The Marcus - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 headline EPS of $0.52 beat consensus, though the beat was driven by a $0.10 per-share insurance gain; excluding the gain, EPS was ~$0.42, roughly in line. Revenue (pre-reimbursements) missed consensus as a softer film slate weighed on Theatres, while Hotels outperformed local comps despite a tough RNC lap. Revenue vs. consensus and EPS consensus from S&P Global estimates are shown below (values with asterisks) (see Estimates Context).
• Theatres: admissions -15.8% and attendance -18.7% YoY on mix lacking family tentpoles; pricing actions lifted average ticket price +3.6% and concessions per patron +2.1%. Hotels: RevPAR -1.5% YoY on ADR normalization vs. RNC, but occupancy +1.7ppt and competitive set outperformance by 5.2ppts.
• Capital allocation: repurchased ~0.6M shares for $9.0M; Board added 4.0M shares to authorization (4.7M total available). Liquidity >$214M; net leverage 1.7x; CapEx 2025 guided to $75–$85M (up from $70–$85M), stepping down to ~$50–$55M in 2026. Dividend of $0.08/share declared Nov 5, 2025.
• Setup: holiday slate includes Wicked: For Good and Zootopia 2 with presales strong; 2026 slate notably more franchise- and family-heavy, a favorable mix for MCS’s Midwest footprint. Management sees stronger free cash flow in 2026 as CapEx normalizes, and has incremental buyback capacity as a catalyst.

What Went Well and What Went Wrong

• What Went Well

  • Hotels outperformed competitive sets by 5.2 ppts as group business and renovated assets drove resilience despite ADR normalization vs. last year’s RNC impact. “We continue to capitalize on the strength in group business…particularly strong at our newly renovated properties” — Michael R. Evans, President, Hotels.
  • Pricing initiatives supported per-cap growth: average ticket price +3.6% and concessions per patron +2.1% YoY, helped by blockbuster surcharges and Everyday Matinee adjustments.
  • Capital return: $9.0M buybacks in Q3; new authorization for up to 4.0M additional shares, bringing 4.7M shares available; cumulative >$25M returned in last four quarters.

• What Went Wrong

  • Theatres’ film mix lacked a breakout tentpole and family content, leading to admissions -15.8% and attendance -18.7% YoY; division revenue -16.6% and Adj. EBITDA -33.4% YoY.
  • Consolidated revenue (pre-reimbursements) -10.2% YoY and operating income -30.7% YoY; Adj. EBITDA -22.6% YoY as Theatres volume pressure outweighed Hotels’ stability.
  • Revenue missed Street (basis consistent with pre-reimbursement “Revenues”) given softer film slate; Q3 Hotels RevPAR -1.5% YoY from ADR normalization vs RNC.

Transcript

Operator (participant)

Good morning, everyone, and welcome to Marcus Corporation's Third Quarter Earnings Conference Call. My name's Lydia, and I'll be your operator today. At this time, all participants are in listen-only mode. We'll conduct a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star zero, and an operator will be happy to assist you. As a reminder, this conference is being recorded. Joining us today are Greg Marcus, Chairman, President, and Chief Executive Officer, and Chad Paris, Chief Financial Officer and Treasurer of Marcus Corporation. At this time, I'd like to turn the program over to Mr. Paris for his opening remarks. Please go ahead, sir.

Chad Paris (CFO and Treasurer)

Good morning, and welcome to our fiscal 2025 third quarter conference call. I need to begin by stating that we plan to make a number of forward-looking statements on our call today, which may be identified by our use of words such as believe, anticipate, expect, or other similar words. Our forward-looking statements are subject to certain risks and uncertainties, which may cause our actual results to differ materially from those expected or projected in our forward-looking statements. These statements are only made as of the date of this conference call, and we disclaim any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

The risks and uncertainties which could impact our ability to achieve our expectations identified in our forward-looking statements are included under the heading "Forward-looking Statements" in the press release we issued this morning announcing our third quarter results, and in the Risk Factors section of our fiscal 2024 annual report on Form 10-K, which you can access on the SEC's website. Additionally, we refer you to the disclosures and reconciliations we provided in today's earnings press release regarding the use of adjusted EBITDA, a non-GAAP financial measure, in evaluating our performance and its limitations, a copy of which is available on the Investor Relations page of our website at investors.marcuscorp.com. With that behind us, let's begin. I'll start this morning by spending a few minutes sharing the results from our third quarter and then discuss our balance sheet, liquidity, and capital allocation.

