Ski INC. 2020; My Second Ever Book Review

It took two guys like author Chris Diamond and his editor Andy Bigford to make this book as valuable as it is.  Their combined 88 or so years in the industry means they have the knowledge, perspective and access to write this book, and the book takes full advantage.  When Chris says “ski” he means ski, snowboard, etc. through the whole book. 

It’s both a strategic evaluation and a history of the ski/snowboard/mountain resort business.  Like most of you, I was aware of the events and transactions Chris describes.  But having them laid out chronologically and the competitive impact and interrelationships evaluated was great.  It caused useful thinking. 

What does Chris conclude?  The subtitle of the book is a good place to start.

“Alterra counters Vail Resorts; mega-passes transform the landscape; the industry responds and flourishes.  For skiing? A North American Renaissance.”

“My premise in this book,” he says, “is that the Epic revolution, as others have followed Vail Resorts’ lead has initiated a renaissance in skiing.  For decades, the media focused on the high cost of skiing, but now the standard refrain is “what a deal” the new passes are.  Total skier visits can be expected to grow coast-to-coast, and not just at the mega resorts.  This energy will eventually expand the number of total participants, if that hasn’t happened already.”

“It is my view that these recent changes have rescued skiing from the trend of becoming, in effect, a rich person’s sport.”

Isn’t it interesting how consolidation has, so far, turned out to be a good thing?  Or at least a necessary thing.  In doing turnaround work I quickly learned that doing “more of the same” isn’t the path to success.  I’d come around to the idea that some consolidation was necessary and appropriate for the industry, but that it would lead to a “renaissance?”  Not sure I’m that far along in my thinking, though I can see how I might have to get there in the not too distant future.

What’s Chris’s business proposition?  He states it pretty clearly using Holiday Valley’s strategy as an example.

  • Make great snow [technology continues to make that easier].
  • Take care of your guests.
  • Know your markets.
  • Maximize summer opportunities [So you’re not a one season business].

That’s from his chapter on small to midsized areas but, you know, all pretty good business advice for any resort. Early on in this chapter I considered skimming it.  Glad I didn’t.  Aside from turning out to be really interesting, it highlighted some consistent themes over the history of the industry

1.            How important commitment, passion and optimism have been (are, I’d say).

2.            The role, for better or worse, of real estate.

3.            The bad things that happen when commitment, passion and optimism obscure the importance of good financial management and a solid balance sheet.   

When you think about it, what’s going on is that the survivors of the consolidation are doing better business.  Well, that’s what happens in a consolidation.  Like, for example, retail.  Adapt or die.  Know your market and take care of your guests (customers).  What an original idea!

It’s true that many small hills have gone away and, as Chris acknowledges, they were great places to learn.  But they only existed when times were easier and the industry was growing madly and they floundered (Chris describes plenty of this) when times got hard and the environment changed, but they wouldn’t or couldn’t change with it. 

Now, as Chris also describes, some of these places are being resurrected by communities, local governments, and investors/skiers who have resources (including for the significant capital improvements required) and are prepared to run the places with best industry practices.

The story for the industry is not fundamentally different from other consolidating industries.  A revolution?  Nah.  Too fraught a term for me.  Let’s say that the pressures of a changing competitive environment have finally, after many years, reached a tipping point where it was, for the individual players, adapt or die.

Chris’ hypothesis is that the mega passes, along with cheaper lodging (VRBO, etc.) are bringing affordable skiing to more people as long as you’re willing to plan in advance.  The mega passes have become the brand, and customers are planning and plotting to get the best deal.  The resorts, meanwhile, are using dynamic pricing, buddy passes, and other permutations of pass terms to give their customers choices and control – what customers want in most industries these days- and influence their behaviors.  Chris and I agree that this process is just beginning and that the ultimate result will be that few people will be walking up to the window and buying day passes.

But what, you say, about all those hills that have closed, mostly to never reopen again?  Where will we get new participants?  Yeah- problem even with all the positive changes Chris outlines.

He reports that retention has increased from 15% to 19% over the many years during which we’ve been trying to move the needle.  He also reminds us of all the improvements in equipment, process and teaching technique for teaching beginners that have evolved.

