Shares of theme-park company Six Flags Entertainment (SIX -1.58%) fell 20.1% in September, according to data provided by S&P Global Market Intelligence. There was little company-specific news during the month, which is why it barely moved for much of September. However, late in the month, inflation fears rose, and Six Flags stock consequently fell. Here's why inflation is a big deal for this company.
According to the U.S. Bureau of Labor Statistics, inflation for the year leading up to August was 8.3%. This number was reported on Sept. 13, and Six Flags' stock moved little then. Perhaps it was because these inflation numbers look backwards and don't really tell where things are headed.
However, on Sept. 21, Federal Reserve chairman Jerome Powell announced that it was raising interest rates by 0.75% -- a historically aggressive raise -- to get inflation under control. The magnitude of this hike evoked a reaction from the market because it suggests inflation rages on and is difficult to tame.
For consumer discretionary companies like Six Flags, the implications are bad. The cost for necessities like food and gas are going up, leaving less money in the end for extras like theme-park admission. Indeed, Six Flags' own results back this view up: In the quarter that ended on July 3, attendance at Six Flags' theme parks was down 22% year over year to just 6.7 million people.
Assuming inflation persists, consumer discretionary budgets will get stretched further. And if that happens, attendance could drop more at Six Flags during its crucial peak season. This scenario appeared to be front-of-mind for investors in September, and it's why Six Flags' stock was down 20%, losing to the market's drop of 9%.
Some perspective is needed to contextualize the drop in attendance for Six Flags. Management is actively trying to make this happen by keeping ticket prices high. A less-crowded park improves the overall experience, which is what the company wants.
Six Flags is also trying to improve in-park spending to make up for the difference from lost ticket sales. In the second quarter of 2022, spending per capita -- which includes tickets and in-park spending on items including food -- was up 23% year over year. Therefore, on one hand, you can say that Six Flags management is executing its strategy.
However, the gains in spending per capita don't entirely negate concerns over inflation. Moreover, Six Flags wants lower attendance -- but not this low. Management said its attendance is 10% to 15% below what it considers to be optimal levels for maximum guest experience and revenue.
Therefore, it's important for Six Flags to see its attendance numbers come up in the third quarter. But that may be a challenge, given the weakening economy. However, if Six Flags proves its strategy works while the economy softens this year, this could turn out to be a great stock to buy.