I'll then turn the call over to Greg, who will focus his prepared remarks on where our businesses are today and what we are seeing ahead. We'll then open up the call for questions. This morning, we reported a quarter with solid results overall, despite somewhat mixed results in our divisions relative to our expectations. In hotels, we exceeded our expectations and were able to overcome a very challenging prior year comparison to deliver revenue growth and outperform our competitive sets. In theaters, we saw a less concentrated film slate with several films that performed well relative to our own expectations, but the slate lacked a major breakthrough tentpole that we've seen in the third quarter of the last couple of years. During our seasonally busiest quarter, our teams in both businesses remained focused on serving our guests with excellence to deliver memorable experiences.

I'll start with a few highlights from our consolidated results for the third quarter of 2025. Consolidated revenues of $210 million were down 9.7% compared to the prior year quarter. Operating income for the quarter was $22.7 million, a decrease of $10.1 million compared to the prior year quarter. Consolidated adjusted EBITDA for the third quarter was $40.4 million, a decrease of $11.9 million compared to the third quarter of fiscal 2024. Net earnings for the quarter were $16.2 million, or $0.52 per share, and were favorably impacted by a non-recurring gain on a property insurance settlement of $3 million, or $0.10 per share, net of tax.

Excluding the impact of the gain, net earnings for the third quarter were $13.2 million, or $0.42 per share, compared to prior year third quarter net earnings of $24.8 million, or $0.78 per share, excluding the impacts of our convertible debt repurchases last year. The change in our fiscal year-end quarters had an immaterial impact on our third quarter results, with one additional operating day during the quarter in fiscal 2025 compared to last year. Turning to our segment results, I'll begin this morning with our theater division. Third quarter fiscal 2025 total revenue of $119.9 million decreased approximately 16% compared to the prior year third quarter, primarily due to weaker performances from the top films in the quarter compared to the top films in the quarter last year, and less carryover of films that released in the second quarter compared to last year's carryover.

Comparable theater admission revenue for the third quarter decreased 15.8%, and comparable theater attendance decreased 18.7% compared with our fiscal third quarter 2024. While our market share in the third quarter of 2025 was in line with our historical third quarter share, including our third quarter share in 2023, this year's film mix did not help us. Notably, the film slate did not include a family animated film in the top five movies of the quarter, a genre that our circuit typically outperforms in. When using our comparable fiscal days, U.S. box office receipts decreased 12% during our fiscal 2025 third quarter compared to U.S. box office receipts during our fiscal third quarter last year, indicating our admissions revenue performance trailed the industry by 3.8 percentage points.

We believe that our lower box office performance relative to the nation during the third quarter was primarily attributable to our strong performance in the third quarter last year when our circuit outperformed the national box office growth by nearly 6 percentage points. As you may recall, a year ago, our third quarter 2024 box office results benefited from a favorable film mix in which we achieved above our historical average market share for each of our top six movies in the quarter, including several films such as Inside Out 2, Despicable Me 4, and Twisters, where we significantly outperformed our typical share. Our admissions revenues did benefit from several pricing changes that we discussed with you last quarter, with average admission price increasing 3.6% during the third quarter of fiscal 2025 compared to last year.

Our admission per caps were favorably impacted by strategic pricing changes, including adjustments to our Everyday Matinee program and pricing surcharges on select high-demand summer blockbuster films. In addition, admission per caps were also favorably impacted by a higher percentage of our attendance on PLF screens compared to last year's quarter. We also grew our average concession food and beverage revenues per person at our comparable theaters, which increased by 2.1% during the third quarter of fiscal 2025 compared to last year's third quarter, and was driven by an increase in merchandise sales and pricing. Our top 10 films in the quarter represented approximately 72% of the box office in the third quarter of fiscal 2025, compared to 83% for the top 10 films in the third quarter last year.

The less concentrated film slate, featuring fewer blockbuster films compared to the more concentrated slate in the third quarter last year, resulted in an approximately 3 percentage points decrease in overall film cost as a percentage of admission revenues. Finally, Theater Division adjusted EBITDA during the third quarter of fiscal 2025 was $22.1 million, a 33% decrease over the prior year quarter, primarily due to the lower attendance volumes. Turning to our Hotels and Resorts division, total revenues before cost reimbursements were $80.3 million for the third quarter of fiscal 2025, a 1.7% increase compared to the prior year. RevPAR for our comparable owned hotels decreased 1.5% during the third quarter compared to the prior year, which resulted from an overall occupancy rate increase of 1.7 percentage points, offset by a 3.6% decrease in our average daily rate, or ADR.

