Special Report: Reopening During The Pandemic

Working Towards A New Normal

Here is a snapshot of current conditions

The Family Entertainment industry is facing unprecedented challenges due to the COVID-19 pandemic although we remain optimistic about the future of the industry in the medium and long term. Unlike most publicly available data based on anecdotal numbers or single-concept public companies, this report gives a view into the industry based on real data from a diverse set of Pinnacle client locations. We will also present an update on the status of Pinnacle’s new and future business, and share opinions of key industry operators, leaders, and groups.

Operating Locations

November 1, 2020: For this period, the six-week average sales were 69% of previous year as shown in “Table 1.” Two additional locations opened for the entire period but two locations closed, one each in Minnesota and Illinois. The closing locations were removed from the comparison leaving the total measured at 43 locations.

The 2 locations reclosing is disconcerting, especially given the lower performance in the last three weeks of the period vs the first three (especially the week of 11-1-20). The COVID resurgence appears to be having an effect on the industry and may continue to get worse through the Winter. The positive news from this data is that locations were steadily increasing in sales prior to the pullback, and in several locations, especially in the Southeast, were even surpassing 2019 sales. This demonstrates that there is pent-up demand for out of home entertainment. Furthermore, even with COVID still expanding, sales were improving, which we believe indicates consumers will return to entertainment venues when they feel the virus is being even somewhat controlled. If we have a vaccine available this Spring and infection rates begin to decline, we expect sales to grow near pre-pandemic levels.

To give some context to these numbers as of June 1, 2020 only 7 location were open. As of August 9, 2020, 39 locations were open and sales were 50% of 2019 sales. For the 6 weeks ending September 6 sales averaged 55% (with the last four weeks of the period averaging 64%. Prior to the most recent pull back, sales were steadily increasing as consumers returned to out of home entertainment venues.

Methodology

This report is compiled from our database of past clients. We have dozens of California locations which have been closed the entire pandemic, and these locations have been omitted. We also do not include clients that opened within the last year, because there is no data from 2019 to compare. We have 16 locations that have sent blank reports, we believe 14 of these are currently open but reports have not been re-programmed to send.

Landscape

We have sales data from open locations in Canada and the following states: AL, CT , FL , IA , IL , IN , ME , MN , MO , MT , NE , NY , NC, ND,OH, OK, PA, SC, SD, TN, TX, VT, WI, WV.

New Locations

• We installed three locations since 4-1-2020: One in Colorado, one in New Jersey, and the other in West Virginia. The Colorado and West Virginia locations are operating profitably, at higher than expected levels given the pandemic. The NJ location is off to a slow start as expected due to strict state laws limiting capacity.
• We have 3 more locations opening through the end of the year one in Oklahoma, one in North Dakota and the other in Ohio.
• We have three projects under construction with Q1 or Q2 2021 planned openings, six other projects are on Covid hold, opening dates uncertain. We are seeing some challenges with financing projects. Two clients who were confident in their financing have been having finding it difficult to finance their projects, though others are progressing as expected.

Taking The Pulse

Our key takeaways from our reading and conversations with industry leaders

Operators are bracing for a rough holiday season. The highly lucrative corporate and group events during this period will be severely diminished by the pandemic. Several operators are not looking at year over year sales as their primary metric going forward. They are focused on month over month and building from the current sales levels. The bullets below are based on conversations with key industry operators and our data and are organized by industry.

Theater

• Movies: Lack of product from studios continues to be the biggest challenge for theaters. Those open operate with reduced capacity and expectations. Will they return to a preCovid release schedule? Probably not completely but public cinema will be in the mix and play an important role.
• Based on discussions with theater chains and our data, arcades in the theater industry are lagging the rest of our venue types although improving. Sales were near 25% of 2019 through the Summer and have improved to 45% this Fall.
• Cineworld has backed out of their purchase of Cineplex and Cineplex has in turn sued them for $2.18 billion in damages. The results of this case could have major implications in our industry because Cineplex owns Player One, the third largest game distributor and large national operator. The trial is set for September 2021. A lot can change before then, see commentary below on Cineworld.
• Cineplex released their 3rd Qtr Results Report. Overall their sales are down 70% YTD, with Player One Amusement Group down 65% YTD.
• AMC has cash issues but only partly industry-related (balance sheet). AMC has indicated they may run out of cash and face bankruptcy by end of year.
• Regal closed 500 theaters in October, leaving 11 operating in New York. Those New York theaters have now also been closed. Regal is owned by Cineworld Group.
• Cineworld Group has closed all US and UK theaters and hired Alix Partners and PJT Partners to help guide them through restructuring and strategic financing. This includes negotiating with lenders and landlords while seeking financing options. The news of successful vaccine trials has boosted the stock although significant challenges remain for the company with its $8 billion debt load.
• Well-run independent and smaller chain movie theaters without a heavy debt load are bullish on the theater industry long term. Several are looking for acquisition opportunities.

Bowling Entertainment Centers

• Main Event received an investment of $80 million in June from Redbird Capital partners. This investment appears to have put the chain on a much stronger financial footing to continue through the pandemic.
• Punchbowl Social defaulted on its loans and their lender took over in August, replacing founder Robert Thompson with a new CEO.
• In states with centers open the standard protocol is 50% capacity with every other lane kept open. Once vacated the lanes are switched, the recently used is sanitized and the previously vacant utilized.
• Full experience varies by state and local depending on bar-restaurant service, arcade and FEC attraction rules.
• Our client arcades in bowling centers that are open are performing at 72% of last year.
• The Winter is when bowling based location make most of their profits for the year, so the resurgence of COVID is particularly concerning for these businesses.

Pizza Restaurant with Arcade

• California remain closed, so our sales numbers in this category are mostly from the Midwest.
• Overall Pizza Arcade sales are 56% of last year, up from 39% through end of Summer.
• CEC Entertainment, the parent of Chuck E Cheese has reached an agreement on a reorganization plan. Existing 1st Lien Holders will exchange their debt for equity and own 100% of the company.

Trade Shows

• BPAA is planning to hold their Mid-Winter Bowling Summit in person in Nashville Jan 17-20, 2021.
• Amusement Expo has been rescheduled to May 6&7 2021.
• F2FEC is scheduled for early March 2021. Organizers will make a final decision January 1 whether to hold the show or not.
• Bowl Expo: Scheduled for June 20-24, 2021 in Louisville, Ky.

We hope you find this report helpful. As always, let us know how we can help your business.