Executive Summary / Key Takeaways

• The Marcus Corporation operates a diversified portfolio spanning movie theatres and hotels/resorts, a model that provides a crucial counterbalance during periods of volatility in either industry segment.
• While the first quarter of fiscal 2025 saw a consolidated operating loss increase year-over-year, driven by a softer film slate impact on theatres and higher depreciation/corporate costs, the hotels segment exceeded expectations with revenue and RevPAR growth.
• Strategic investments in both segments, including premium theatre formats (ScreenX, PLF) and hotel renovations (Hilton Milwaukee, Pfister, Grand Geneva), are aimed at enhancing the customer experience, driving per capita revenue, and capturing market share, particularly in group business for hotels.
• Management is optimistic about the film slate recovery in the latter half of 2025 and into 2026, following strike-related disruptions, and sees strong forward bookings in the hotel segment, although acknowledging elevated economic uncertainty.
• A strong balance sheet, enhanced by recent debt refinancing actions that simplified the capital structure and extended maturities, provides liquidity and flexibility for continued investment, opportunistic share repurchases, and dividend payments.

A Tale of Two Segments: Marcus Corporation's Diversified Foundation

Founded in 1935, The Marcus Corporation has built its enduring presence on a diversified business model encompassing movie theatres and hotels and resorts. This structure, rooted in a history of partnerships and operational expertise, serves as a fundamental strength, offering a counterbalance against the inherent cyclicality and distinct market dynamics of each segment. As management frequently highlights, this diversification proves particularly valuable when one business faces headwinds, allowing the other to potentially offset challenges and provide stability. The company's overarching strategy centers on enhancing its existing asset base through targeted investments, driving operational performance, pursuing opportunistic growth initiatives, and maintaining a disciplined approach to capital allocation.

Central to Marcus's operational strategy is the application of technology and service enhancements to elevate the customer experience and improve efficiency. In the theatre segment, this isn't about a single, proprietary deep technology, but rather the strategic deployment of various operational technologies. Premium Large Format (PLF) screens, including the company's UltraScreen and SuperScreen formats, alongside newer additions like ScreenX (recently expanded with three new auditoriums), offer immersive viewing experiences designed to command higher ticket prices and attract patrons seeking a differentiated outing. While specific, quantifiable performance metrics for these formats versus standard screens are not detailed, the strategic intent is clear: to capture premium revenue and enhance the theatrical appeal against at-home alternatives. The company is also investing in digital initiatives, such as adding walk-up concession stands to some dine-in Movie Tavern locations. This move, piloted successfully at other sites, aims to streamline service and is expected to capture higher per capita concession sales by making ordering more convenient, complementing existing mobile app ordering. The Magical Movie Rewards loyalty program and Marcus Passport subscription service are also key technological tools, leveraging data to drive repeat attendance and facilitate targeted promotions.

In the hotel segment, technology underpins revenue management strategies. Systems and expertise are employed to optimize pricing and occupancy, particularly for group business and during low-demand periods. This allows the company to strategically adjust rates to maximize overall RevPAR, even if it means accepting lower average daily rates for certain segments or during specific times. While specific efficiency gains from these systems are not quantified, management attributes improved occupancy and RevPAR performance, especially in capturing midweek group business, to these refined revenue management practices.

This focus on operational technology and service differentiation is crucial in a competitive landscape dominated by larger players. In the theatre industry, Marcus (with its estimated 5-7% market share) competes with giants like AMC Entertainment (AMC), holding 45-50% market share, and Cinemark Holdings (CNK), with 20-25%. While AMC and Cinemark benefit from greater scale and brand recognition, Marcus differentiates through its regional density in the Midwest and its focus on enhancing the in-theatre experience through PLF and service amenities. The strategic pricing decisions, such as not raising prices on blockbusters and offering value promotions like the $7 Everyday Matinee, are a direct competitive response aimed at driving attendance, even if it temporarily impacts average ticket price. Management believes this focus on attendance outperforms peers in certain periods and ultimately benefits higher-margin concession sales. The addition of ScreenX and concession stand upgrades are tangible investments designed to boost per capita spending, a key metric in theatre profitability, and streamline operations against competitors who may have different service models.

In the hotel sector, Marcus (estimated 1-2% market share) competes with global powerhouses like Hilton Worldwide (TICKER:HLT, 15-20% market share) and regional players. Hilton's strength lies in its vast brand portfolio, global distribution, and powerful loyalty program. Marcus competes by focusing on the upper upscale segment, investing heavily in property renovations to maintain competitive assets, and leveraging its regional market knowledge and relationships to capture group business. The recent acquisition of The Lofton Hotel in Minneapolis, rebranded under Hilton's Tapestry Collection, demonstrates a strategy of partnering with larger brands to gain access to their reservation and loyalty systems while applying Marcus's management expertise. The significant renovations at properties like the Hilton Milwaukee are critical investments to remain competitive, particularly in markets benefiting from expanded convention centers, where being the "newest, nicest" hotel connected to the facility provides a distinct advantage in winning group business.

