Although it may seem to many that going to the cinema is as outdated as listening to a CD or watching broadcast TV, shares of Cineworld (LSE: CINE) have tripled in the past five years thanks to record revenue and profit growth. And full-year results released this morning show this trend continued apace in 2016.
The company reported an 8.7% year-on-year rise in constant currency sales and 12.5% rise in adjusted pre-tax profits. While a good portion of this success came down to a slew of blockbuster hits that drove consumer interest, Cineworld has been doing some heavy lifting of its own.
The chain has invested in upgrading its cinemas, bringing in higher-end concession options and offering consumers more VIP packages. All of this led to retail sales growing 12.6% year-on-year at a much faster clip than the 7% rise in admission sales.
These investments have obviously paid off, as has the company’s expansion into countries such as Romania, Poland, Hungary and the Czech Republic. Sales from non-UK regions rose a whopping 13.3% year-on-year, even accounting for the positive effects of the weak pound. As discretionary spending among consumers in these increasingly wealthy countries rises, Cineworld is well placed to reap the rewards.
Looking ahead to 2017 there is also reason for investors to be optimistic. The slate of blockbusters appears as strong as last year’s with new instalments of popular franchises such as Star Wars, Pirates of the Caribbean and Fast and Furious. The company should also benefit from opening further sites in the UK and abroad and investments in premium 3D and IMAX theatres that have proved popular with consumers.
Cineworld shares aren’t a bargain basement value at 19.5 times forward earnings, but the company’s strong growth, admirable focus on margins and fast rising 2.75% yielding dividend should remain attractive to investors in the year ahead.
No blockbusters are saving this stock
Another retailer that is pinning its hopes on being as relevant in the 21st century as it was in the 20th is Pets at Home (LSE: PETS). The latest results from the UK’s biggest pet store show this isn’t working out as planned though. In Q3 the company’s merchandise sales fell 0.5% on a like-for-like basis as footfall to its stores dropped.
For the time being, the company isn’t sure whether this is a short-term issue or the beginning of a longer-lasting trend. Either way investors have been fleeing the stock, which is down more than 20% since the beginning of 2017.
But while same-store sales may be falling the company is still boosting its top line through acquisitions, especially in the faster-growing services segment that includes veterinary care. In Q3 these actions helped boost revenue 4.4% year-on-year to £203.7m
But this growth through acquisition model may not be able to last forever. At the end of H2 the company’s net debt-to-EBITDA ratio had risen to 1.5, which is at the top end of its target range. As the company’s margins and cash flow decrease, this ratio will become a major constraint on growth.
Given these issues and uncertainty over whether or not same-store sales could be entering a period of significant decline I’ll be avoiding shares of Pets at Home Group for the time being.