Our average occupancy rate for our owned hotels was 78.4% during the third quarter of 2025. As you may recall, our third quarter 2024 results benefited from the Republican National Convention and its significant impact on the results at our three Milwaukee hotels, resulting in approximately $3.3 million of incremental revenue. The RNC primarily had the effect of increasing average daily rates, and when we adjust out that one-time impact, we achieved some very impressive rate and RevPAR growth. When excluding the impact of the RNC on our three Milwaukee hotels from last year's results, our average daily rate during the third quarter of 2025 grew approximately 5% compared to the prior year quarter, and RevPAR grew approximately 7.5%.

According to data received from Smith Travel Research, comparable competitive hotels in our markets experienced a decrease in RevPAR of 6.7% for the third quarter of 2025 compared to the third quarter of fiscal 2024, indicating that our hotels outperformed the competitive set by 5.2 percentage points. We believe our outperformance resulted primarily from strong sales results with our group customer segment, as well as a strong summer season at Grand Geneva Resort & Spa, and higher results from the recently renovated properties in our portfolio.

When comparing our RevPAR results to comparable upper-upscale hotels throughout the U.S., the upper-upscale segment experienced a decrease in RevPAR of 1.3% during our third quarter compared to the third quarter of fiscal 2024, indicating that our hotels performed generally in line with the industry despite the growth headwind from the prior year RNC impact, and they outperformed the industry by nearly 9 percentage points when adjusting for the estimated impact of the RNC on our RevPAR growth. With the strong growth in group business and events, our banquet and catering operations continued to grow, with food and beverage revenues up 8.3% in the third quarter of fiscal 2025 compared to the prior year, which includes the impact of the headwind from prior year RNC-related banquet and catering events.

Finally, hotels' adjusted EBITDA was essentially flat in the third quarter of fiscal 2025 compared to the prior year quarter, which we believe was a significant achievement given the changes in our revenue mix, with a decrease in high-rate, high-margin rooms revenue in the prior year due to the RNC, and the increase in comparatively lower-margin food and beverage revenue. Shifting to cash flow in the balance sheet, our cash flow from operations was $39.1 million in the third quarter of fiscal 2025 compared to cash flow from operations of $30.5 million in the prior year quarter, with the increase in cash flow primarily due to differences in the timing of various working capital payments. Total capital expenditures during the third quarter of fiscal 2025 were $20.9 million compared to $18.5 million in the third quarter of fiscal 2024.

A large portion of our capital expenditures during the third quarter were invested in the Hilton Milwaukee renovation, with the balance going to maintenance projects in both businesses. Our capital investments and renovation projects have progressed as planned, and we now expect capital expenditures for fiscal 2025 of $75 million-$85 million. The timing of several projects will impact our final capital expenditure number for the year. Looking ahead, as we get past the heavy part of the reinvestment cycle that we are in this year with our current hotel portfolio, we see a meaningful step down in capital expenditures in 2026. Our preliminary expectation is for approximately $50 million-$55 million of capital expenditures in 2026, with this range subject to adjustment for the final timing of payments for our 2025 projects.

We ended the third quarter with approximately $7 million in cash and over $214 million in total liquidity, with a debt-to-capitalization ratio of 26% and net leverage of 1.7x. Finally, in today's earnings release, we announced that during the third quarter, we repurchased approximately 600,000 shares of our common stock for $9.1 million in cash. This brings our share repurchases this year to just over 1 million shares, or approximately 3.2% of our outstanding shares at the beginning of the year. Our cumulative buybacks since resuming share repurchases in the third quarter of 2024 are now over 1.7 million shares, or approximately 5.3% of our outstanding share count when we began, returning nearly $26 million in capital to shareholders.

Our strong balance sheet and confidence in our businesses gives us the ability to continue pursuing growth investments while returning capital to shareholders through our quarterly dividend and opportunistic share repurchases. We will continue to allocate capital with a balanced approach that supports our strategic priorities while pursuing investments that provide the most attractive returns to shareholders. Greg will further discuss our capital allocation approach and today's announcement of an increase in our share repurchase authorization. With that, I will now turn the call over to Greg.

Greg Marcus (Chairman, President, and CEO)

Thanks, Chad. Good morning, everyone. When we were together last quarter, we shared that our summer was off to a solid start in both of our businesses. In theaters, a more diverse film slate was bringing out audiences for a series of solid performances.

In hotels, we were gaining momentum as we entered the third quarter and were well-positioned with several newly remodeled properties in our portfolio. As the rest of the third quarter played out, we saw some divergence between the results of our two divisions. In theaters, we saw a late summer movie season that included several films that performed well and met our own expectations, but it lacked a runaway hit blockbuster film that we've had the last couple of years, and the film mix was challenging for our markets. In hotels, our team executed exceptionally well, capitalizing on both group and leisure demand, and delivered a quarter that outperformed our competitors in the nation, overcoming a very difficult comparison to our record third quarter results last year.

