3 Ways to Profit From the Serious Business of Fun

In his short story about Hollywood titled "Crazy Sunday," F. Scott Fitzgerald described America as "a nation that for a decade had wanted only to be entertained." That observation, made 80 years ago, is even more true today, as the entertainment options available to Americans encompass a breathtaking variety.

Today's topic is the spectacular entertainment offered by amazing sea creatures, rugged wrestlers, and lovely dancers. The companies are Seaworld Entertainment (NYSE: SEAS  ) , World Wrestling Entertainment, or WWE (NYSE: WWE  ) , and Rick's Cabaret International (NASDAQ: RICK  ) .

Proving you don't need higher attendance to earn higher profits
Seaworld operates 11 destination and regional theme parks that allow visitors to interact with and learn about the natural world. The company's attractions include 67,000 marine and terrestrial animals. The company's brands, Seaworld, Busch Gardens, and of course Shamu (the renowned "killer whale") are recognized across the globe.

In the third quarter, critical for the company because it includes the summer travel season, Seaworld announced that it earned record revenue of $538.4 million, a 3% increase over the same quarter in 2012. The revenue increase was due to a 6.9% increase in total revenue per capita from $56.80 in 2012's third quarter to $60.74.

Attendance declined 3.6% compared to the third quarter of 2012. Some of this was attributed to less-than-ideal weather in July, but Seaworld has undertaken a strategy of reducing low-yielding attendance while increasing revenue per capita.

Excellent cost management combined with the revenue increase resulted in a spectacular 30% increase in net income compared to last year, to more than $120 million. Cost of goods sold was actually down 7% year over year, and selling, general, and administrative expenses were down 19%.

Where content is king of the ring
World Wrestling Entertainment delivers family friendly fun through a variety of platforms, including television, pay-per-view, digital media, and publishing. Its programming blends the sport of wrestling with almost theatrical-style drama. The company truly is a worldwide phenomenon, broadcasting to more than 150 countries and reaching more than 600 million homes worldwide.

In the third quarter, the company's revenue of more than $113 million was up 9% compared to the same quarter last year. The North America region, the largest revenue stream for WWE, achieved a 9.3% revenue increase. Growth was also excellent in the Europe/Middle East/ Africa region, where revenue was up 19.1% to $11.2 million. 

The company's largest business segment, live and televised entertainment, was up 13.3% to nearly $90 million. Digital media also grew significantly, by 14.7%, to $8.6 million, as the company's website generated higher sales of advertising and sales of the company's content across various digital platforms.

The only weak segment was consumer products, which fell 15.2% due to lower video game shipments. 

Operating income performance was hindered by a $7 million impairment charge on the company's film-release slate from 2010-2012. Even so, operating income was $3.2 million compared to $5 million in the prior year's third quarter. Without that charge, operating income was significantly higher in 2013's  third quarter. 

Can local government provide a barrier to competitive entry?
Rick's Cabaret International is primarily an operator of adult gentlemen's clubs, with 41 locations in key markets such as New York, Los Angeles, Dallas, and Miami. Since 2008, Forbes magazine has designated Rick's Cabaret as one of America's 200 best small companies in its annual rankings.

One of the company's strategies is to focus on cities where local ordinances restricting adult business prevent competitors from coming in. Rick's is growing through acquiring competitors, increasing same-store sales, and diversifying into owning sports bars/restaurants.

The company strives to maintain strong financial controls at its clubs and restaurants while achieving the customer service levels of the higher end Las Vegas casino operations.

For the company's fiscal year ended Sept. 30, it reported a strong 17.8% increase in revenue year over year. The company was pleased to leave what it termed its "recessionary model" behind, as higher-margin guests returned to its clubs. This was evident in the 19.2% increase in service revenue, which includes cover charges.

The company's focus on operational efficiency was also evident. Income from operations rose 33.9% to $22.1 million.

On Jan. 9, Rick's released summary results for the first quarter ending Dec. 31 -- and these findings featured more positive news. Total sales reached a quarterly record $29.1 million, up 8.4% from the first quarter of last year.

What we learned
The best position in which to be in the theme park business in the U.S. is to already have popular parks in place. Attempting to build a Seaworld-scale park today would be such an expensive undertaking that it discourages competitors.

Earlier in 2013 I wondered if increasing prices while the economy is still not that strong would drive away guests. But it turned out the attendance decline was modest and more than offset by the increase in per-capita spending. 

In several press releases, WWE had been alluding to its intention to launch its own cable-broadcast network. On Jan. 8, at the Las Vegas Consumer Electronics Show, the company announced that this intention had morphed into launching its own streaming-content network, a kind of Netflix model specializing in both new WWE programming and content from its vast video library.

The content can be delivered through a host of devices such as Android devices and Xbox consoles. Given the company's enormous audience, this is a great strategic move. And the subscription fee will be a modest $10 per month.

I really like how WWE has been able to generate so many different revenue streams through the popularity of the characters it has created in its live wrestling events. And they truly are characters.

Rick's Cabaret International's industry-consolidation strategy allows it to capture larger and larger market share. Given the company's operational strength, it makes sense to expand into the sports bar/restaurant market. The only slightly negative thing I saw in the first-quarter results was that same-store sales increased only 0.3% from the same quarter a year ago.

No offense to Shamu, but my favorites of the three are WWE and Rick's Cabaret because they have the greatest room for future revenue growth.

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