Things are starting to look up for Six Flags
Last week, I covered Mark Shapiro's first conference call as Six Flags' new CEO. His realistic assessment of the shortcomings at the chain was refreshing, and his family-friendly initiatives are mostly spot-on. However, I promised to poke at some holes in Shapiro's otherwise sound strategy. So let's go ahead and stuff the suggestion box with some free advice for Shapiro to make the 2006 season -- and beyond -- even stronger for Six Flags.
Your pal, pricing
One of the few troubling snippets from the conference call came when Shapiro said he's seeking to standardize pricing across the 30 parks in the chain. He pointed out how a slice of pizza at Six Flags Over Georgia was far cheaper than a similar slice at Magic Mountain in California, and he wanted a more universal pricing strategy. Perhaps that was just a prelude to Papa John's
Regional parks depend on locals, and every local economy is different. Every Six Flags location is surrounded by unique wages, property values, and disposable income levels. Even theater tickets and overpriced multiplex concessions fluctuate from town to town. More importantly, regulars at the lower-priced parks will feel stiffed if uniform pricing prevails, and that's not something that may wash away so easily.
See, Six Flags will need its bargains. When I go to Holiday World, I know I'm going to get free sodas. If I go to Knoebel's, I know I'm going to binge on snow cones and pierogi for pocket change. Likewise, this season, Cedar Fair
Even Disney
Indubitably inherited indebtedness
The company's $2.1 billion in debt isn't going to be wiped out overnight. Six Flags is looking to produce adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $340 million this season, but let's take a look at the ITDA portion. The company paid out $183.5 million in net interest expense last year. Taxes won't be a problem until the company turns a profit. Depreciation and amortization make up a significant sum in accounting terms, but they're also indicative of the high capital expenditures necessary to keep parks exciting, especially for the jaded locals.
Whittling down the debt organically would take ages, and that's why the company is exploring the sale of some of its parks and the excess land. It's already looking to bring in roughly $80 million once it completes a deal for the Houston land where Astroworld once stood, and a few more parks are likely to go between now and the start of the 2007 operating season. Let's just hope that shareholders and antsy creditors don't get too greedy and force Six Flags to slay its cash cows.
This season is going to be an eye-opener. I firmly believe that Six Flags will make a lot more money than it thinks it will this year -- on far fewer turnstile clicks than it expects. The company's gargantuan debt didn't allow it the logical luxury of fixing its parks first and raising prices later, so it's putting the cart before the horse -- or, you might say, the hike before the smile. That's a shame, because it's an approach sure to turn off a lot of people who would have been ideal lifelong patrons.
Yet if Shapiro's turnaround vision is true -- and I do think he's on the right track -- I can assure you that he will live to regret nearly each and every park, not to mention each and every parcel of undeveloped land, that is ultimately sold off for milk money.
Why? Because many of the initiatives that Shapiro and Dan Snyder have been championing to make the parks more attractive to marketers, given the captive audience, can be exploited in volume. It's not just about advertisers counting heads. If Six Flags were to strike a deal with a leading LCD- or plasma-television maker to retrofit its queues with high-definition monitors in exchange for in-park ad time, such a deal would raise customer satisfaction while it improved the cost structure. After all, Six Flags could charge content providers and other sponsors for airtime on the screens.
If Six Flags chooses to unload parks based on what they produce now, it could result in a grand near-term fiasco. Six Flags simply needs to use its real estate more efficiently. Take a look at what CBS's
Rather than wait for Roger Staubach's report on what to do with Six Flags' dormant land later this month, how much easier would it be to contract with a Great Wolf or a Kalahari or any lodging juggernaut to build resorts on someone else's dime? How easy would it be to erect a "condotel" with investors and well-heeled park enthusiasts snapping up rooms that would fund the project and still provide Six Flags with future streams in management fees? Every parcel of land that it sells instead of entering into negotiations with developers and prospective tenants to build out shopping, dining, and entertainment districts is a betrayal of the lessons that Shapiro should have learned when he was an employee at ESPN -- an arm of the Disney company that he seeks to emulate.
Build it, and the revenue streams will come
Six Flags is in the process of upgrading its fleet of in-park digital photographers as well as its website. Let's hope it realizes how to put two and two together. I wrote an article a couple of years ago for InterPark magazine on the merits of turning high-margin digital photography into sticky website flypaper at the parks. Search-engine giants are tripping over themselves to tap into the local search-ad market, and here's Six Flags with access to a few million local visitors at some of its busiest parks.
Shapiro is on the right track. A better-trained staff, along with experience-enhancing initiatives such as more character interactions, hourly restroom checks, and more entertainment like concerts, parades, and fireworks will make the parks stickier destinations indeed. Now Shapiro just has to make sure the Six Flags website has the interactive splendor to keep its guests close by, long after they have left the park.
Six Flags has the right to dream, as well as luxury to dream that dream on the dime of its sponsors, patrons, and eventual developers. It's unfortunate that first impressions in 2006 will produce a mixed message. Let's hope it doesn't rattle Shapiro from staying the course where his vision is true and from being flexible everywhere else.
Regret is the ultimate spin-and-puke ride.
Cedar Fair became an Income Investor newsletter recommendation last year, given 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 Great Wolf 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.
