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July 25, 2007
Summer Box Office Update #2
As I expected, the summer box office momentum resumed at the end of June. Since June 29th, the box office is up 11%, ahead of analyst estimates built into 3Q models for the theatres companies. I think the rest of July and August should be able to sustain the gains with some possibility for further gains as the release schedule looks good and early reviews and buzz on upcoming films is favorable.
The renewed momentum should allow theatre stocks to move back to their early summer highs over the next six weeks. Regal Entertainment (RGC), held widely across the Northlake client base should be a primary beneficiary
Coming into the summer, analysts were looking for an upper single digit gain for the season which runs from the first weekend in May through Labor Day. Box office gurus also were expecting the summer to beat the all-time record from 2004 of $3.8 billion. Most of the excitement surrounded the big three May blockbusters, Spiderman 3, Shrek The Third, and Pirates of the Caribbean: At World's End. While none of these films missed analyst estimates, the strength mostly occurred overseas. The combined domestic gross of the films is almost $960 million but I think many prognosticators felt that $1.1 billion was realistic. Two other early June releases also fell short of expectations. Evan Almighty will miss by about $70 million and Oceans 13 will miss by about 45 million
The shortfall of $265 million for these five films soured sentiment on the theatre stocks and cost the box office about 7% versus the record summer of 2004. As a box office and theatre stock bull, I was disappointed but I didn’t get too shook up because I was aware that this was going to be a backend loaded summer.
I had completed an analysis which revealed that last summer there were only two films released in July or August that grossed over $100 million -- Pirates of the Caribbean: Dead Man's Chest reached $423 million and Talladega Nights brought in $148 million. However, for 2007, the gurus expected as many as nine films released from the last weekend in June onward to gross over $100 million and two of those films, Transformers and Harry Potter and the Order of the Phoenix, had the potential to bring in $200 million to $300 million. Fortunately for box office bulls, the recent releases have done very well and as I mentioned buzz is good for the yet to be released films....
Here is a table from which shows how the post-May summer films have performed relative to initial expectations:
As you can see, the June, July, and August films are shaping up well. This is critically important to the box office thesis given the shortfall from the May and early June films.
When I built that table for the first time, I noted that the June through August blockbusters had the potential to pull in 32% more than the 2006 blockbusters from the same period. At the time, I excluded The Simpsons Movie from the 2007 tally because initial expectations had the film grossing under $100 million. The film is getting favorable reviews and Fox has done a good marketing campaign and expectations have grown considerably. In fact, some gurus believe the film could do over $40 million this coming weekend when it opens. Adding The Simpsons Movie to the 2007 list raises the growth rate for blockbusters this year to 46% with almost all of the gain coming from June 29th and beyond releases.
Obviously, the box office is not growing by 40% as there are other films in theatres besides blockbusters and many of them are getting crowded out by weekend after weekend of major openings. The summer of 2007 is the year of the blockbuster while the summer of 2006 benefited from depth of films.
The bottom line is that despite a slow start, the summer of 2007 is on track to set the all-time seasonal record and the momentum since June 29th could actually improve the next of couple weekends. This should be enough to provide the final upward surge I have been expecting in RGC.
The one remaining obstacle is the second quarter earnings report that contains estimates built on upper single digit rather than 2% gains in the second quarter box office. I think the current box office momentum will trump the probable 2Q miss. In addition, the fact that has pulled back more than 7% from early summer highs means that the 2Q miss might be in the stock.
We'll know more soon as the company reports before the open tomorrow morning.
Posted by Steve Birenberg at July 25, 2007 01:40 PM in Box Office
