The last year has been no fun for Six Flags Entertainment (SIX +0.00%) shareholders. The stock fell nearly 20% in calendar year 2019, which turned out to be an omen of even more pain to come. In the course of just a couple months, the company went from what I thought looked like a compelling high-yield dividend stock to something more reminiscent of a brand in need of reinvigoration.
That's because shares have tumbled another 25% to start 2020. And that's because of bad news out of China and because new CEO Mike Spanos, his top team, and the board of directors have decided to cut the dividend payment to focus on getting customers back to its parks. Getting shot down by rival Cedar Fair late last year now looks like a blessing, as Six Flags now looks like the more likely takeover candidate.
Healthy consumers, stagnant results
In spite of all sorts of worry about the economy, consumer spending in the United States remained solid in 2019. However, that didn't quite pan out for Six Flags. Revenue declined 3% in Q4 to $261 million, driven by a 3% decline in guest attendance.
Most of that was due to the theme parks in Mexico underperforming (because of fewer government-sanctioned field trips for schools and an accident at a rival park that reduced attendance due to fear) and lower attendance at Six Flags Magic Mountain in Southern California, where management blamed inclement weather and a delay in the opening of the new ride West Coast Racers.
Disney's new Star Wars attractions at Disneyland were not called out as a problem -- though that doesn't mean they weren't -- but attendance at Magic Mountain is reportedly back up since West Coast Racers has opened.
Image source: Six Flags.
Added to the rest of 2019, Six Flags was still able to notch a moderate increase in revenue, mostly due to increased attendance from the six acquired regional parks in the year. But legacy parks grew attendance by less than 1%, operating expenses continued to climb, and profitability took a serious tumble.
|
Metric |
Full-Year 2019 |
Full-Year 2018 |
Change |
|---|---|---|---|
|
Revenue |
$1.49 billion |
$1.46 billion |
2% |
|
Operating expenses |
$608 million |
$575 million |
6% |
|
SG&A expenses |
$186 million |
$179 million |
4% |
|
Net income |
$179 million |
$276 million |
(35%) |
|
Adjusted EBITDA |
$527 million |
$554 million |
(5%) |
SG&A = selling, general, and admin. EBITDA = earnings before interest, tax, depreciation, and amortization. Data source: Six Flags Entertainment.
While the overall picture doesn't look great, it is worth noting that included in the bottom-line figures was a $10 million loss mainly related to its park development in China. As announced in late December 2019, Six Flags' Chinese partner Riverside Investment Group defaulted on payments, and it is looking unlikely that construction on new attractions will continue anytime soon -- with Riverside or anyone else.
According to Senior Vice President Steven Russ on the last earnings call:
In China, our partner was unable to meet the financial terms of our contract. Last month we issued default notices for a lack of payment. Since that time, they did not clear their defaults and we terminated our agreements with them this month. Therefore, we are planning with the assumption that there will be no revenue in 2020 from our activities in China. Going forward, we still see a future opportunity to leverage our brand with a rapidly growing middle-class in emerging markets, but we will be very cautious as we consider potential international projects and progress is likely to be slow.
As for specific numbers, management said that the domestic business will post similar numbers as in 2019, but to expect significantly lower revenues from international development. As a result, adjusted EBITDA was forecast to be $435 million to $465 million, as much as 17% down. Due to the significantly lower bottom line that's anticipated, the quarterly dividend was slashed to $0.25, compared with $0.83 before. Thanks to the stock's recent declines, that's still good for an annual yield of 3.2%, but far less than the 7.1% that peer Cedar Fair is still doling out.
China is only part of the problem
Struggles on the other side of the sea would be an easy scapegoat, but there's no denying that Six Flags has issues stateside as well. CEO Spanos acknowledged this, and in his first few months at the head of the company has recognized that giving domestic operations some TLC is in order.
While Active Pass memberships have been stable, single-day visits have been in steady decline the last few years. Simultaneously expenses -- primarily those related to wages -- have been going up, and Six Flags has been reducing marketing and other in-park services to offset the growing expenses. It's finally caught up to the theme park operator, though, and the bottom line is in all-out retreat.
Spanos said he and his team will outline more details during the investor event in May, but part of the rationale for slashing the dividend is to increase marketing and invest in domestic parks to get those roller coasters filled up and increase guest satisfaction. It won't be an easy fix, but this is the right move.
Vacationers have options when it comes to theme parks, and with new attractions opening up at rivals, cost-cutting only amounts to a band aid. The good news is that, though consumer discretionary spending on things of this sort tends to be cyclical, Six Flags' business is at least stable during this recent downturn. The time to buy doesn't look to be here yet, though.
