Vail Resorts (NYSE:MTN) is the world's biggest ski resort operator, but like other vacation destinations, the company has been hit hard by the coronavirus pandemic.
The global catastrophe forced the closure of its North American resorts on March 15, and it subsequently took a number of steps to shore up its financial position, including pausing its dividend for at least two quarters, cutting capital expenditures by $80 million to $85 million, furloughing hourly workers, cutting corporate salaries, and taking on $600 million in debt to help weather the storm. The company also offered credits to passholders for next season to encourage them to renew their passes, which will impact revenue for the 2020-21 ski season.
Like the rest of the travel sector, Vail Resorts, which owns dozens of ski mountains including Whistler/Blackcomb and Park City, has essentially adopted an emergency position, seeking to conserve cash to survive the crisis.
However, Vail stock has fallen alongside those concerns, and shares are now down 30% since Feb. 21, when the coronavirus sell-off started. Considering that discount, investors may be wondering if the stock is worth buying at this point? Let's take a look at how Vail is managing through the crisis and if shares are a good value right now.
The COVID-19 impact
In its third quarter, ended April 30, the company saw business decline sharply due to the forced closures and credits offered to passholders. Revenue fell 27.5% to $694.1 million, but the company still posted a profit in its seasonally strongest quarter as the first half of the period was largely unaffected by the pandemic. Net income fell 47.8% to $152.5 million, or $3.74 per share.
Management declined to give guidance for the current quarter, and while credits for passholders will eat into revenue in the next ski season, that was the right move to support long-term customer loyalty and to compensate those whose spring ski trips were ruined by the pandemic.
The good news now is that Vail is opening its resorts for the summer season, starting with Keystone, Crested Butte, Okemo, and Mountain Snow opening on June 26 and other properties following soon after. Summer activities will be limited with the company focusing on mountain access and scenic lift rides, and social distancing and mask-wearing protocols will be in effect. Though Americans are mostly limiting long-distance travel this summer with airline passenger traffic still down about 75% from a year ago, Vail's mountain properties offer vacationers access to safe, open spaces well suited to social distancing, and may therefore be better options than, say, theme parks.
Reopening for the summer will also give the company a chance to straighten out its operations and pandemic protocols before the busier winter season arrives.
The big test
Vail's fourth and first quarters, through the months of May to October, are its seasonally slow period where the company reports wide losses even in good years, but it makes up for those losses during the ski season. For investors, that leaves a big question mark, as the company won't really be tested for another five months until ski season picks up in December. What the status of the pandemic is by then as anyone's guess; however, much of Vail's business relies on its passes, including the all-encompassing Epic Pass, and it will need to sell those before the season starts. Historically, prices have risen as the ski season approaches.
Last year, pass sales totaled about $485 million, or 47% of lift revenue and about 21% of the company's total revenue of $2.27 billion. In addition to making up a significant percentage of its revenue, the pass business is also a key source of competitive advantage. Independent resorts can't as easily offer a multiresort pass, and selling season passes also gives Vail financial flexibility as it gets a guaranteed revenue stream upfront rather than having to rely on its day pass business, which is sensitive to weather, snow conditions, and other such unpredictable events.
Fifty-seven percent of guests at North American resorts last year were out-of-state or international visitors, meaning the company also is highly dependent on customers' willingness to travel long distances, usually by airplane.
The pandemic's impact on the upcoming season is unclear at this point, but with cases spiking in a number of states it's clear that the outbreak is far from being under control. Most experts seem to think that a vaccine won't be ready until at least early next year, meaning that COVID-19 will be a factor for much of the 2020-21 ski season, if not all of it.
Despite those concerns, analysts are expecting revenue for fiscal 2021, which begins in August, to increase 12%, but that may be an overestimation given the ongoing headwinds from the pandemic. Meanwhile, the economic recession also seems likely to weigh on the company's business, since Americans who have lost work or income during the crisis are unlikely to splurge on an expensive ski vacation.
Vail still looks like a strong business over the long term; there are only so many ski resorts in North America, and the company owns a significant percentage of them. However, the company is facing substantial challenges from the pandemic, which may not end until there's a vaccine. Given that risk, investors may be better off avoiding the stock for now and revisiting it when the end of the pandemic is clearer.