As I will discuss today, while the overall result was a mixed quarter compared to our own expectations, there were many positives that we think will benefit us in the long term. I'll start with our theater division. In a quarter where there has been much industry discussion about a national box office that was down nearly 12%, I'd like to step back for a moment with some perspective and start with a few things that we thought were positive. First of all, we had good product supply with 32 wide releases in the third quarter of this year compared to 29 last year. The film slate was less concentrated, and many of the smaller mid-sized pictures actually performed better on average than they performed last year.

When you get past the top six movies in the quarter, the average box office gross per film for the next 14 films in the top 20 was up over 11%. We believe this illustrates that there is an important role for small and mid-sized films in theatrical, and contrary to some of the narrative in the trade press, audiences want to come out to see these movies in theaters. Second, there were several films that outperformed expectations. James Gunn's Superman opened to $125 million domestically, achieving over $350 million in box office during its domestic run and grossing over $600 million globally. More importantly, the success of this DC franchise film sets up a promising outlook for future sequels with more DC adventures on the horizon.

Zach Cregger's horror hit Weapons crossed $100 million in domestic box office in just two weeks, on its way to over $150 million for the run. The Conjuring: Last Rites smashed box office records with both the highest domestic and global opening for a horror film, going on to become the highest-grossing film in The Conjuring series. Demon Slayer: Infinity Castle broke the anime record with a $70 million domestic opening and has continued to play strong to become the highest-grossing international movie ever in the U.S. with a domestic run now over $132 million. These were all great results for these films, and they illustrate the audience appeal for a wide range of content across genres. Where did the summer box office come up short compared to last year? We think it ultimately comes down to a couple of simple factors.

First, we didn't have a breakout smash hit this year that was the must-see film of the summer, as we've seen in the last two years. The number one film in the third quarter last year was Deadpool & Wolverine, and in 2023, it was Barbie, with both films grossing approximately $630 million domestically in the quarter. As I discussed earlier, the number one film in the quarter this year, Superman, was a great success for many reasons, but at $350 million, its gross was approximately $280 million lower. We've been in this industry for a long time, and this dynamic with varying levels of box office hits from year-to-year isn't new. It's just the nature of our business. In the third quarter, the summer box office was lighter on family films, a genre we typically outperform.

Last year, our top five films in the third quarter included Despicable Me 4 at number two and Inside Out 2 as the number five film, which was a second quarter release that carried over and held strong into the third quarter. To contribute $183 million to the third quarter domestic box office. This year's third quarter did not have a family animated film in the top five and didn't benefit from carryover of family films released in Q2. This isn't really a new phenomenon, but it did create a tough comparison to last year, particularly for our circuit, which historically has outperformed on family films. Chad discussed the factors we believe are impacting our box office growth relative to the nation.

While we underperformed the nation by just under 4 percentage points, this was primarily due to our strong outperformance in last year's third quarter, coupled with a film mix this year that didn't include many family films. I'm pleased to share that we continue to make progress on optimizing prices to capture a premium during peak periods and maintain the right balance of value-oriented options for more price-sensitive customers during lower demand periods. As expected, our admission per caps improved during the third quarter as we implemented blockbuster pricing on high-demand films and continued to adjust pricing for our Everyday Matinee program. We expect continued growth in our admission per caps for the next several quarters.

We're looking forward to an exciting fall and holiday film slate with Wicked: For Good, Zootopia 2, Five Nights at Freddy's 2, The SpongeBob Movie: Search for SquarePants, and Avatar: Fire and Ash, just to name a few. Advanced ticket sales of Wicked: For Good have been strong and are currently trending over 3x ahead of pre-sales for last year's Wicked. As we look ahead to next year, the 2026 film slate features major franchises including Spider-Man: Brand New Day, The Super Mario Galaxy Movie, Moana, Jumanji 3, two different movies, Toy Story 5, Mega Minions, The Mandalorian and Grogu, Dune: Messiah, and Avengers: Doomsday, just to name a few. There are many more great films coming, noted in today's earnings release.

The 2026 film slate continues to fill in, and the early indication is that while there are a similar number of franchise films in 2026 compared to this year, the grossing potential of the 2026 franchises is greater based on their historical predecessor box office performances. The 2026 slate currently includes four films where the predecessor earned over $500 million at the domestic box office compared to only one such film in 2025. Moving to our Hotels and Resorts division, you've seen the segment numbers, and Chad shared some additional detail on the performance metrics, including our outperformance to the competitive sets. We expected this quarter to be a challenging comparison to last year for the hotel division, given the significant impact the RNC had on our Milwaukee hotels in the third quarter last year.