Perhaps most importantly, he makes it clear that the larger, consolidating, remaining resorts know that developing new, committed skiers is imperative.  Their acquisition of and relations with other resorts as well as the structure of their pricing and pass products are focused on the issue. 

And perhaps, since we’re trying to change human behavior and tried to do it through the Great Recession, we shouldn’t be too hard on ourselves.  I’m not sure 15% to 19% over a decade or more is so bad.  With the changes going on now, I can even imagine it accelerating. 

So, everything is fine, right?  It’s conceivable that Chris as a consummate industry insider might be on the optimistic side, but he does point out some issues.

To paraphrase, he says the industry will be fine if we don’t have a recession.  I’d change that to “until we have.”  The business cycle has not been rescinded and we won’t have any more fun in a recession than other industries. 

He also notes our inability to crack the diversity puzzle.  I’ll just include myself on the list of people who don’t have a solution.

Climate change.  Yes of course, though it’s amazing that this industry still has people resisting the idea.  Tactically, we are relying on improved and increased snowmaking and warm weather activities to deal with this.  The big players are counting on geographical diversification.  Strategically, the industry is active in sustainability and confronting climate change.

He also discusses issues with demographics; an aging base and drop off in snowboarding.  He spends just a paragraph on issues of income, and I think more time might have been warranted.  Skiing may be getting less expensive, but it’s never going to get cheap.  What I know about the stagnation or even decline in real middle class and below incomes over several decades gives me pause.  Skiing may be “cheaper” but if taking advantage of that requires a $500 or higher outlay months before you hit the slopes (plus equipment, lodging, transportation, food, apparel even if they are all cheaper), does it matter?  Economics limits our customer base.

The answer?  Snowmaking, good management, and summer activities generating year around cash flow.  It doesn’t hurt if some of your competitors have gone out of business.  You need to read this book.  The integrated strategic perspective is very important as you consider what your industry business should be doing.

I’ve never met Chris.  I think I might have met Andy.  If you guys are going to be wandering around Denver in a couple of weeks, I’d love to talk with you.  Among the things I’d like to ask is if the numbers exist yet to evaluate the extent of the decline in cost to go skiing. 

Consolidation and Finding New Participants; Vail Buys Peak Resorts

It was July 22nd when Vail announced it had reached an agreement to purchase Peak Resorts for $11.00 a share or a total of $264 million.  Peak Resorts, traded publicly under the symbol SKIS, closed at $5.19 on July 19.  Hard to say “no” when somebody offers you more than double your stock price.  Vail will also assume or refinance Peak’s debt, which totaled around $230 million on April 30.

Vail operates 20 mountain resorts in the west (I guess Australia is “west.”).  Peak has 17 ski areas in the northeastern U.S.  Vail also has 240 retail locations.

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Vail Buys Whistler; A Good Deal For Everybody?

You know, I always try to write things that identify a valuable business lesson.  The valuable business lesson here I guess is do what Vail did.  While I think there are a couple of interesting industry considerations, I can’t strategically fault this deal.  Vail by no means got a great deal with a price of a little over US$1 billion, but paying a fair price for a good property is the kind of combination that’s most likely to work out in my experience.

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Vail Figures Out How to Generate Summer Revenue During the Winter

It figures. Over the weekend I finished up a long article for SAM (Ski Area Management) on winter resorts generating summer revenue. I think it included some interesting approaches to the issue, but apparently I missed one.

Today Vail Resorts announced that it’s acquiring Perisher Ski Resort in New South Wales, Australia. Here’s the link to the resort web site. It’s fall there, so the web cams show no snow. Hmmm. Looks a little like some West coast resorts right now.

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What Can We Learn From Vail’s Metrics?

Vail Resorts released some metrics today on their season through April 22nd that I thought were worth a quick review because of some of the lessons it teaches any business about market positioning. I also want to discuss briefly accounting for season passes (try and contain your excitement). You can see the complete press release here. The numbers exclude Kirkwood, which was acquired by Vail only on April 12th.

Lift ticket revenue was down just 0.3%, in spite of a 12.6% decline in skier visits. Ski school revenue rose 0.3% while dining revenue fell  4.0% and rental/retail was down 0.3%. These numbers are compared to last year’s season through April 24th.

