Cineworld Group (LSE: CINE) is one of the most controversial turnaround stocks on the London market. The Cineworld share price is up by 15% so far this year, but it’s still nearly 70% lower than it was one year ago.
I covered the firm’s 2021 results yesterday, but to gain more insight into the situation I also dialled into Cineworld’s conference call for City analysts. I picked up some surprising facts — here are my top three takeaways.
#1 – Customers are spending more
We’re all feeling the daily impact of inflation on our lives. Cineworld’s average ticket price is up 9% since 2019. But what surprised me is that moviegoers are choosing to spend more on top of rising ticket prices.
CEO Mooky Greidinger says that when cinemas reopened in 2021, the company found that customers were spending more on concessions than before the pandemic. The average spend per person has risen by 29% to $5.80 since 2019.
Of course, one reason for this may be that Cineworld is upgrading its food and drink offerings. In the US, cinemas are getting alcohol bars and Lavazza coffee. In the UK, it’s Starbucks and a VIP offering.
Whatever the explanation, higher spending could help power recovery at Cineworld.
#2 – More profitable cinemas?
Cineworld finance boss Nisan Cohen said on the call that the company’s cinemas should be more profitable in the future than they were before the pandemic. He reckons the group has locked in annual cost savings of $50m-$75m.
Some of the changes made include a shift to online ticket sales, upgrades to lower-energy laser projectors, and rent reductions. Cinemas may also have fewer staff than in 2019.
Assuming that admissions return to pre-pandemic levels, higher profit margins could help lift the Cineworld share price over time. Management expects admissions to reach 85%-90% of 2019 levels in 2022, returning to 2019 levels by 2024.
However, Cineworld still needs to tame its runaway debt pile. My sums suggest interest payments alone could swallow up 35% of the group’s operating profit in 2022.
The other big financial risk is a recent court ruling that Cineworld must pay around $1bn in damages to rival Cineplex. That’s gone to appeal, but it’s a serious risk — Cineworld says it couldn’t pay.
#3 – An exciting movie schedule
Thanks to the impact of Omicron, 2022 started quietly. However, Cineworld’s revenue has bounced back this month with the release of Batman.
Greidinger says the movie slate for the remainder of 2022 and 2023 is equally exciting, with lots of big-name sequels lined up.
Interestingly, Cineworld told analysts that its research shows that people now value the cinema experience more than before the pandemic. For example, 67% of those questioned in January said they “love the shared experience”. Before the pandemic, only 56% said this.
Cineworld share price: high risk?
Greidinger is obviously passionate about cinemas. I’m sure he’s doing a good job. But the company’s financial situation is still finely balanced, in my view.
As a potential equity investor, that makes me nervous. The shares could be a bargain at current levels. But if the group’s debt problems get worse, then I’d expect the Cineworld share price to suffer badly.
For now, Cineworld shares are too speculative for me.