SIX - Six Flags Entertainment: Unimpressive Growth Numbers

2023-03-13 09:01:27 ET

Summary

• Six Flags Entertainment's premiumisation strategy leads to a 26% drop in attendance, and lower revenue, although per capita spending is higher due to increased ticket rates and in-park spending.
• Adjusted EBITDA increased YoY to $99 million, ambitious guest facing CAPEX budget for the next two years and management expects double digit attendance growth for 2023.
• Cautious of the company's historically poor performances, high CEO turnover, and downward trending growth numbers compared to competitors.

Six Flags Entertainment Corporation ( SIX ) is an amusement park stock with a market cap of $2.37 billion, famous for its thrilling rides and water parks. Equally compelling has been its historical performance, which saw the company file for bankruptcy in 2009 after overspending on acquisitions and rides for years. Since 2021 the newly appointed CEO has taken on an aggressive facelift strategy targeting higher-paying family consumers by investing in guest-facing improvements to uplift the parks and justify a steep price increase in tickets and passes. In a short time, pass prices had doubled , often well before the parks made adequate upgrades, which has been criticised. Over the last five years, investors have lost 58.98% in stock value.

Although its most recent Q4 2022 Earnings report was well received by the stock market due to a growth in adjusted EBITDA and a positive 2023 outlook, unfortunately, most of FY2022 can be summarised as overpromising and underdelivering. The drop in attendance by 26% YoY and the declining topline is concerning, especially if we compare it to other amusement park peers, namely SeaWorld Entertainment ( SEAS ) and Cedar Fair ( FUN ). We have yet to see an adequate improvement in the KPIs to justify a Buy rating and therefore recommend a Hold rating while we see whether the management's ambitious double-digit attendance growth rate materialises in 2023.

Six Flags Race toward premiumisation

SIX has 27 regional theme and water parks generating revenue through admission, the sale of food, beverages, merchandise and other products and services within the parks. In addition, the company owns the Six flags brand name and real estate.

SIX's CEO is changing the face of SIX from a thrill-seeking location loved by teenagers, often cheaper than its competitors, to a higher-end family-orientated, higher-spending consumer group destination. SIX has a long term goal of delighting the guests, by making the guests happier and improving the park experience.

His strategies have been heavily debated, although per capita spending is increasing. Nonetheless, as seen below, a drop in attendance of 26% YoY has hurt total revenue.

Since COVID-19, the company has been investing in the parks with a focus on ticket restructuring, guest comfort, technology integration with QR codes and flash pass systems, a revamp of their mobile app, food technologies and a significant focus on water parks. SIX has restructured its ticketing to move away from freebees but allow for pricing proportionate to the experience the guest is receiving. Pricing has been all over the place, with many changes to the strategy and significant increases to pass fees. SIX predicts that margins will continue to improve in 2023 through the efficiencies the company is implementing.

Going into 2023, the goal is to simplify the ticketing and pass structure, which has seen many changes since 2021. In the next two years, the company is focusing its energy on rides and rollercoasters. 75% of capital expenditure is aimed at guest-facing costs, expected to increase to 80% in 2024 and 2025. Seasonal events, ticketing draw and existing customers to return to the park. SIX invests in technological advancements such as QR codes for line skipping, e-gaming, and themed and seasonal events. The company has opened new family rides. SIX targets double-digit attendance growth, between 25 million and 27 million visitors, for FY2023. We can expect the per-capita to decrease with such a change.

Q4 Earnings report

SIX released its latest Q4 earnings report with mixed results. We saw a decrease in its top-line performance in Q4, with revenue dropping by $37 million compared to Q4 2021. The bottom line in Q4 showed improvement, with a net income of $13 million compared to a loss of $2 million the year prior. Adjusted EBITDA increased by $4 million to $99 million YoY in Q4 2022. Looking at FY 2022 versus FY 2021, we see a decrease in performance, not including per capita data.

Topline has decreased due to less attendance driven by increased ticket prices, eliminating free tickets, heavily-discounted pass products, and fewer operating days. Although EPS of $0.16 for Q4 2022 missed expectations by $0.01 , results were more promising than the weak start. Earnings improved due to cost corrections, pricing strategies, cost control and margin improvements compared to Q4 2019. A significant factor was reduced worker headcount and employees working fewer hours, which begs whether this is a sustainable strategy if the parks increase in capacity.

If we look at the balance sheet, the company has a total debt of $2,381 million and cash and equivalents of $80 million. If we look at the liquidity ratios, we see a current ratio of 0.55 and a quick ratio of 0.31. Capital expenditure was $112 million. For FY2023, SIX predicts a capital expenditure of $150 million and up to $200 million for FY2024. It has a positive levered free cash flow TTM of $89.68 million. Excess cash will pay off debt; the next maturity is in 2024. The management is looking into opportunistic refinancing as early as July 2023.

If we compare SIX to two of its peers, FUN and SEAS, we can see that SIX has a lower grade for growth with a C- and profitability with a B. Furthermore, the TTM price-to-earnings ratio is higher at 20.05 compared to FUN at 8.42 and SEAS at 14.29, indicating that the stock may be overvalued compared to its peers. What stands out is SIX's negative revenue growth of 9.26% compared to the double-digit growth of its competitors.

Final thoughts

While SIX made some very promising remarks during its most recent Q4 2022 Earnings call about double-digit attendees growth in 2023, we should remain cautious of the many downfalls in its history, especially overestimating performances and excessive spending through acquisitions and new ride additions. In 2009 this business strategy led to the company reaching an all-time low and filing for bankruptcy. We have also seen little consistency when it comes to management staying on board. Selim Bassoul is the CEO but may need more experience, with only two and a half years spent in the amusement park industry. SIX is underperforming in growth compared to its direct competitors. If we look at the company's forecast for capital expenditure for the next two years we can expect some significant upgrades and additional rides to be added, which is promising. However, as we enter the typically weaker Q1, we would need to see concrete upward-trending KPIs. While waiting on more action rather than encouraging words, I give SIX stock a hold rating.

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