You Have To Spend Money To Make Money
The saying “You have to spend money to make money” has been shown to be true over and over again in the amusement park industry. A common question that is posed by both analysts, fans, financial advisors and shareholders is what new ride is coming next to the parks. Fans are excited to experience brand new rides and attractions while analysts, financial advisors and shareholders are worried about how much companies are spending on capital expenditures (capex) every year. Unlike companies in some industries, it’s impossible for an amusement park or theme park to be able to thrive without continued reinvestment. Some companies in other industries, for example In-N-Out, can continue to grow for years without changing their offerings, but that strategy simply doesn’t work in the amusement industry where guests need new motivations to turn off Netflix and head to the park. Let’s take a look at how much the two leading regional amusement park chains, Cedar Fair and Six Flags, have been spending annually.
What Is Capex?
Capex is normally separated into two categories: maintenance expenditures, when a company purchases assets that extend the useful life of existing assets, and expansion expenditures, when the company purchases new assets in an effort to grow the business. Unfortunately companies rarely break out the the division of expansion expenditures versus maintenance expenditures. Instead both are included under capital expenditures. Costs to repair or conduct ongoing, normal upkeep at the parks are not included in capex and are instead expensed on the income statement.
In my opinion, one of the best ways to learn about an industry is to listen to the earnings calls of publicly traded companies and read over the financials included in their SEC filings. The presentations are freely available on the investor relations pages of each company. The most interesting part of the calls are the question and answer sessions. Advisors and analysts have the opportunity to ask each CEO and CFO questions that dig deeper into the company’s strategy and financials. A topic that comes up frequently is capex strategy and outlook, which can vary widely from year to year. When companies don’t spend money on capital expenditures, they have more funds available for stock dividends and repurchases. Both stock dividends and repurchases provide a way to reward shareholders and are therefore highly desired by investors. The tough part is finding the right mix of capex vs. shareholder rewards to ensure that you reinvest enough into your parks to allow for continued attendance while also paying back your loyal shareholders.
Comparing the Capex of Cedar Fair and Six Flags
Let’s take a look at how much Cedar Fair and Six Flags have spent on capital expenditures on an annual basis over the last nine years:
Here’s an even more interesting graph, which shows annual capital expenditures as a percentage of revenue for the past four years:
Analyzing the Numbers
What surprised me the most from reviewing the financials of Cedar Fair and Six Flags is how remarkably similar the companies have become over the last few years from a financial point of view. Six Flags has changed dramatically since undergoing a painful bankruptcy reorganization in 2009. Each park chain has a similar number of locations, are focused on drawing visitors from the local region around their parks, distribute high yields to their shareholders and have, for the most part, had similar levels of capital expenditures up until 2012.
In the past few years, under the leadership of new CEO Matt Ouimet, Cedar Fair has dramatically increased their capital investment, as shown from the recent increase of capital expenditures from ~9% of revenue to ~14% of revenue. In earnings calls, Matt Ouimet and CFO Brian Witherow have attributed much of that increase to investment in Hotel Breakers at Cedar Point. The over 100-year-old hotel property received a complete refurbishment that was a major contributor to an 8% increase in out-of-park spending in 2015 for the company thanks to both higher occupancy and average room rates.
Cedar Fair is continuing the strategy of investing in lodging with the 2016 refurbishment of Cedar Point’s Express Hotel (Formerly Breakers Express) and the new expansion of Hotel Breakers. In the recent third quarter 2016 earnings call, Brian Witherow mentioned that Cedar Fair expected to spend 150 to 160 million dollars in capital expenditures in 2016. He also mentioned that the company would begin to decrease capex in future years to a core growth average level of 120 to 130 million dollars.
Are More Hotels Coming To Regional Parks?
Matt Ouimet also mentioned on that same earnings call that Cedar Fair is exploring partnerships with major hotel operators to help increase their lodging options at their parks. More details are expected to be released in 2017. The Disneyland Resort also recently announced plans for a fourth hotel that will be opening in a few years. Universal Studios Orlando continues to build hotels at a rapid pace with their third new property in four years scheduled to open in 2018 along with an expansion of Cabana Bay opening in 2017. Will Six Flags CEO John Duffey and Executive Chairman Jim Reid-Anderson follow suit and begin a strategy of trying to increase guest out-of-park spending and per capita guest spending overall with hotel investments and partnerships?
Please Note: All information and conclusions mentioned in this post came from publicly available SEC filings and earning calls. No proprietary company information was used from my position as Digital Marketing Representative at Knott’s Berry Farm (Owned by Cedar Fair Entertainment).