I didn't think the market would put a whole lot of weight on yesterday's fourth-quarter showing by Six Flags (NYSE:PKS). This is the offseason for most of the regional amusement park chains, and the turnaround measures being put into place by new Six Flags CEO Mark Shapiro won't be evident until the 2006 season gets under way.
Still, the market responded by sending shares of the company down by as much as 8% yesterday. Then sanity kicked in, and the stock recovered most of those downticks.
Let's dig into this ugly quarter. The company posted a charge-laden loss of $1.55 a share on a 6% uptick in revenues. Then again, this seasonal operator also happens to be sandbagged with $2.1 billion in long-term debt. Even though most of its parks closed for the season as Halloween festivities concluded in October, creditors don't hibernate over the holidays. The company still had net interest expense of $48.8 million during the quarter.
Although rival Cedar Fair (NYSE:FUN) surprised the market with a profit during the same period, it's pointless to judge the incoming Six Flags team for the results of the old regime. Shapiro faces an uphill battle in 2006, but he certainly seems to be trying. I like just about everything that I've been hearing from him, but I wouldn't drag you this deep into a story just to hurl softballs at the former ESPN star.
I see six surprises for Shapiro and Six Flags in 2006. Some of them are bad. Some of them are pretty darn good. Let's dig in.
1. Some smiles are being faked
Shapiro has spent the past few weeks hitting all but six of the company's 30 amusement parks. During yesterday's conference call, Shapiro made it a point to say that employees have sky-high morale and are eagerly embracing his vision of making the parks family-friendly destinations. It sounds good, but the company has already axed five of the park GMs. In two weeks, Six Flags will be receiving a report from Roger Staubach's real estate consulting company, advising him on which parks to unload and what real estate to sell off.
Yesterday, Six Flags announced that it was done replacing park managers, but until it provides employees a definitive list of the parks that it plans to keep, morale won't likely be as upbeat as Shapiro may want to believe.
2. Attendance will fall in 2006
The company is expecting revenues to climb by 8% to 9% in 2006, despite operating with two fewer parks. The key will be higher per capita spending -- and I'll touch on that shortly -- but also in more turnstile clicks.
I just don't see the latter happening in 2006. During the offseason, Six Flags has been inching ticket prices higher at many of its parks. Parking fees have been raised considerably at some of its destinations, too. This comes just as rival Cedar Fair has lowered ticket prices at its two largest regional parks, with plans to sell cotton candy for a mere quarter a stick.
Six Flags' experience improvements, which will include everything from nightly fireworks to afternoon character parades to Chinese acrobatic shows, will surely draw families in droves, but the marketing emphasis isn't likely to appeal to the thrill-seeking teen with a season pass.
But it's just as well. The company will make more off a middle-class family spending a Saturday at the park than it would likely make on a pass-toting teen making a dozen visits over the summer. It's a good financial move, even if it may result in lower turnstile clicks this year.
3. Per capita spending will soar
On a more positive note, I think the company's bottom-line results will be better than expected, thanks to a surge in what the average guest spends at Six Flags. Having more families with disposable income will do that every time. But Shapiro has his finger on the pulse here.
Like Disney (NYSE:DIS), a company that Shapiro worked for when he was a young programming guru at ESPN, Six Flags will make a killing on characters. It will be digging deep into the Looney Tunes and DC Comics vaults to keep about 30 characters entertaining guests at each park. That was 29 more costumed hires than Six Flags was staffing a year ago.
The move to beef up its roving army of Time Warner (NYSE:TWX) characters is brilliant in many ways. For starters, it will allow the company to offer things like character-themed meals and premium character-aided train rides. And having the characters around will give the company the ability to build out a fleet of digital photographers, an area where the company made just $15 million last year because there weren't many paid snapshots worth taking.
Having kids see some of their favorite characters will also likely inspire greater retail sales. That's one area where Six Flags will improve dramatically - it generated just $2.21 in retail sales for every person who entered the park last year. That will be an area of considerable improvement in 2006, as more families hit the park and Shapiro makes the most of it by upgrading the stale offerings.
