaxy, Famous Players, Colossus, Coliseum, SilverCity, Cinema City and Scotiabank Theatres.

The Cineplex Galaxy Income Fund, part of the Onex Corp. (TSX:OCX) investment group, owns about 97 per cent of Cineplex Entertainment LP.