However, revenue per skier visit from ski school, dining and rental/retail combined rose 13.4%. I commented on Vail’s January 31st quarterly results back in March and said, in the title, “If You’re a Winter Resort, Be a Big One. With Rich Customers. And Great Facilities.” These numbers don’t do anything to make me reconsider that.
Lift ticket revenue benefits from season pass sales. Vail CEO Rob Katz referred the strength of that program in discussing these results.   You get the money early and don’t have to give it back if it doesn’t snow or the buyers don’t come as often (Hmmm…. Some resort should look into offering a more expensive season pass with some kind of insurance feature that gave you back some amount of money if it didn’t snow a certain amount. Or maybe offered you a discount on next year’s pass.).
Since season passes have become more important as a revenue source for a lot of resorts, let’s talk about accounting for those revenues. The first issue is whether or not a resort is set up to scan passes. That is, do they specifically know how many times a season pass holder uses their pass?
Somebody I talked to who knows way more about this than I do estimated that between 50% and 65% of resorts now scan passes and I’ll bet that all the big, sophisticated ones do. Vail does.
Let’s assume first the case where you scan passes. If somebody paid $100 for a pass and they only come once, the resorts lift ticket revenue from that pass is $100 per visit. If they came ten times, it’s $10 per visit.   Note that when Vail talks above about revenue per skier visit increasing 13.4%, they are not including lift ticket revenue.
Now that $100 is in the bank. And you’re not getting any more lift ticket revenue from that pass purchaser. But if they come a lot, they may bring friends and they’ll spend money at all those other places at your mountain. And the incremental operating costs of having that customer come more often are almost nothing. So a resort at the end of the season should hope that their lift ticket per visit from the person who bought the $100 season pass is about $1.00 a visit. Because the lower the lift ticket revenue per visit from that customer, the higher the total revenue for the season.
What the resort would really like is for that same customer to come 100 times but not buy the season pass. That could get us into an interesting discussion about how to price season passes and how customers perceive the utility of those passes, but maybe another time.
What if you don’t scan? Then I guess you just estimate a certain number of days based on conditions, past experience, anecdotal evidence and maybe activity at restaurants or the ski schools or something. Hopefully, that doesn’t translate into the “wing and a prayer” approach. If the number they use is higher than it actually was, then reported skier visits are over reported. But reported revenue per visit would be too low.  
The person I spoke with suggested that in a season such as the one just ended, there might be a smaller percentage of visits on season passes and more on single tickets. If a resort that scans treats season passes in the oversimplified way I suggested for the $100 pass that would increase ticket revenue per visit. If resorts accurately track season pass usage, they probably saw a smaller percentage of visits on passes, more on single tickets. That should increase ticket revenue per visit.
The first conclusion, I guess, is that scanning is good. Without it, your financial statements can be fine (not necessarily good, but accurate), but your management information will, at best, be inconsistent from year to year. You’d want to not just scan your season passes, but every lift ticket every time it’s used.
I know scanning equipment costs money and takes training, but in this competitive, cost sensitive, weak economy environment it doesn’t seem like a luxury. To the 35% plus of you who are getting along without it, I’m forced to ask how much better you could do with it.
And if anybody out there things I’m nuts, let me know and I’ll be pleased to write about how you succeed without it.
The lesson is that good management information matters. I suppose I could write thousands of words on ways to account for season pass revenue (I’m actually getting kind of intrigued by it). When I was finished with what would probably be a really boring accounting discussion, I would have no doubt concluded that there were a few ways to do it that make sense. And I would further conclude that it wouldn’t matter which one you used as long as you applied it consistently and understood its strengths and weaknesses. That’s the way it is with management accounting.
Meanwhile, speaking of other lessons from Vail’s metrics, CEO Katz noted that cumulative snowfall was down 50% over Vail’s six resorts compared to last year. He credits a few things with their results in spite of that. They include “…increased yields from luxury and international guests.” He also points to their snowmaking capabilities, level of service, quality of facilities and available activities.
Now, you never expect to read these press releases and learn about how a company really, really, screwed up (Anybody who has been in business more than a few years and hasn’t really screwed up, please call me. I want to invest in whatever you’re doing). Still if, like Vail, you’ve correctly identified your customers, figured out what they want, and provide it to them, things are likely to go well.      