4. Capital expenditures won't shrink as planned
With $90 million of this season's $140 million to $150 million in capital expenditures earmarked for four new coaster installations, Shapiro sees the company moving away from costly coasters in the future.
For all of 2005, capital expenditures clocked in at nearly $170 million, and the company is looking to work that down to $100 million annually come 2007. Unless this is being made under the assumption that the company is going to shed a significant number of parks, that may not happen according to plan.
New family rides, unless we're talking about the big-ticket themed attractions at Disney and General Electric's (NYSE:GE) Universal parks, don't drive up park attendance. Six Flags is trying to position itself as "a more convenient Disney" to its locals, but it can't do that with the same spinning rides that carnivals take from town to town.
The company is making some welcome inroads into improving the guest experience. It is looking to kick off a 45th anniversary celebration, complete with free birthday cake at its Georgia park, but it will fall far short from duplicating the marketing sizzle of Disney's recent 50th anniversary celebration. That's because folks still don't have the warm fuzzies that Shapiro is looking to imprint on their memory banks this season. No one is going to be trading pins that promote the 45th birthday of a chain that, until now, didn't seem to have much of a heartbeat.
This will all pay dividends in the future, but the company may have to backtrack on keeping expenditures at a minimum.
5. Margins will come in stronger than expected in 2006
A move as simple as having Papa John's (NASDAQ:PZZA) being the exclusive in-park pizza provider may not seem like much. If anything, it may turn the stomach of folks who think that corporate brands don't belong in local parks. However, as talks with Papa John's to become Six Flags' provider enter their final stages, let's go over why Six Flags will be making dough off the deal.
Papa John's would pay Six Flags for the right to be the exclusive provider. It would also help promote the park regionally through pizza delivery marketing materials. Six Flags is talking to many other companies about these kind of win-win opportunities. It generated just $25 million in sponsorship revenue last year, so it can certainly do better.
In fact, that number is going to shoot up nicely. And it will also give Six Flags the chance to eradicate long food lines by placing more concession carts all over the park, as well as having mobile vendors going around selling things like hot dogs, pizza, and drinks. Shapiro argues that a vendor who sells three bottled waters in an hour has already paid for himself. When you figure in that many of these vendors will also serve as human billboards, it's easy to see how concessions -- especially the margins -- will go through the roof.
6. The public will love Six Flags again
Six Flags is abolishing the old general-manager bonus plan that rewarded park executives based exclusively on performance according to earnings before interest, taxes, depreciation, and amortization (EBITDA). That plan contributed to stingy operators cutting costs late in the season at the expense of park guests. Now, the new bonus system will introduce gauges such as revenues generated per guest, patron satisfaction, and park cleanliness to go along with operating profits at the park level.
Six Flags is also contracting with SASI Consulting, a company that helped improve operations at four of the company's parks recently, to develop a universal training program. The old regime didn't emphasize training, probably figuring that the high turnover of young seasonal hires wasn't a group worth investing in. Big mistake. And a big opportunity for Shapiro.
The real smiles
Something special is happening at Six Flags. You don't see it right now, but just wait until it's early August, and your co-worker has a picture of his or her daughter with Wonder Woman taken at Six Flags. Just wait until your next visit, when you find yourself amazed that the restrooms are being tended to on an hourly basis, the "streetmosphere" is thickly enjoyable, and you're finding yourself smiling again -- in a Six Flags park.
That smile won't be faked.
Next week, I'll be back with six suggestions to make Six Flags even stronger in 2006.
Time Warner is a Motley Fool Stock Advisor recommendation. Cedar Fair became an Income Investor newsletter recommendation last year, thanks to the company's smooth performance and uninterrupted track record of annual payout hikes.
Longtime Fool contributor Rick Munarriz enjoys taking his family on coaster treks over the summer. He has three Six Flags parks on his itinerary this time around. He'll count the smiles. He owns shares in Disney and units in Cedar Fair. T he Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
