Indoor water park operator Great Wolf Resorts (NASDAQ:WOLF) reports earnings Tuesday morning. Will it be a barrel of fun or a slippery slide? Let's find out.

What analysts say:

  • Buy, sell, or waffle? Six analysts follow Great Wolf today. Four of them are howling "buy!" while the other two prefer holding. In our Motley Fool CAPS investor community, 40 users have rated the stock to arrive at an overall three-star grade.
  • Revenues: $45.9 million would satisfy Wall Street's revenue hunger this time, a 23% boost over last year's $37.4 million.
  • Earnings: The average forecast calls for a $0.07 loss per share. It's worse than the $0.02 loss a year ago, and at the very worst end of the management guidance range.

What management says:
CEO John Emery says that rising construction costs and lower demand for vacation property, while hurting Great Wolf, mainly raised the barriers to entry into the water park industry. "We have seen planned indoor water park developments delayed or canceled in several markets around the country," he said.

What management does:
For all of management's positive talk, the numbers don't seem to back that story. Gross margins have a generally positive trajectory. Other than that, it's a mixed bag of volatility and plain old disappointments. Zooming in on separate quarters rather than a trailing-12-month period doesn't improve the picture much, apart from highlighting the seasonal weakness of the December quarter and corresponding September strength.

Margins

9/2005

12/2005

3/2006

6/2006

9/2006

12/2006

Gross

39.8%

38.0%

39.6%

41.1%

43.1%

44.2%

Operating

(4.1%)

(1.4%)

1.2%

3.2%

(1.0%)

0.8%

Net

(7.6%)

(17.5%)

(15.3%)

(13.6%)

(18.8%)

(33.1%)

FCF/Revenue

(84.3%)

(76.8%)

(58.1%)

(47.7%)

(57.4%)

(61.1%)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
I'm encouraged by management's willingness to continue building resorts, as that's a vote of confidence in future prospects from the company itself and from the banks that finance this build-out.

That's also a serious downside, though. Great Wolf now has nearly $238 million of debt in senior notes, up from $117 million at the end of 2005. Why is that so bad? Well, in the event of bankruptcy, senior note holders are way ahead of shareholders in line for a cut of the liquidation proceeds. And that debt is more than 50% of the current market cap.

Oh, I'm being pessimistic. Senior notes also carry fairly low interest ratios, exactly because of the low risk to debt owners. But the fact remains: Great Wolf is growing on borrowed funds, and largely unable to produce any cash on its own so far. I'd much prefer the controlled, cash-based growth of companies like Chico's FAS (NYSE:CHS) or Urban Outfitters (NASDAQ:URBN).

Indoor water park resorts centered around the colder climes in the Great Lakes region sound like a great business model. It just isn't working out quite to plan yet. That hasn't stopped the stock from gaining better than 30% in a few months. Thanks, but I'll stay on the sidelines for a while.

To read more about Great Wolf, check out the following articles:

Fool contributor Anders Bylund holds no position in any of the companies discussed here, but has a certain affinity for nearby star Wolf 359. You can check out Anders' holdings if you like, and Foolish disclosure is your heated pool in the cold, dark wasteland of the markets.