Cedar Fair (NYSE:FUN) operates traditional amusement parks -- think roller coasters, thrill rides, and carnival games. Its properties experienced low attendance in the opening months of the summer, and unfortunately, there's little room for the company to catch up due to the seasonal nature of the business.
In this segment from Industry Focus: Consumer Goods, the cast talks about the effect of weather on the industry as well as the importance of new ticketing strategies that can help smooth out the volatility in this space.
A full transcript follows the video.
This video was recorded on Aug. 14, 2018.
Vincent Shen: Cedar Fair is up next, ticker FUN, which is awesome. This one is unique among the three companies because Cedar Fair is an MLP, or master limited partnership. Fool.com offers a detailed overview of MLPs and how they work, but in short, these are publicly traded partnerships that operate in specific industries like oil and gas and real estate. MLPs pay out distributions to its unit holders. That's the MLP equivalent of dividends and stockholders. There are tax advantages to this organizational structure.
For Cedar Fair, the company has a distribution yield of 6.7%. Pretty attractive to any income-focused investor. Size-wise, the company is pretty similar to SeaWorld and Six Flags, for that matter, about $1.3 billion of revenue for the trailing 12 months. Dan, can you walk us through the business, some of Cedar Fair's properties, and recent updates?
Dan Kline: Cedar Fair owns very traditional amusement parks -- Knott's Berry Farm, the various ones with the Cedar Fair name. They're your mix of roller coasters, kid's rides, classic merry go rounds. As a company, they've struggled. Their attendance was down slightly, although spending per person was up a little bit. They illustrate a major problem for this industry -- seasonality. It was a rainy July, the summer was too hot, there were some different issues. Cedar Fair Parks, almost all of them are not open full-year.
Through the first six months of the year, they're actually down. While they haven't changed their guidance for the full year, they will in September, there's almost no way to catch up, because a lot of their parks close. This shows you that, in this business, unless you're in a market like Florida with a year-round tourist base, you have a set up where if you lose three weeks due to hurricanes or bad weather or rain or early snow, you're not going to be able to catch up. That's what's happening to Cedar Fair this year.
Shen: Yeah. Looking at the company's second-quarter results, you notice themes that tend to stretch across the industry. There were the weather impacts that you mentioned, there was also a shift, in terms of the Easter holiday, which affected the distribution of revenue between the first and second quarters. Also, rising labor costs, which is something we'll talk about a little bit more. Revenue was down 3% year over year in the quarter. Attendance specifically fell 5%. This was the third or fourth consecutive year of poor weather for the opening months of the summer season. Analysts really pressed management during the earnings call to gauge how the company will adapt if this less-than-ideal weather becomes an ongoing problem.
Related to that, Cedar Fair also spoke to the importance of season pass customer, which ultimately serve to smooth out the volatility from these stretches of bad weather. CEO Richard Zimmerman said that the season pass channel makes up about 50% of park attendance. Another interesting detail from that customer contingent, which you talked about, in terms of the local contingent, most season pass holders live within 30 to 45 minutes of the park. You're a good example of that, Dan, right, in Central Florida?
Kline: My main home is about 2.5 hours away, but, yeah, we do have a place that's between 20 and 45 minutes, depending on which park you're going to. Let me explain how this works, because I think it's important. If you're visiting and it rains, they don't operate most rides. A roller coaster, even if there's lightning within ten miles, they shut them down. Water-based rides have to shut down. Disney and Universal can weather that because they have tons of shows and high capacity. SeaWorld, to an extent, has covered venues that can run some of its shows.
At the Cedar Fair parks, while there certainly are some non-ride things to do, if it rains, you're a park with very little capacity. If I'm a local, I might just go home. I have a pass, I'll come back. If I'm a tourist, I either don't go that day and never sign up, and that's just revenue you completely lost, or I bought a ticket, but I don't stay all day, so you don't get lunch and a beer and a giant pretzel or whatever it is I'm going to spend money on later in the day.
Having those annual passes is so important for the company because they can do things. The way Starbucks emails you and says, "Hey, it's 03:00 o'clock, do you want a half-priced Frappuccino? "Cedar Fair can say, "Hey, the weather is nice now, do you want a free beer to come to the park on Wednesday?" SeaWorld actually does that. Having that base that you can market to and entice them to come during slow times is of absolute importance across the entire theme park industry.
Shen: I'm glad you shed a little bit more detail on that. Management talks about how their guests will adjust or change their visitation to fit their schedules because of things like that. They'll make a shorter afternoon or evening visit instead of spending a full ten-hour day at the park, depending on what works best. It's a little harder to get away for a full Saturday at a park, in terms of their visits.
Kline: There's also an ability to control guest flow. I mentioned I'm a SeaWorld pass holder. SeaWorld, every month, does different promotions. Sometimes it's cheap tickets for friends and family, sometimes it's a free meal, sometimes it's get to ride a new ride before other people, whatever it is. All of the different park companies can do that. If Cedar Fair says, "Sales are slow in Cincinnati," which they were in the past six months, they might be able to take people who are members at a park that's two hours away and offer them 75% off the Cincinnati park, and then it's worth traveling to try the different roller coasters, sample the different food. And if you've traveled, you're probably going to spend a full day, so you'll spend a decent amount of money.
The stronger relationship you have -- I know, as a pass holder, I do the math. I've been to SeaWorld four times on my $200 pass. A regular one-day ticket is around $135, so my earn-out is already there. Every time I go, it gets cheaper. That's what they're pushing you to do. But, of course, I reactivate my soda glass, I probably eat, maybe I have a drink. My son probably has a cookie or a thing of fries. The money adds up, even if you're not paying an admission.
Shen: That goes to the in-park spending, which is obviously a big part of the revenue streams for these companies. I'll close with a broad note for Cedar Fair. The company is in a holding pattern. Given its generous distribution, investors will always want to track the company's free cash flow to see how sustainable the 4% annual distribution growth is for unit holders. Any other thoughts on Cedar Fair before we move on to our final company, Dan?
Kline: I think Cedar Fair largely has a branding issue. They have lots of different theme park brands, they don't have the overriding -- Cedar Fair is a corporate name. It's not the name that's on all the parks. Whether they should be rebranding as Knott's Berry Farm or Cedar Fair or whatever it is, it is a little bit harder to communicate the value of passes when parks that are nearby maybe don't share the same brand name. And, they've also struggled. They've had a couple of roller coaster openings that did not go as well as planned. Once those get smoothed out, you could see the uptick of people who travel for those major new coasters.