I'm thrilled to share that our team met the challenge and delivered absolute growth to overcome the tough comp. The RNC was an extraordinary event for our largest market. If we back out the RNC impact from our prior year results, our core business performed very well. In particular, two of our newly renovated properties, Grand Geneva Resort & Spa and Pfister hotel, benefited from our investments in renovations and great execution by our teams to deliver outstanding results this quarter. There were several notable items in the quarter that I'd like to highlight. Average daily rates during the quarter were generally strong, with rate growth at four of our seven hotels when adjusted for the prior year RNC.

We have been successful in achieving higher rates at our hotels with newly renovated room product, including the Pfister, Grand Geneva Resort & Spa, and Hilton Milwaukee. Occupancy remains strong, with occupancy growth at six of our seven hotels. The combination of strong ADR and occupancy growth resulted in our properties once again outperforming the competitive sets, with impressive RevPAR growth of 7.5% when adjusted for the prior year impact of the RNC. Group business during the quarter was stable. As we approach the end of the year, our group room revenue bookings for full year fiscal 2025, or group pace in the year for the year, are running slightly behind where we were at this time last year, which includes the RNC Group business last year.

Even more encouraging, group room pace for 2026 is running approximately 14% ahead of where we were at this time last year for the next year out, with banquet and catering revenues similarly running ahead of last year's pace. The current state of our hotel business remains stable and consistent with our view last quarter. While some markets have seen some more significant leisure softening, our own portfolio has generally performed well. Leisure transient demand remains soft in some markets around the country, but our hotel portfolio has not seen significant signs of softening or significant cancellations of group business. We believe our upper upscale positioning, drive-through market locations, and a broad segmentation lessening our exposure to any one type of customer will see less volatility if further economic softening occurs.

There remains an increased level of economic uncertainty compared to where we were a year ago, and if we begin to see softness, we are prepared to react and adjust quickly. Our operations team is continuously focused on labor efficiency, and we've developed a strong track record of successfully managing through a changing demand environment. Finally, I'd like to close with our views on capital allocation and returning capital to shareholders. For the last couple of years, we've made significant reinvestments in our assets, and as Chad discussed, we expect to move past this heavy CapEx cycle next year as we shift back to a more typical maintenance and ROI CapEx mix. We're seeing great results from our renovated properties, and we believe these investments will continue to have attractive long-term returns.

On the growth front, we continue to look for opportunities to deploy capital to grow both of our businesses with value-accretive investments. We have confidence in our businesses and a strong balance sheet that allows us to move quickly when we see good opportunities, and we have a history of executing when they arise. To the extent that we don't see attractive investments that are actionable, we expect to return excess capital to shareholders through share repurchases or dividends. As Chad described in greater detail, we've repurchased over 5% of our outstanding shares through opportunistic share repurchases since we began repurchasing shares in the third quarter of 2024. Between cash dividends and share repurchases, we've returned over $25 million, or approximately $0.80 per share to shareholders in the last four quarters.

This morning, we announced that our Board of Directors has approved a 4 million share increase in our current repurchase authorization, bringing our current share repurchase authorization to 4.7 million shares. In the absence of growth investments with attractive returns, we will continue to use this authorization to opportunistically repurchase shares and return capital to shareholders. This new authorization will give us the flexibility to move quickly as opportunities arise. Throughout our company's history, we've taken a balanced approach of investing in long-term growth opportunities while returning capital to shareholders, and you should expect us to continue to do both going forward. It won't be all of one or the other. We continue to pursue growth opportunities in both of our businesses, and we're generally opportunistic, investing where we see value and attractive returns, whether it be in new deals or in buying back our stock as we've done recently.

Finally, tomorrow marks an important milestone in our history. On November 1st, 1935, my grandfather, Ben Marcus, founded what became The Marcus Corporation with the purchase of a single-screen movie theater in Ripon, Wisconsin. During the month of November, we will celebrate the company's 90th anniversary, and our theme for the year has been the spirit of entrepreneurship, one of the guiding principles that my grandfather and dad instilled in all of us, and our company's future will be built on that same entrepreneurial legacy. We are called on to push, change, and evolve because, as we know from our 90 years of history, the only constant is change. I'm excited to celebrate our 90th anniversary with our associates, who, by the way, my grandfather taught us, are our most important asset.

