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May 30, 2006

Weekend Box Office Report: X-Men Show Their Powers

If this summer is "the last stand" for the box office bulls, the third installment of the X-Men franchise should make shorts nervous. Debuting as the 5th best four day opening, the 4th best three day opening, and the second largest Friday opening, X3 racked up $120 million over the Memorial Day weekend. Along with good business from the second weekend for The Da Vinci Code and Over The Hedge, the total weekend box office matched last year's tough comparison against the final installment of the Star Wars trilogy. With easier comparisons ahead, some strong product in theatres now, and Cars coming the weekend after next, my bull case on the summer box office remains intact.

Regal Entertainment (RGC) is my long position to play the summer box office....

So far, this quarter, the box office is up about 14%, well ahead of revenue estimates for RGC which imply a gain of no more than 6-11%. I think estimates will begin going up around the time of the June 9th Cars debut. RGC shares have dropped about 8% during the market's decline. I think they should regain prior levels and move higher through the summer.

My call on RGC is for a trade off the anticipated strong summer box office, but beyond the year-over-year comparisons, I think the huge numbers for X3 are a reminder that the theatre business is here to stay. What better marketing for the News Corp (NWS/NWSA) X-Men franchise than the huge marketing and media blitz ahead of the film and a few days worth of newspaper articles and TV stories about the opening weekend numbers.

Using the theatrical launch is the only way to build the franchise, set-up DVD sales and rentals, earn license revenues, recoup the rumored $200 million production budget, and possibly spin-off new movie franchises (this is supposed to be the last X-Men film). I just don’t see how diluting the box office by opening the film in theatres, DVDs, and broadband downloads simultaneously could generate the same buzz as a big opening weekend and a climb up the all-time box office charts.

I think this realization will dawn on investors as Cars and Pirates of the Caribbean follow X3 with huge numbers over the next six weeks. If any other films perform well, it will just be gravy. A big summer at the box office will show that the studio business still works if the product is right and the theatres are at the center of the financial model. For the next several months that should make RGC blockbuster.

Posted by Steve Birenberg at May 30, 2006 08:43 AM in RGC