Vail’s Quarterly Results. If You’re a Winter Resort, Be a Big One. With Rich Customers. And Great Facilities.

In Vail Resort’s March 6 conference call, CEO Bob Katz described snow conditions during the quarter ended January 31st in the following terms:

“In Colorado, snowfall levels were the lowest in over 30 years and for the first time in as many years, we were not able to get Vail’s Back Bowl open until Mid-January.”

“In Tahoe, we experience weather patterns that have not been seen since the late 1800s including having zero inches snowfall in December.”
“…snowfall levels at our six resorts were down 60% through January as compared with the prior year.”
After those cheery pronouncements, you might have expected him to leap up, yell, “We’re doomed!” and throw himself out the window. Or, maybe more poetically, off the top of one of the resort’s not necessarily snow covered mountains.
But he didn’t and, in fact, he didn’t have any reason too. Vail’s total revenue did in fact drop during the quarter to $373 million from $395 million in the same quarter last year. But most of the decline came from the inevitably and notoriously bumpy real estate segment. Revenues in the mountain and lodging segments were down only $5.7 million. Net income fell from $54.4 million to $46.4 million.
Really not bad for a disaster of a snow year. How’d they do that?
Vail’s Four Key Drivers  
The first thing they point to is their season pass program. About 45% of the quarter’s total lift revenue recognized was from season passes. It was 39% in last year’s quarter. It’s good when people give you their money early. It motivates them to show up even if conditions aren’t great and spend money on restaurants, lodging, meals, lessons and other stuff. Those season pass holders, during the quarter, came to Vail’s resorts just half a day less than in the previous year’s quarter in spite of the conditions. With snow since the end of the quarter, that’s normalizing.
The second driver Vail points to is all the money it’s invested, and continues to invest, to give it the highest quality assets. They specifically point to the snow making capabilities that allowed them to have more terrain open than other area resorts.
Investments in those assets, they assert, let them increase prices. Their ability to do that is their third driver. Ignoring season passes, Vail’s effective ticket price was up 9.1% in the quarter.
And finally, notes CEO Katz, “…our resorts attract a high income demographic that allows us to benefit from the enhanced consumer spending, especially in the luxury segment, as we realized significant increases in guest spending per visit…”
The average daily rate of their lodging rose 13.8%. Ski school revenue per visit was up 17%. Dining revenue was up 9.5% and rental revenue was up 9.1% per visit.
I guess the moral of the story is to have rich customers and spare no expense in treating them well. At the end of the day, the 14.6% decline in visits during the quarter were mostly offset by strong season pass revenue, higher list ticket prices, and more spending per visit on other services. Ski school, dining and retail rental revenue ended up declining 0.1%, 6.4% and 0.6% respectively during the quarter.
Customers don’t seem to come to Vail’s resorts worrying about saving money. It no doubt has something to do with the fact that 55% of their visitors were destination visitors who came from somewhere besides the local area and stayed a while.
Financial Statement Metrics
Due to seasonality, winter resort balance sheets can be intriguing exercises in financial analysis as they jump around from quarter. That’s especially true when there’s real estate involved. But Vail’s January 31 balance sheet is pretty strong. It’s nearly unchanged from a year ago, but what change there has been is positive. I guess I’ll pay it the highest compliment I can pay a balance sheet by not spending much time on it.
The one thing I might point out (on a positive note) is that though they have about $725 million in long term debt (almost the same as last year’s $734 million) there are essentially no principal payments due on any of it until 2019.
I gave you an overview of their quarterly income statement at the start of this article. Vail divides their business into three segments. The first, Mountain, includes the resort properties of Vail, Breckenridge, Keystone, Beaver Creek, Heavenly and Northstar as well as all the services associated with those resorts. The Lodging segment is the hotel rooms and condos that Vail owns or manages. Obviously, that’s closely associated with the Mountain segment. Finally, there’s the Real Estate segment, which owns and develops real estate around the company’s resorts.
I suppose most of you already knew that.
Mountain revenue in the quarter rose from $191 million to $195 million. Lodging revenue fell from $50.8 million to $47.1 million, though it benefited from a favorable $2.9 million litigation settlement.  Real Estate revenue declined from $25.3 million to $12.6 million. Total revenue, then, was down 4.6% from $267 million to $255 million.
In the Real Estate segment, during the quarter, among other things, four condo units sold for $1.1 million each, and one condo unit at their Ritz-Carlton Residences for $2.4 million. As you can see, it doesn’t take many closings moving from one quarter to another to really move the revenue and expenses in the Real Estate segment around a whole bunch.
Vail reduced operating expenses during the quarter by 4.6% from $267 million to $255 million. Mountain segment expenses rose by $2.2 million because poor snow meant they spent that additional amount on snow making.
Operating income dropped from $97 million to $84 million. Pretax income was down from $89 million to $76 million. No expense between those two numbers changed much from the same quarter last year.
The net income drop from $54.6 million to $46.4 million benefited from an income tax provision that was $4.5 million lower this year than last.
Vail is also big on reporting its EBITDA numbers by segment (earnings before interest, taxes, depreciation, and amortization. Those of you have followed what I’ve written about winter resorts know that I recognize the validity of trying to isolate operating results to give better focus on how a business is running. But given the winter resort business model, I sometimes have a hard time filtering out interest expense, amortization and depreciation.
As Vail says, upgrading and improving their assets on a continuous basis is one of their key drivers and the amortization and depreciation is a direct result of that. I know it’s non-cash, but it’s an inevitable part of running a quality winter resort. They indicated that resort capital expenditures will be between $75 million and $85 million in calendar 2012.
Be that as it may be, EBITDA for the Mountain segment fell from $127.2 million to $120.6 million. Lodging’s EBITDA rose from $881,000 to $1,213 million. Real Estate’s EBITDA was a loss of $3.5 million compared to a loss of $197,000 in the same quarter last year.
Vail had a quarter where revenue and profit fell, but you might have expected much worse given the lack of snow. It’s a shame we don’t get more public results, and discussion of those results from more winter resorts. It would be interesting to see the extent to which other resorts, if any, benefit from the same factors as Vail.   There’s nothing like a good long term strategy consistently applied.