As we both recognize our achievements and look ahead to a future that will continue the legacy of these great businesses for many years to come. Before we open up the call for questions, I want to conclude my remarks by saying thank you to all the hardworking associates of The Marcus Corporation. I don't want to ever take for granted what each and every one of them does to contribute to the success of both of our businesses. Thank you. With that, at this time, Chad and I would be happy to open the call up for any questions you may have.

Operator (participant)

Thank you. Please press star followed by the number one if you'd like to ask a question, and ensure your device is unmuted locally when it's your turn to speak. Our first question today comes from Eric Wold with Texas Capital. Please go ahead. Your line is open.

Eric Wold (Analyst)

Thank you. Good morning, guys. A couple of questions. On the hotel side, you mentioned that you had rate growth in four of the seven hotels in the quarter. I guess for the other three, is that something that was more of a short-term issue? Is that something that's kind of been more than one quarter where you haven't had rate growth at those three hotels? Something that you think is more of a competitive issue in those markets? I don't want to lean on that too much, but I just want to see if it's more of something that's been short-term or something that's been more than a quarter. Is that something you think that's more of a competitive issue or something that may require an investment as you look in the next couple of years?

Chad Paris (CFO and Treasurer)

Thanks, Eric. Yeah, I mean, at the three hotels where we didn't see ADR growth, I would say they're more market dynamics. Two of them have been persistent market dynamics that are more generated by supply in the market. In the third, it really was just a little bit of softening very recently in demand. At two of the three, I don't see significant CapEx investments. We have one of those three that we're going to be doing some small refreshes to, but nothing anywhere near what we've done at the three major properties over the last few years. I would describe it as a more normal course refresh that is embedded in our $50 million-$55 million of CapEx that we expect for next year.

Eric Wold (Analyst)

Got it. On that $50 million-$55 million, is that considered including refreshes, is that considered, I guess, more of a maintenance CapEx number kind of going forward? Anything that would be kind of unusual in that number?

Chad Paris (CFO and Treasurer)

It's not 100% maintenance. There is some ROI that we're doing in that. We've done some of that this year in the theater business, and there'll be some of that again as we look forward in both of the businesses. There's always some of those types of activities, but it is primarily maintenance and ROI capital.

Eric Wold (Analyst)

Got it. Last question. I know you touched on this a little bit with the capital return comments. With the increased share purchases this year and the new share repurchase authorization, should M&A—I know you obviously have some increased free cash flow with the reduced CapEx next year, and presumably going forward—but should M&A opportunities come up on either the hotel or the exhibition side, can you talk a little bit about your comfort taking on leverage to the balance sheet and kind of what's your comfort level on a leverage ratio? Also, should the equity get back to a more, whatever in your mind, be a more appropriate valuation, would you use equity for M&A in the future, or is debt, in your view, the more Appropriate way to kind of go about that?

Chad Paris (CFO and Treasurer)

Yeah. On the first part of your question on M&A, I think if we have something that's actionable, we will move on it. We have been allocating a lot of capital to share repurchases lately. At the current leverage at 1.7x, we're very comfortable, and we actually have a target leverage that's a bit above that, closer to two and a quarter to two and a half. We have some capacity to do that. If we found the right type of M&A opportunity, we have some flexibility and can flex up a bit and then bring ourselves back down to somewhere in that target level. Very comfortable with where we're operating right now, and there's actually some room to do a bit more and continue to invest.

Greg Marcus (Chairman, President, and CEO)

As for whether we are taking on more leverage and doing things, we have that balance sheet capacity, as Chad pointed out. Would we use equity? Yeah. I mean, look, we have a history—and you know this, Eric—if you go back.

When we think there's an opportunity to return capital to shareholders through stock repurchases that makes sense, we do that. When we believe the stock is at a price where we think it's appropriate to use it as capital, we do that as well. It will just depend on market conditions. We are not a company that just says, "We programmatically buy stock no matter what the price is, or we're going to sell stock to grow just to raise equity." We will do it based on what we think the price is and whether it makes sense.

Chad Paris (CFO and Treasurer)

Just to be clear, at the current levels, obviously, we're in the market, and we were repurchasing shares during the quarter. That's kind of the level that we're at right now. You wouldn't see us issue equity at the current share price to go do M&A.

Eric Wold (Analyst)

Completely understand. Appreciate it. Thanks, guys.

Operator (participant)

Our next question comes from Patrick Sholl with Barrington Research. Your line's open.

Patrick Sholl (Analyst)

Thank you. I'm just curious on concessions. Just with the current macro environment, have you seen any change in how consumers are—just consumer uptake or hesitancy with regard to price increases and the ability to offset inflationary pressures there?