Performance Under Pressure and Signs of Recovery

The first quarter of fiscal 2025 highlighted the ongoing, uneven recovery trajectory, particularly in the theatre segment. Consolidated revenues increased by 7.4% to $148.8 million compared to $138.5 million in Q1 2024, significantly aided by the inclusion of four additional operating days due to the fiscal calendar change, which favorably impacted revenue by approximately $9.2 million. However, the consolidated operating loss widened to $20.4 million from $16.7 million in the prior year quarter. This was primarily driven by increased operating losses in both segments and a rise in corporate expenses, including higher noncash share-based compensation and depreciation related to recent hotel renovations.

The theatre segment saw revenues increase by 7.5% to $87.4 million, with admissions up 0.8% to $40.9 million and concessions up 9.5% to $38.0 million. Despite the revenue growth (boosted by the additional operating days and stronger film performances compared to a weak start in Q1 2024), the operating loss increased by 9.4% to $6.3 million. This was attributed to higher film costs (due to a more concentrated slate of holiday blockbusters) and increased labor expenses as the company returned to more normalized operating hours and staffing levels compared to the significantly reduced levels in Q1 2024 following the strikes. Management noted that some films underperformed expectations, impacting labor efficiency. Comparable theatre attendance increased by 6.9% in the fiscal quarter, but decreased by 8.0% on a calendar quarter basis, trailing the U.S. box office increase of 3.1% (fiscal quarter comparison). This underperformance was linked to strategic pricing decisions that resulted in a 5.1% decrease in average ticket price, influenced by promotional offerings and an unfavorable ticket mix (more family films/child attendance, lower PLF sales). Average concession revenue per person increased by a modest 0.8%, primarily due to pricing adjustments.

In contrast, the Hotels and Resorts segment demonstrated resilience, with revenues increasing by 7.2% to $61.3 million. This growth was supported by the additional operating days (approximately $2.1 million revenue impact), a stronger ski season, and increased group business. Rooms revenue grew 5.8% to $19.3 million, and food and beverage revenue increased 10.3% to $17.8 million. Despite the revenue growth, the segment's operating loss increased by 17.1% to $6.0 million, largely due to a $1.9 million increase in depreciation expense from renovations completed in fiscal 2024. Comparable owned hotel RevPAR grew 1.1%, driven by an 8.0% increase in ADR, which offset a 3.4 percentage point decrease in occupancy. The ADR increase benefited from revenue management optimization and rate compression in Milwaukee due to the Hilton Milwaukee renovation, which temporarily took rooms out of service and negatively impacted RevPAR growth by an estimated 3.7 percentage points. While the segment underperformed its competitive set in Q1 2025 (5.6 percentage points lower RevPAR growth), management attributes this primarily to the renovation impact and believes performance was closer to peers when adjusted. The segment outperformed the comparable upper upscale U.S. segment when adjusting for the renovation impact.

Looking back, the third quarter of fiscal 2024 served as a significant milestone, with both the theatre division and the total company exceeding pre-pandemic revenue and profitability levels. The theatre division achieved a record $143.8 million in revenue and $33.2 million in Adjusted EBITDA, with a 23.1% margin, demonstrating the potential for strong performance when the film slate is favorable, even with lower attendance than in 2019. The hotel segment also posted record Q3 2024 results, significantly boosted by the Republican National Convention in Milwaukee, which generated approximately $3 million in incremental revenue.

Strengthening the Balance Sheet and Investing for the Future

Maintaining a strong balance sheet is a core value for Marcus Corporation, providing the flexibility needed to navigate industry cycles and pursue strategic opportunities. As of March 31, 2025, the company held $11.9 million in cash and had $180.2 million available under its $225 million revolving credit facility. The debt-to-capitalization ratio stood at 0.31, and the net leverage ratio was 2.00x net debt to Adjusted EBITDA. Management believes this liquidity position is sufficient to meet obligations for at least 12 months and fund longer-term capital requirements.

Cash flow from operations was a use of $35.3 million in Q1 2025, an increase from the $15.1 million used in Q1 2024, primarily due to lower net earnings and unfavorable seasonal timing of working capital movements (accounts receivable collection and accounts payable payments).

