David Passman’s classic remake of Carmike Cinemas is garnering rave reviews from Tinsel Town to Main Street. After falling into a state of disrepair, the nation’s fourth largest theater chain, through Passman’s efforts, has boosted the fortunes of film distributors and once beleaguered shareholders as well as the appetite of moviegoers.
“Hollywood didn’t like us, our shareholders didn’t like us and our employees were driving customers away,” Passman says. “Every option was on the table from bankruptcy to revival or something in between when I came out of retirement to become Carmike’s president and CEO.”
Known as “America's Hometown Theater Chain,” Carmike operates some 245 theaters and 2,476 screens in small to midsized communities located throughout 35 states. Despite enjoying quasi-monopolistic conditions, Carmike’s ticket sales were declining, the stock price had fallen to $1.30 per share and the company had restated earnings three times shortly before Passman traded his board seat for a corner office in 2009.
He’s remodeled aging theaters, paid down debt and consummated strategic acquisitions since taking the helm. After logging net losses for three straight years, Carmike produced net income of $96 million on revenues of $539 million in 2012, driving the average stock price above $20 per share.
Here’s a look at Passman’s steps behind his Hollywood-style success story, which just happens to include a fairy-tale ending.
Undertake the easier tasks first
After conducting secret shopping excursions to several theaters and evaluating competitors’ financial statements and operating metrics, Passman concluded that Carmike was worth saving.
Best of all, his due diligence revealed enough “low-hanging fruit” to produce modest improvements in revenues and profits while he executed a burgeoning slate of long-term strategies.
“Competitors with the same raw attendance numbers in similar markets were turning a profit, yet we were broke,” he says. “My analysis revealed that our operating costs as a percentage of revenue were substantially higher than Regal or Cinemark.
“If you think the underlying fundamentals are OK, then it makes sense to put all your efforts into fixing the problems,” Passman says. “If the underlying fundamentals are unsound, then you stop renewing leases and prepare an exit strategy.”
His stealth visits to Carmike’s rural theaters also revealed poor sanitation, broken marquees and scruffy-looking employees who dissuaded customers with their indifferent attitudes.
“Customers were staying away because the prior CEO tried to manage earnings by deferring repairs and maintenance,” Passman says. “That attitude was further reflected in the appearance and actions of our employees who had become disenchanted with the company.
“I stole a page from Jim Skinner’s playbook,” Passman says, referring to McDonald’s CEO, who steered the floundering company to the best financial performance in its history. “We needed to have a clean, friendly environment before asking customers to return. In other words, we needed to clean up our act.”
Passman replaced under-performing theater managers, authored new hiring and performance standards, retrained the entire staff and spent millions repairing broken signs and theater seats. Admittedly, he took some heat for making substantial repairs and booking a multimillion-dollar impairment charge, but through it all, he remained committed to the idea that improving the customer experience would boost loyalty today and pay dividends down the road.
“Our investments in training and repairs increased attendance, customer loyalty and concession stand revenues,” he says. “The key to getting the most from part-time workers is to hire for attitude and give them training. That’s why Disney is so successful.”
He also asked Carmike’s vendors to sharpen their pencils as part of a comprehensive effort to bring the company’s operating costs in line with those of competitors.
“The conventional wisdom is that you can’t renegotiate contracts until they expire,” he says. “We asked everyone from our refuse removal service to Coca-Cola to give us a better deal even if their contracts were in the middle of the term.”
The revised vendor pricing not only lowered Carmike’s operating costs but boosted customer goodwill and concession revenue by allowing Passman to reduce prices for beverages and snacks.
Although Carmike has traded margin percentage for margin dollars at the concession stand, it’s come out ahead as concessions and other revenue increased to $54.9 million in the most recent period compared to $43.6 million for the same period in 2012.
Repair vital relationships
After witnessing Carmike’s dramatic slide, constituents had not only lost money but faith in the company’s leadership. Since their support was critical to Carmike’s long-term success, Passman launched a series of steps to build goodwill and repair damaged relationships.
For starters, he garnered shareholder support by reducing the company’s debt by $120 million over three years. The company’s highly leveraged position had left shareholders vulnerable and fearful, especially when the economy faltered in 2008.
“Ultimately, deleveraging the company would free up cash, reduce our debt service cost, mitigate shareholder risk and give us more choices,” Passman says. “We stopped paying dividends and put every available dollar toward retiring bank debt.”
Next, he solicited revenue-generating ideas from theater managers, who were initially stunned by his request. After some prodding, however, the managers offered-up great marketing tips including a promotion called Stimulus Tuesday.
“The problem with discounting tickets to drive attendance is that it impacts studios who get a percentage of box office receipts,” Passman says. “You don’t want to bite the hand that feeds you in an effort to increase sales.