Chad Paris (CFO and Treasurer)

Hi, Pat. No. We haven't really seen a lot, to speak of, over the summer in changes in consumer buying patterns. The hit rate and the basket sizes have been pretty consistent. We've moved through inflationary-type price increases, nothing overly aggressive, as we've seen in our per caps. There's actually been more propensity for our customers to buy merchandise associated with concession purchases. That's been a nice part of the uplift. Nothing that we've seen would tell you there's a change going on in the willingness to buy concessions.

Patrick Sholl (Analyst)

Okay. Maybe just a question on the M&A markets. With the softening macro environment in hotels and maybe some stability in the film slate, I'm just kind of curious how you're seeing the various macro factors affecting the M&A market in those two segments.

Greg Marcus (Chairman, President, and CEO)

It feels like there's some more—I mean, if you look at it from a macro level and you back up, the market is still very, very sluggish in terms of transaction volume. If I had to explain how does it feel right this minute, it's starting to feel like there's some more stuff happening. I don't think we're seeing so much selling pressure from anyone feeling the pressure to sell from a performance standpoint yet. I think you get people who've just owned things too long, and that's their issue. The thing I think we bumped into—and by the way, if interest rates, as they come down, that will help.

Again, I think one of the bigger challenges that we bump into is if you wrote a pro forma to buy an asset and you had an exit cap that's significantly below where cap rates are now, and you don't have to sell, you're going to hold on as long as you can. Since the economy has held up, we're not seeing people feeling pressure and forced sales. You're seeing people where now they're starting to say, "Okay, am I going to make the reinvestment the next cycle? Because PIPs are coming up on people. Am I going to want to reload that?" That's probably where we're seeing some opportunity. It's more along that. We're not feeling that, as you might be alluding to, some economic pressure as the economy slows down.

Patrick Sholl (Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question comes from Drew Crum with B. Riley Securities. Please go ahead.

Drew Crum (Analyst)

Okay. Thanks. Hey, guys. Good morning. I think you talked about expectations for admission per cap growth over the next few quarters. Does that incorporate or contemplate any further changes to your pricing strategy? If so, what are those? Any early learnings from the pricing increases you took at the beginning of 3Q?

Chad Paris (CFO and Treasurer)

Hi, Drew. Yeah. It does not contemplate a lot of significant changes prospectively beyond what we did in the third quarter. It's more the annualization benefit and tailwind that we'll get from, frankly, flipping from a headwind on some of the discount programs that we've been comping for the last year to now moving to some strategic pricing moves that have increased pricing, and that becomes a tailwind. During the third quarter, we had blockbuster pricing on a number of films.

Our pricing approach on that evolved a bit throughout the quarter in terms of the length of period that we had blockbuster pricing on, and Everyday Matinee evolved a bit during the quarter. I think we've hit a level that makes sense. Pricing, as we talked about last quarter, continues to be an area where the industry has done various experimenting. We will continue to watch what others are doing. In what we did in the third quarter, it is having the effect that we expected it would.

Drew Crum (Analyst)

Got it. Okay. You guys discussed the composition of the slate in 3Q having a negative impact on your theater admissions. Now, as you look at 4Q, how are you viewing mix? Is it a positive for your circuit, negative, or too tough to tell?

Chad Paris (CFO and Treasurer)

Yeah. I'll start first, and let Greg add on his thoughts. I mean, I think it's a little bit tough to tell. It's easy to forget that we had a Moana film in the fourth quarter last year, and we don't have something quite like that. We do have a couple of family films here coming up in the quarter, and we have an Avatar, which we didn't have last year. There are several puts and takes. It's frankly tough to tell on mix.

Greg Marcus (Chairman, President, and CEO)

It's so hard. It is really hard to tell. We never know. Again, glad we got Zootopia. Glad we got Wicked. Those should play good in our markets. SpongeBob, I'm a fan. We'll have to see how it goes.

Drew Crum (Analyst)

Okay. All right. Thanks, guys.

Operator (participant)

Thank you. Just as a reminder, please press star followed by the number one if you'd like to ask a question today. We'll move to our next question from Mike Hickey with Benchmark. Please go ahead.

Mike Hickey (Analyst)

Hey, Greg. Thanks for taking our questions. I guess first, Greg, obviously, I heard your prepared comments on 2026 for both your segments. Sounded pretty bullish, actually. Encouraging. Just would love to get sort of your off-script thoughts, Greg, on the growth opportunity you see from theaters and hotels and any catalysts or major drivers. Obviously, you list a lot of films. That sounds encouraging. Maybe something that's very relevant to your demo. On the hotel side, I don't know if the Mark seems like a really interesting project that you guys are doing, if that could be a catalyst, or any other initiatives that you think could move the needle for you guys across your two segments in 2026. I got a couple of follow-ups.