Capital expenditures totaled $23.0 million in Q1 2025, up from $15.4 million in Q1 2024. These investments included $4.4 million in the theatre division (maintenance), $15.9 million in hotels (Hilton Milwaukee renovation, maintenance), and $2.7 million corporate (land purchase, office relocation). The company expects total capital expenditures for fiscal 2025 to be in the range of $70 million to $85 million, reflecting ongoing investments in both segments.

A significant financial undertaking in fiscal 2024 was the repurchase of substantially all of the $100 million convertible senior notes due in 2025. This action, completed primarily in Q2 and Q3 2024, simplified the capital structure and eliminated potential future dilution. Concurrently, the company completed a $100 million private placement of senior notes in July 2024, extending the weighted average debt maturity from 1.6 years to just over four years. The oversubscribed offering demonstrated strong investor confidence.

Marcus takes a balanced approach to capital allocation. In Q1 2025, the company repurchased approximately 0.4 million shares for $7.1 million, viewing this as an opportunistic move given the perceived value in the stock. This is in addition to paying $2.2 million in quarterly dividends. Over the last four quarters, the company has returned over $25 million ($0.78 per share) to shareholders through dividends and share repurchases. This balanced approach, prioritizing investments for growth and asset maintenance alongside shareholder returns, is expected to continue, leveraging the strong balance sheet.

Outlook: Momentum Building Despite Uncertainty

Management maintains a positive and optimistic outlook for the full year, although acknowledging that the path may differ from initial expectations. The diversified model is expected to continue providing a counterbalance.

In the theatre segment, while Q1 2025 was softer than hoped, performance in April demonstrated a significant rebound, with the industry building momentum into the summer movie season. The film slate for the remainder of 2025 and into 2026 is viewed very positively, with numerous anticipated franchise films expected to drive attendance. Management expects product supply to ramp back up to and potentially exceed 2023 levels in 2025 and beyond, moving past the strike-related disruptions. The focus on driving attendance through value promotions and enhancing the in-theatre experience remains key to capturing market share and maximizing per capita revenue as the slate improves.

For the Hotels and Resorts segment, Q1 2025 exceeded expectations, and bookings remain strong. Group room revenue pace for the remainder of fiscal 2025 is running over 11% ahead of the prior year (excluding the RNC impact), and the pace for fiscal 2026 is over 20% ahead. Banquet and catering pace is similarly strong. The ongoing renovation at the Hilton Milwaukee is on track for guest rooms to be back in service by June 30th, with meeting spaces following later in the summer. This project is expected to significantly enhance the hotel's competitive positioning, particularly benefiting from the expanded Milwaukee convention center. While management anticipates leisure travel demand may soften amid elevated economic uncertainty, they expect group business to remain stable and are prepared to adjust operations quickly if needed. The portfolio's focus on Midwestern drive-to markets is seen as providing relative stability.

The anticipated effective income tax rate for fiscal 2025 is expected to be in the 28% to 32% range, excluding potential one-time items. Capital expenditures are planned to continue supporting asset enhancements and strategic initiatives across both segments.

Risks and Considerations

Despite the positive outlook and strategic initiatives, several risks warrant investor attention. The theatre segment remains heavily reliant on the quantity and audience appeal of film releases, a factor outside of Marcus's direct control. Production disruptions (like past strikes or potential future events) or studios opting for shorter theatrical windows or direct-to-streaming releases could negatively impact performance. Competitive pressures in both segments, including pricing dynamics in theatres and new supply or shifting demand patterns in hotels, pose ongoing challenges. While the diversified model helps, a significant downturn impacting both leisure spending (theatres and hotels) and group travel simultaneously could pressure results. The capital-intensive nature of the business means ongoing investment is required, and the success of major renovation projects in delivering expected returns is crucial. Changes in labor costs, supply chain issues for concessions or hotel supplies, and macroeconomic conditions, including potential softening in leisure demand, are also factors to monitor.

Conclusion

The Marcus Corporation's investment thesis is grounded in its resilient, diversified business model, strategic investments in its core assets, and disciplined capital management. While the first quarter of fiscal 2025 reflected the uneven nature of the post-pandemic recovery and the impact of a softer film slate, the underlying strength of the hotel segment and the anticipated improvement in the theatrical content pipeline point towards building momentum in the latter half of the year and into 2026. The company's focus on enhancing the customer experience through operational technology and service, coupled with strategic property renovations, positions it to capture demand in its key markets. A strengthened balance sheet provides the flexibility to continue investing for growth and return capital to shareholders. Investors should monitor the pace of the film slate recovery, the impact of macroeconomic conditions on travel and leisure spending, and the successful execution of ongoing renovation projects as key indicators of Marcus Corporation's ability to translate its strategic initiatives into sustained financial performance.