Vail 2nd Quarter Results- Watching Real Estate Will Be Interesting

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Given that Vail says the snow up to about Christmas was the worst in 30 years, you have to say that they really did okay. But I think the most interesting thing in the whole 10Q was the disclosure that 13 holders of contracts to purchase Ritz-Carlton Residences had sued to get out of the contracts and get their deposits back because of a disputed delivery date.

If you really wanted your new 2nd home, you probably don’t sue because it’s a little late being finished. Maybe you negotiate for some free upgrades (heated toilet seats?), but you don’t sue to get out of the deal. Unless, of course, you can no longer afford to buy the place and/or it’s now worth a lot less than you’ve agreed to pay for it. Hey, why should the winter resort real estate market be different from other real estate markets?
 
Apparently it isn’t. In the risk factors section, Vail talks about the “… increased risk associated with selling and closing real estate as a result of the continued instability in the capital and credit markets and slowdown in the overall real estate market, including the risk that certain buyers may be unable to close on their units due to a reduction in funds available to buyers and/or decreases in mortgage availability, as well as the potential of certain buyers being successful in seeking rescission of their contracts” They go on to note that, “… the Company cannot predict the ultimate number of units that it will sell and/or close, the ultimate price it will receive, or when the units will sell and/or close.”
 
Vail “… currently does not plan to undertake significant development activities on new projects until the current economic environment improves.” The 10Q can be found here http://investors.vailresorts.com/ and you might also want to review the March 11 investor presentation.
 
I’ve commented before, though long ago, on the relationship between mountain and real estate development for winter resorts with both. To maximize total value, you have to synchronize the development of both, not letting either get too far ahead of the other. As Vail puts it, “The Company’s real estate development projects also may result in the creation of certain resort assets that provide additional benefit to the Mountain and Lodging segments.”
 
Real estate revenues are recognized in the income statement only when a sale closes. Obviously this means, as we’ll see when we look at the financial statements, that sometimes there’s a lot and sometimes there’s a little. That’s just the way the real estate development business is. But of course if you don’t start projects, it’s going to be kind of hard to finish them and recognize revenue as your book of projects under development runs down. Let’s look at the numbers to see what this means.
 
Mountain revenue for the quarter ended January 31, 2010 was up 1.35% to $261 million compared to the same quarter the previous year. Lodging revenue fell 6% to $38.7 million. Real estate revenue pretty much disappeared, falling from $89.2 million to $870,000. That’s largely determined by when the sales close assuming, of course, that there are sales in the pipeline.
 
The Mountain segment includes the operations of the company’s five resorts as well as the related ski school, dining, and retail/rental operations. About half of its revenue comes from lift tickets, including season passes. It’s recognized in the income statement over the course of the season. Season pass revenue was up about 9% this season and is expected to represent about 35% of list ticket revenue for the fiscal year.   Vail noted that the Mountain EBITDA (earnings before interest, taxes, depreciation and amortization) was up by 3.6% due to this increase and to the “…cost reduction initiatives implemented during the second half of the prior fiscal year.” 
Mountain operating expenses were down 2.2%, the result of a freeze in the company’s 401K matching contributions, a company-wide wage reduction plan, and better inventory management offset by some higher food, fuel and medical costs.
 
In the Lodging segment, the average daily rate the company earned on its owned hotels and managed condos fell by 2.1% in the quarter compared to the same quarter the previous year. Revenue per available room was down 11.1%. EBITDA was down from $2.5 million to $0.9 million for the quarter ended January 31, 2010. This was due almost entirely, according to the company, to declines at Keystone properties and to higher employee medical costs.
 
Total revenue for the quarter ended up declining by 22.7% from $389 to $301 million. This was almost completely the result of the decline in real estate revenue. Total operating expenses fell 21.7%. All three segments showed declines, but again, most of the total was the result of real estate expense falling from $60 to $7.4 million.
 
Net income fell 32.8% from $60.5 to $40.7 million. And yes, it’s because of the decline in real estate revenue, but how do we look at Vail’s overall performance given the variability in real estate?
 
We can start by subtracting segment operating expense from segment revenue for the quarter and constructing the little chart below and show what I guess we’ll call operating income for each segment for the January 31, 2010 quarter and the same quarter last year. The numbers are in thousands.
 
SEGMENT                                            1/31/10                                1/31/09                               
Mountain                                              $106,960                              $102,301
Lodging                                                $888                                     $2,453                                  
Real Estate                                         $(6,547)                                $29,649
Total                                                      $101,301                              $134,403
 
Remember that below this line we’ve got all that interest, amortization, taxes, depreciation, investment income, and net income attributable to noncontrolling interests. How shall we allocate it among the three segments?
 
You got me. Perhaps I shouldn’t quite put it like that. There are ways to allocate, and some of them would be better than others, but you’d find that there isn’t just one right way to do it. But remember what I said (and what Vail said) above. The performance of each of these segments is related to the others.
 
Let’s say you got a dollar in the bank, and you need a total of three dollars to do a few projects. So you borrow two dollars and add them to the one dollar you already have in the bank to do the projects (they’re small projects). The projects are all related to each other. You have to pay interest on two of those three dollars, but which project do you allocate that interest expense to? Does it matter? Probably not. Would you learn anything by doing it? I don’t think so. Could you screw up your comparisons across sectors? You bet.
 
