I was looking forward to Great Wolf Resorts (NASDAQ:WOLF) finally going public yesterday. I had driven past its majestic all-inclusive lodge in Sandusky on the way to Cedar Fair's (NYSE:FUN) Cedar Point thrill haven. Driving through the Wisconsin Dells where hotels offering indoor water play areas are a dime a dozen, the Great Wolf Lodge is the shiny silver dollar in the lot.
That's why no one has to sell me on the notion that Great Wolf is the class act of family resorts. I know it. And the fact that it has all of five resorts to its name -- with three more on the way over the next year and a half -- makes the hairs on the back of my neck rise (like a wolf, perhaps) because investors have the opportunity to buy a quality outfit so early in its growth cycle.
Yet before I tell David Gardner and the rest of the Rule Breakers newsletter analytical team to stop the presses on the next monthly issue ripe with promising ultimate growth stock ideas, there are a few things that worry me about Great Wolf.
The obvious concern isn't all that daunting. Through the first nine months of the year, the company has posted a small loss, but that's often the price you have to pay when you are building out your business. So why don't I just keep quiet, back up the truck, and go along for the ride? While I may in due time, there are three things that trouble me.
- Given that the lodging industry is built mostly on fixed costs, even the slightest improvement in occupancy rates can drive profits through the roof. Great Wolf's occupancy rate of 65% over the past year may lead one to believe that there is ample room for improvement. I'm not that sure. These are pricey family resorts. While that means that they will be booked solid when school is out for summer and for holiday breaks as well as most weekends, you can't expect the chain to grow its non-peak weekday business. Even charging $60 a night less during the week isn't enough to draw in the families.
- No great concept goes unduplicated. In fact, just last month Cedar Fair transformed a Radisson hotel off its fabled amusement park peninsula into Castaway Bay, a Great Wolf clone just miles from its likely source of inspiration. I would watch this situation closely. If occupancy drops significantly or if Great Wolf is forced to discount aggressively in Sandusky, it would expose the stock as an investing risk if other barbarians come snarling at its other gates. The company's lowest occupancy and room rates are at its original resort in the crowded Dells.
- Two of its next three lodges will have roughly 400 rooms. Until now its largest resort has just 309 rustic efficiencies. Bonus? Not so fast. The highest occupancy rates and revenue per available rooms are coming from its smaller resorts. Bigger isn't always better, so one will have to watch how these larger properties make out.
But, yes, there is potential here. With a market cap of $600 million at yesterday's close, Great Wolf is selling for more than six times trailing revenues. That may seem pricey, but Marriott (NYSE:MAR) and Hilton (NYSE:HLT) are selling at five and three times trailing sales, respectively. While less than $30 million of the proceeds raised during yesterday's IPO were earmarked for future resort development -- with the balance going to pay the company's debt -- it will ultimately give the company a relatively clean balance sheet in what has traditionally been a debt-heavy industry.
So if you're like me and you will be watching this upstart closely, you may want to check out a free trial offer for Rule Breakers. Because it's OK to have reservations when you approach Great Wolf as an investment. But, surely the company wouldn't mind taking those reservations.
Longtime Fool contributor Rick Munarriz thinks that Great Wolf's resorts would also do well in the South. While the warmer climate may have some longing for outdoor water attractions, the irky weather in some parts -- like his park-less homestead of Miami -- would devour the concept. His portfolio fancies thrills as he owns units in Cedar Fair. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
