Increasing investment in the customer experience could improve AMC Entertainment Holdings Inc.'s (AMC, Financial) financial prospects. The company is refurbishing its theaters and adding new technological improvements, while also seeking to become increasingly efficient through stronger back-office systems.
It’s A-List subscription program has proven to be popular and is due to deliver a profit one year earlier than expected. Price increases and the marketing opportunities provided by its AMC Stub loyalty program could help it to outperform rival services.
After rising 8% in the last year versus a 5% increase for the S&P 500, the stock appears to have investment potential.
Investment
AMC’s investment in the customer experience has the potential to boost its financial performance. It is renovating theaters across multiple territories, including the U.K., Spain and Italy, where they are performing ahead of expectations. It is adding recliner-equipped theaters in the U.S. and Europe, while a larger number of IMAX and Dolby (DLB, Financial) screens are being deployed. They offer higher price premiums, while encouraging stronger customer loyalty.
Investments in digital opportunities, such as its website and smartphone app, could help to appeal to millennials. A new accounting system installed in Europe is also helping to strengthen the IT applications and efficiency of its international operations. Higher bonuses for almost 1,000 of the company’s managers may help to improve staff morale and customer service levels.
The company continues to have a number of areas where high returns on investment could be made. Around 45% of its U.S. theaters and 30% of its domestic screens offer recliner seating and Dolby experiences, which suggests there could be further benefits ahead from the current investment strategy. The emergence of a premium chain of theaters in the U.K., called Odeon Luxe, could offer a higher price point. If successful, this strategy could be rolled out around the world.
A-List
The company’s A-List subscription offering has proven popular with customers since its release five months ago. It has already reached its forecast of 500,000 members within the first year, with it offering consumers the opportunity to watch up to three movies per week at a cost of $20 per month. Marketing for the service has been boosted by the success of the company’s Stubs loyalty program, which provides it with a significant amount of data, including movie-going history and habits for its 17 million member households.
The A-List subscription program has beaten guidance not only in terms of membership numbers, but in its financial returns. Average visits per month are lower than expected, which means the program is set to be earnings accretive in 2019 – one year earlier than expected. Its popularity is also providing scope for a 10% price increase for new members in 2019 and renewing 2018 members in 10 states, with a price increase of 20% in five other states. Since A-List members often bring friends and family along to theaters, sales of regular-priced tickets could gain a further boost from the popularity of the subscription program, while a higher portion of recurring revenue could offer greater sales visibility.
Risks
While the company’s A-List subscription program has been successful so far, the performance of MoviePass suggests it can be a volatile segment. It was able to increase membership to 3.2 million by August, but has been unable to deliver a profit from the service. It found that the average monthly usage among members was higher than expected. It then introduced a series of changes to the program, which limited movie availability, resulting in a decline in subscriber numbers.
AMC’s A-List program, though, could enjoy increased longevity in comparison to MoviePass. The company has control over its input costs and the capacity to generate rising concession sales that have high margins. It is also focused on sustainability, with its price point being more than double any of its competitors. Lower-than-expected subsidization costs also suggest it will deliver improved profitability, while the marketing potential of AMC Stubs could help it to grow at a faster and more profitable pace than MoviePass.
Outlook
With continued investment in the customer experience, AMC could generate rising profitability. Refurbishment of its theaters alongside technological advancement may provide pricing power, with improved margins being the potential end result.
The A-List subscription program has seen a high rate of adoption, with continued marketing via the AMC Stub loyalty program having the potential to drive subscriber numbers higher.
Although rival offerings have proven to be relatively unsustainable, greater control of costs and lower-than-expected subsidization costs suggest A-List could catalyze the company’s financial performance while providing greater revenue visibility. Having outperformed the S&P 500 in the last year, further stock price appreciation could be ahead.
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