Vail’s quarterly earnings of $40.7 million represent a return on end of the quarter equity of 5.2%. It was 8.1% for the same quarter next year. They’ve got very little debt coming due in the next four years- only $2.6 million through fiscal 2013. At the end of the quarter, they had no debt drawn under their senior credit facility and the land they are holding for development was bought at favorable prices which means a low holding cost. They report that through March 7, for the season, they’ve seen some recovery since the poor early season snow. Total skier visits were now up 0.4% and lift ticket revenue was up 1.6%.
 
Vail suffered like most businesses from the recession. As you think about their future, the extent and timing of the recovery is where you have to focus. When can they begin to develop real estate again and what will they be able to sell it for? How committed are snow sliding consumers, and will their caution be, to any significant extent, a long term condition? 

 

 

Quik’s Quarter Ended Jan. 31, 2010; Great Tactics- What’s the Growth Strategy?

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A sales decline of 2.4% for the quarter ended Jan. 31, 2010 compared to the same quarter the prior year, from $443.7 to $432.7 million isn’t what you’d like to see.  Then you notice that their gross margin percentage rose from 46.7% to 51.3% and that their gross profit was up by 7.2% even with the sales decline and things look better.  Quik attributes this to a better economic environment, improved sourcing, reduced discounting and good inventory management.

 A year ago, on Jan. 31 2009, their inventory was $380.5 million.  At January 31st this year, it was down to $301.2 million, a decline of almost 21%.  Very impressive.  They have also reduced their receivables by 13.5% over the year and days sales outstanding (how long it takes them to collect their receivables) fell from 72 to 64 days.  Cash is up from $42 to $150 million.  Their current ratio has improved over the year from 1.63 to 2.24, indicative of the capital raised and the restructuring of their bank lines to improve liquidity.  Their total debt to equity has also improved from 3.81 to 2.91, also largely due to the equity raised.

But their long term debt and lines of credit still total $977 million.  While that’s down from $1.013 billion a year ago, it’s still a lot and they’ll have to work to reduce it if they want to improve their operating flexibility and maybe refinance their expensive (15% plus warrants) debt that they got from Rhone capital.  They expect to reduce that debt by about $100 million a year over the next three years.  In the conference call, they increased their estimate of free cash flow from $50 million to $75 million for the year.

I don’t typically lead with a balance sheet discussion, but it’s so pivotal to Quik’s future that it seemed to make sense.  Back to the income statement.

Selling, general and administrative expenses fell 1.8% to $203 million.  They expect their marketing expenses to be around $100 million in the current fiscal year, down from $120 million last year.  Operating income grew from $345,000 to $19 million.

Interest expense, to nobody’s surprise, was up from $14 to $21 million.  They expect total interest expense this year to be around $92 million $26 million of which, Quik reminds us, is noncash.  The loss from continuing operations was $65.2 million in this quarter last year, compared to $4.6 million this year.  The net loss fell from $194.4 million last year ($128 million of that was Rossignol related) to $5.4 million in the quarter ended January 31, 2010.

During the quarter, sales decreased by 8% in the Americas.  They fell by 2% in Europe and rose 16% in Asia/Pacific.  In constant currency terms they were down 12% in Europe and 15% in Asia/Pacific.  That translates into a decline in sales overall in constant currency terms of 11%.  As reported (that is, ignoring currency fluctuation), revenues were $187 million in the Americas, $178 million in Europe, and $67 million in Asia/Pacific.

They commented that the juniors market was difficult.  The Americas decrease was in Roxy and Quiksilver, offset by an increase in DC.  However, they note that increase “was partially related to the timing of shipments,” which means some of the increase was not organic growth, and will reduce next quarter’s sales.  In constant currency in Europe, the story was about the same, with declines in Roxy and Quiksilver offset by some growth in DC.

As with any company, there’s a limit to how much improvement you can see from inventory management, expense control, and sourcing improvements.  There is, I suppose, always room to do better, and I’ve been urging companies for maybe two years now to focus on gross profit dollars.  But at some point, to improve profits, you have to sell more.  What Bob McKnight said in the conference call was that Quik is “… in a prime position to benefit from future improvements in the world’s economies and in particular in consumer spending.”

I believe that, but what I also hear him saying is that they really need that improvement to get growth and profitability back on track.  For the second quarter, they expect to “…generate earnings per share on a diluted basis in the low single digit range.”  CFO Joe Scirocco believes they can still achieve the full year revenue objectives they outlined last quarter (he didn’t say profit projections), “…although some definite challenges remain, including a challenging juniors market, foreign currency headwinds, and uncertainty at retail.”

We didn’t get (and probably shouldn’t expect in a conference call) a lot of specificity as to where growth can come from.  CEO McKnight highlighted the core shop strategy that has been rolled out for all three brands where they have developed and are selling product only in their own stores and the best independent retailers.  I think that’s a great, and necessary, thing for them to do.  As I’ve argued before, however, I’m not sure that will be the source of enough additional revenue to make a big financial difference.  Hope to be wrong about that.

So I’m impressed by the steps Quik has taken to improve their liquidity, control expenses, manage their inventory and restructure their businesses for improved efficiency.  The last step will be reducing their leverage.  That’s just going to take some time and some cash flow.

The source of their future revenue growth (which they need if only because of their increased interest expense) is not clear to me.  I’ve said that a couple of times before in comments on their filings and it’s still true.  Like all of us, they are dependent on and hoping for a recovery in consumer spending.  They’ll get- are getting- some.  Like all of us, it won’t be as much as we’d like or have gotten use to.  But what they really need are some new places to sell their products.  At least in the U.S., I don’t know where else they can go with their distribution.  Maybe there are some opportunities in the rest of the world.