Greg Marcus (Chairman, President, and CEO)

Sure. Look, on the theater side, you know me, Mike. I tend to hate to try to predict how things are going to go. I always go down to, "Let's just count the number of films, and that'll give us a range." I don't know what—in some years, it's going to be better, or some years, in some periods, it'll be not as good. I keep reminding myself, "Oh, yeah. Memorial Day this year was the biggest Memorial Day in the history of the movie business." Some are slowed down. You just don't know. I thought it was a really interesting data point to look and say, "Look at the number of franchise films next year, pretty much like this year." I think maybe one less. If you look back at the historical grossing of the franchise films that are coming around this time, certainly more robust than we had in 2025. I'm not going to ignore that stat.

I go to bed feeling good about that. Again, always hard to predict. On the hotel side, we've made a lot of investments that should continue to bear fruit for us, which is great. There's that old saying, "Old smells and new sells." That's very good for us, and we should see that. I don't want to overplay the Mark thing. The Mark was done opportunistically, frankly. We've been very disciplined about the amount of investment we wanted to put into here, into the Hilton Milwaukee. We had made the decision that we weren't going to renovate the entire property. We were going to actually close 176 keys. We looked at it and said, "We weren't going to close them immediately, and we had demand for the rooms." While there's demand for the rooms, we're not going to actually make much of an investment in it.

We're just going to separate it out from the Hilton system, basically, and we'll run it as an independent. It's a way to, "If it's there, let's get some cash flow off of it while it's there, but I'll always figure out where it's going." If the city and the community decide they want to go in a certain direction because it will involve all of them, any further investment in that hotel, frankly, is going to require subsidy. If that's going to happen, we're all ears. If not, that will become a different use. While it's waiting, let's warehouse it and get some cash flow from it.

Chad Paris (CFO and Treasurer)

Mike, I just want to add one comment on the 2026 slate in terms of film mix. The one thing that does stand out is when you look at family content next year and you look at the franchises, we have a Mario Brothers, we have a Toy Story, we have a Minions movie, we have Moana, we have a Jumanji. I think the family mix comparatively to 2025 is very helpful for our circuit.

Mike Hickey (Analyst)

Nice. I guess, given that you guys seem optimistic on growth, how should we think about the bottom line here, even the growth potential, operating leverage, and free cash flow conversion? I know that's come up a lot. When you think about, I guess, catalyst to your valuation, I think free cash flow in 2026 would probably stand out as the largest.

Chad Paris (CFO and Treasurer)

Yeah. No doubt. Just by virtue of the CapEx coming down, our free cash flow is going to grow significantly next year. I think the highest leverage is in the theater business. If you assume the hotel business kind of continues steady as you go, as it has with a stable economy, if you believe the 2026 slate will grow, our operating leverage in theaters has historically contributed around 50% to the bottom line in top-line growth. We continue to focus on managing our cost structure and getting better at managing these buildings when you're in the troughs of the content supply. That's really critical to holding that type of contribution margin because the peaks and valleys have been pronounced the last couple of years. The EBITDA should flow through if the top line grows as you would expect for the slate.

Mike Hickey (Analyst)

Thanks, Chad. Last question. Obviously, recent news that Mark is retiring. Sad to hear that. 55 years, you never hear that sort of tenure with the company. Congrats to him. Just curious on the transition plan and if this could also be a potential catalyst for maybe a change in strategy on how you manage your theater asset.

Greg Marcus (Chairman, President, and CEO)

We are looking—we're in the middle of a search for the new leader. We're looking at internal and external candidates. We have both. With a new leader, look at the idea that we hopefully will see new ideas and new approaches. Yet, look at, we're celebrating our 90th anniversary. I don't think that we're going to see a wholesale change as to how we approach the business. I like the idea of new ideas and bringing out new approaches. We're always trying to do new things to figure out what will work. Most of it doesn't, but every once in a while, you find one, and we'll run with it. I can't tell you where it's—it's like the surprise movie.

I never know what's going to hit, but there always is one.

Mike Hickey (Analyst)

Nice. Thanks, Chad.

Chad Paris (CFO and Treasurer)

It's exciting. Thanks, Mike.

Operator (participant)

Thank you. At this time, it appears there are no other questions. I'd like to turn the call back to Mr. Paris for any additional or closing comments.

Chad Paris (CFO and Treasurer)

We'd like to thank everybody for joining us today, and we look forward to talking to you once again in late February when we release our fourth quarter results. Until then, thank you, and have a good day.

Operator (participant)

This concludes today's call. You may disconnect your line at any time.