Investors keen to bet on the future of moviegoing shouldn’t miss iPic Entertainment.
The theater and restaurant company, whose shares listed in early February, offers the atmosphere of a luxury hotel at a price that’s within reach for millions of moviegoers. The strategy is to keep customers happy with not just movies and snacks, but upscale dining available either at adjacent restaurants or in the auditoriums themselves. For investors, that translates into a more appealing proposition than the likes of AMC Entertainment or Cinemark.
In fact, iPic looks more like a restaurant than a cinema operator, with five times as much spending on food and beverages compared with its theater peers. In 2016, some 52% of revenue came from food, beverage, and services. That compares with an average of just 31% for its competitors. Overseeing all restaurant operations is iPic’s chief operating officer Sherry Yard, an award-winning chef who worked for 20 years with Wolfgang Puck and developed menus for famous restaurants like Spago and Chinois.
The emphasis on cuisine is helpful for multiple reasons. First, it leaves iPic less vulnerable to the vicissitudes of Hollywood box office sales. Many customers actually come to iPic simply to dine and drink at one of its in-house restaurants without seeing a movie. Even in an environment as cutthroat as Manhattan, iPic’s location on Fulton Street draws crowds with a hip, art-filled dining area replete with a speakeasy hidden behind a bookcase.
All that is good news for investors because food and beverage sales are simply a better business than selling tickets, with the former carrying much higher margins. Beverages, in particular, account for 35% of the average dining check and tend to have ultra-high margins.
Another secret weapon: iPic’s loyalty program. Much like a frequent flier program or Starbucks Rewards, iPic offers members perks when they spend money at any of its locations. The program works through a sleek, user-friendly app that stores credit card information and makes it simple to make purchases – similar to the Delta Air Lines app. Already, iPic boasts 1.8 million members who drive 45% of all spending.
The value of the loyalty program should not be underestimated. Investors may not realize that a large part of Starbucks’s success can be attributed to the Starbucks Rewards program. In an analysis conducted by The Wall Street Journal, Starbucks card activations were shown to have an 84% correlation with same-store sales. Such a high level of correlation suggests that rewards programs actually have the ability to drive sales growth.
Try as they may, rivals are unlikely to beat out iPic by stealing its model. As detailed in The Wall Street Journal, AMC a few years ago announced a $600 million investment in reclining seats. But the renovation has a serious shortcoming: The seats are still packed together tightly so it’s nearly impossible for waiters to bring food or drinks without standing in the way of viewers.
By contrast, iPic seats are clustered into pairs. Such an arrangement allows for complete meal and drink service without obscuring anyone’s view. In the latest generation of theaters, the “premium plus” seats resemble a pod-style setup seen in first-class international flights, creating a true sense of privacy.
One risk that warrants some attention is potential stumbles as new theaters are added. After all, with only 16 locations, even one misstep could cause problems.
The good news is that iPic won’t have to settle for second-rate locations. That’s because it is highly coveted by real-estate developers as an anchor tenant. Since iPic draws a steady flow of customers, it brings business to nearby retailers in any given development. As a result, developers make generous financial incentives to bring in quality anchors. That helps explain how iPic can be profitable in pricey real-estate markets like Manhattan where big spaces fetch astronomical rents.
Indeed, iPic will likely remain a valuable anchor for many years because it isn’t susceptible to disruptive Internet businesses that change the way people spend their time. In an era when people buy groceries on Amazon and download movies, traditional anchors are being marginalized.
iPic has plenty of runway for growth. Domestically, there is potential for more than a tenfold increase in locations. If iPic were to reach 200 locations, it would account for less than five percent of the total number across the country.
Also, the company continues to upgrade older generations of its theaters to newer ones, which clears the way for higher revenue without the risks associated with a new opening. Revenue per screen in 2017 was $830,000 for first-generation auditoriums compared with $1.7 million for third-generation.
And investors shouldn’t be surprised if iPic winds up expanding overseas as moviegoers abroad show demand for high-end experiences. If iPic were to, say, license its concept to a foreign operator, there could a windfall of extremely high-margin revenue.
For the moment, while iPic focuses on growth, the company remains unprofitable. But at the theater level in 2016, it earned $15.2 million of EBITDA on revenue of $125 million. As the business grows, corporate costs should hold relatively steady and allow profits to roll in.
For new investors, the recent pullback in iPic shares may be an opportunity. After pricing at $18.50, the stock was pummeled in the volatility spike of early February and now trades at $11.66, indicating at an enterprise value of just $270 million, or less than two times sales. Meanwhile, revenue is growing at a robust 25%. In a market cluttered with expensive stocks, iPic looks like an affordable luxury.