The Walt Disney Company (NYSE:DIS) is known for the success of its theme parks. Although rivals like Six Flags (NYSE:SIX) and SeaWorld Entertainment (NYSE:SEAS) are forces to be reckoned with, neither business has the prestige and global reach that Disney has developed. The big question though is not which of these companies' parks have done well, but rather what their success implies about their futures. Can Disney maintain its lead moving forward, or can its competitors eventually catch up?
Disney has an impressive park portfolio!
In addition to owning the Walt Disney World Resort, Disneyland Resort, and Aulani, a resort and spa, the entertainment giant holds substantial ownership interests in Disneyland Paris, Hong Kong Disneyland Resort, and Shanghai Disney Resort. Disney's parks and resorts segment also owns Disney Cruise Line, Disney Vacation Club, and Adventures by Disney.
As can be expected of so many properties, with Walt Disney World Resort the largest at 25,000 acres, Disney's parks and resorts segment brings in some serious cash. In 2013, the segment reported revenue of $14.1 billion, up 19% from $11.8 billion for the same period in 2011. This converts into about 31% of the company's consolidated revenue. Most of the segment's growth came from its domestic operations, which saw revenue climb 22% over this three-year period from $9.3 billion to $11.4 billion.
From a profitability standpoint, Disney's results have been even more impressive. Between 2011 and 2013, the company saw its parks and resorts segment's operating income climb 43% from $1.6 billion to $2.2 billion. After adding in a pro rata portion of unallocated expenses (excluding a Hulu-related expense in 2013), the segment's pre-tax income grew 40% from $1.33 billion to $1.86 billion. In addition to benefiting from higher sales, parks and resorts enjoyed a significant reduction in costs in relation to sales.
While the company did report higher labor costs and costs associated with greater guest count, its operating expenses fell from 62.6% of sales to 60.6% and its selling, general, and administrative expenses fell from 14.4% of sales to 13.9%. The fact that profit grew faster than costs points to a scenario where the segment is seeing greater economies of scale.
How does this segment stack up to its peers?
Over the past three years, both SeaWorld and Six Flags have done well but nowhere near as well as Disney's parks and resorts segment. Between 2011 and 2013, SeaWorld saw its revenue climb a modest 9.7% from $1.33 billion to $1.46 billion. According to the company's most recent annual report, this rise in sales was largely driven by a nearly 12% rise in admissions revenue from $824.9 million to $921 million, while its food, merchandise, and other category grew sales by less than 7%.
Although this growth rate is respectable, there is one downside to the data. In its report, management outlined that attendance had dropped by 1% during this three-year time-frame. This means that the company had increased its sales through price increases as opposed to higher traffic. In the short run, this can be a good way to raise revenue, but if its downturn in traffic becomes a long-term trend, then the company's future could be in doubt.
From a profitability standpoint, SeaWorld did pretty well for itself. Between 2011 and 2013, the company's pre-tax income grew a stunning 132% from $32.5 million to $75.5 million. Excluding impairment charges, the company's pre-tax profit soared 215% from $34.2 million to $107.7 million. This rise in fortunes came, in part, from SeaWorld's rising revenue, but it also stemmed from a reduction in costs, primarily in the form of depreciation and amortization, which declined from 16.1% of sales to 11.4%.
Six Flags' performance has been even less impressive. Over the past three years, Six Flags saw its revenue rise 9.5% from 1.01 billion to $1.11 billion. Unfortunately, the company does not provide specific data on attendance numbers, but it did disclose that its 2011-2012 revenue increase was driven largely by higher attendance, while it mostly attributed its 2012-2013 revenue increase to higher pricing that was somewhat offset by decreased traffic. This mix resulted in admissions revenue rising over 11% while its food, merchandise, and other category saw sales rise over 8%.
Six Flags also performed well from a profitability perspective, but not as well as SeaWorld did. Over the past three years, the company's pre-tax income rose from $3.9 million to $203.4 million, but if you remove impairment charges, this metric grew a more modest 141% from $88.8 million to $214.3 million.
To some extent, this was driven by a rise in the company's revenue, but the biggest contribution to its increase in profit appears to have come from its selling, general and administrative expenses, which fell from 21.2% of sales to 17%, and its depreciation and amortization, which dropped from 16.7% of sales to 11.5%.
There's no denying that Disney's parks and resorts segment has been anything but a success in recent years. On top of being the entertainment conglomerate's second-largest source of revenue, the parks and resorts segment has developed a reach far across many geographic regions and has grown both revenue and profits at an enviable clip. Yes, Six Flags and SeaWorld have done better from an earnings growth perspective, but with slower revenue growth, this can only push up their margins so much.