Hoping to claw its way out of a freshman funk, Great Wolf Resorts (NASDAQ:WOLF) is off to a surprisingly respectable start in its second year as a public company. Revenue soared 40.2% higher in the March quarter, to hit $37.8 million, and the company's net loss was more than halved to $0.9 million, or $0.03 a share.

How well Great Wolf is doing at this point depends on how you want to gauge success. If you look at the older Great Wolf locations, things don't look so good. Occupancy rates and average nightly rates fell.

But things improve nicely when you tack on the Williamsburg and Pocono Mountains properties that opened last year. They are doing so well that Great Wolf as a whole has seen a 9% uptick in revenue per available room compared with the first quarter of 2005 (as opposed to an 8% decline without them).

That's been the knock on Great Wolf. The resorts do gangbusters business early on, but then buckle under competitive pressure and the faltering interest of the initially curious. Indoor water parks are still a relatively new phenomenon. Lavish lodges with active indoor play areas dominate the tourist haunts of Wisconsin, Michigan, and Ohio, but are still rare novelties elsewhere. Earlier this year, Six Flags (NYSE:PKS) opened the first indoor water park resort in New York, and other large states rich in outdoor diversions, like Florida and California, don't have any notable indoor water parks at all. If you argue that they don't need them, you've never lived through the pesky afternoon thunderstorms in Florida or the sunburned pain of a day out on Malibu.

That may be Great Wolf's advantage as it expands into crowded markets. The two new openings for 2007 will be in Texas and the state of Washington. This promises to be an exciting introduction into some hungry markets. It's not like the Wisconsin Dells where dozens of hotels with watery play areas dot the tourist-friendly town. Larger metropolitan areas should be able to support Great Wolf's hefty lodging rates, given the concept's all-inclusive entertainment value.

Great Wolf's challenge is to exploit the virgin soil before the rest of the industry catches on. InterContinental's (NYSE:IHG) Holiday Inn chain is the only one of the established chains that is aggressively pursuing this approach in select properties. The Holiday Inn makeovers have usually been on a cheaper and smaller scale, though.

Most of Great Wolf's worthy rivals are standalone locations like Cedar Fair's (NYSE:FUN) Castaway Bay in Ohio, or a couple of Kalahari locations. I recommended shares of Great Wolf to Rule Breakers subscribers last year, but then followed that with a sale over the summer after the company disenchanted investors with back-to-back disappointments. I still own the stock personally,since I hold out hope that it will shore up its managerial acumen and vision, and because the concept is still sound.

The clock is ticking for Great Wolf. It better not blow its sophomore season.

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Longtime Fool contributor Rick Munarriz enjoys taking his family on coaster treks over the summer. He owns shares in Great Wolf and units in Cedar Fair. T he Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.