“Instead, we offered $1 popcorn on Tuesdays,” he says. “We immediately got a 35 percent increase in attendance and best of all, it didn’t diminish ticket sales on Mondays or Wednesdays.”
Not to be outdone by rank and file employees, Passman’s marketing team introduced a rewards program, allowing moviegoers to accumulate points and earn discounts on concession items and movie tickets.
He conveyed his revenue-boosting strategies during personal visits with distributors and studio executives who had experienced a falling out with Carmike’s former CEO. His cross-country trek not only bolstered the firm’s relationships with Hollywood moguls, it quashed their fears that the chain might file for bankruptcy.
Carmike’s marketing strategy has led to big gains in ticket and concession sales. Second quarter admissions revenues grew 24.7 percent year-over-year and 13.9 percent on a per screen basis, significantly outperforming the domestic cinema industry increase of 7.8 percent. Beyond the strong gains in admissions receipts, second quarter concessions and other revenue per patron increased 6.9 percent to a new all-time record, extending Carmike’s year-over-year per patron spending growth to 14 consecutive quarters.
Best yet, giving theater managers a voice has created a sense of ownership, improved theater cleanliness, boosted attendance and reduced annual turnover from 40 to 20 percent.
“Not everything we tried worked,” Passman says. “But we kept trying. In fact, my idea of offering graduated concession packages actually decreased revenues based on the results of a 12-theater pilot.
“My philosophy is that you can’t fail as long as you keep trying and CEOs need to lead the way by acknowledging their mistakes.”
Armed with an improved balance sheet, Passman went on another shopping spree in late 2011. But this time, he didn’t travel incognito. In the cinema world, he’s widely recognized as a savvy buyer.
The top four exhibitors control about half of the country's 40,000 screens and many smaller players are looking to sell out. In fact, during the firm’s July 22 conference call, Passman characterized the market as “very buyer-ripe,” adding that Carmike “is inundated with opportunities to purchase assets.”
“After analyzing our income statement, I realized that we could support an additional 300 theaters without adding to our headquarters’ staff,” Passman says. “We were able to use mostly cash to consummate a number of purchases due to our improved performance and balance sheet. Plus, we raised $60 million by issuing additional stock.”
Passman isn’t looking for fixer-uppers or aging venues in declining markets. Rather, he’s looking for turnkey properties in stable locales that stand to benefit from his marketing expertise and Carmike’s highly efficient infrastructure.
“We had a chance to leverage our efficiency and G&A by making strategic acquisitions in maturing markets where the owners don’t have the ability to lower costs and boost their profitability,” he says.
Carmike has purchased 366 screens since the end of 2011. It’s also building new theaters, both to replace existing venues and open new locations. For instance, Passman built three new theaters in the first half of 2013, closed several under-performing locations and raised an additional $88 million in order to hone Carmike’s portfolio amid a maturing market.
“In 1991, the Atlanta Braves became the first team in the National League to go from last place one year to first place the next, and we may be the second team to achieve that feat,” he says. “Our stock has rebounded after hitting rock bottom. Which proves that Wall Street still believes in fairy tales.”
How to reach: Carmike Cinemas: (706) 576-3400 or www.carmike.com
- Start with the easiest tasks.
- Repair vital relationships.
- Use strategic acquisitions to leverage G&A.
The Passman File
President and CEO
Birthplace: Bay Shore, N.Y., raised in Ocala, Fla.
Education: He attended the University of North Florida and received a bachelor’s degree in accounting from the University of Florida. Passman is also a CPA.
What was your first job and what did you learn from it?
I learned how to run a successful concession operation when I was just 13 and sold milkshakes at the local Burger Chef. Later, I learned what it takes to be a successful entrepreneur when I joined the audit practice at Deloitte. I spent the better part of 20 years helping small businesses grow and became a partner. Having a horizontal view of everything that goes on in a company helped me understand what it takes to be successful.
What’s the best advice you ever received?
Attitude trumps aptitude. I’ve met a lot of very smart people who never achieved success because of their attitude. On the other hand, I’ve seen folks with average IQs and a positive outlook rise through the ranks. A positive attitude is how Jim Skinner became CEO of McDonald’s, and it’s one of the main reasons why he was able to save the company.
Who do you admire most in business and why?
Warren Buffet because he’s involved but not overbearing, he’s trusting but not naïve. He’s successful because he sticks with what he understands. He doesn’t invest in unfamiliar businesses; he knows his limitations.
What is your definition of business success?
You’re successful when you improve the return for shareholders, empower people and instill the right values. Ultimately, a leader is successful when he or she leaves a company better off than he or she found it.