Vail’s Annual Report; What’s the Future of Resort Real Estate?

This 10K was filed a couple of weeks ago for the year ended July 31. There are about 760 ski areas in North America. Vail owns five major ones that accounted for 7.7% of skier visits (about six million) during the last season. We don’t get many chances to see individual data from many of them, so taking a look at this is worthwhile. It’s particularly interesting, in our current economic circumstances, to see how the real estate component of Vail’s business is faring.

 Numbers by Segment

 Let’s start with a little table that shows Vail’s revenues over the last five years broken down by its three business segments; mountain, lodging and real estate. The numbers are rounded to the nearest millions of dollars and are for the years ending July 31.
                                                2010       2009       2008       2007       2006
Mountain                               638         615         686         665         620
Lodging                                169         176         170          162         156        
Real Estate                            61         186         297          113            63
Total Revenue                      869        977     1,152           941          839
Here the operating expenses for each segment:
                                                2010       2009       2008       2007       2006
Mountain                                456         451         470         463         443
Lodging                                  167         169         160         144         143        
Real Estate                              71         142         251         115           57          
Total Expense                       694         763         882         722         642
And here is the EBITDA (earnings before interest, taxes, depreciation and amortization) for each:
                                                2010       2009       2008       2007       2006
Mountain                               184         164         221         202         177        
Lodging                                   2              7            10           18           13
Real Estate                             (4)          44            46             (2)           6
Total EBITDA                        182         215         277         218         196
Some of the above numbers don’t add precisely because of rounding and some minor accounting stuff. I’ve ignored that to minimize the eyes glazing over factor.
The Mountain segment “…is comprised of the operations of five ski resort properties as well as ancillary services, primarily including ski school, dining and retail/rental operations.” Lift tickets are about 45% of revenues there. Of the three segments, it contributes by far the most revenue and EBITDA. You can see that segment revenue in 2010 is only about 3% ahead of where it was after peaking in 2008.
Lodging revenues come from owning and managing hotels near their resorts. It also includes revenue from golf and a transportation company they own. It follows a pattern similar to the Mountain segment, peaking then falling in the recession and ending up just 8% higher than it was at the end of fiscal 2006. I should note that the Lodging revenue numbers include $19 million and $18 million in 2010 and 2009 respectively for transportation. That’s from a company Vail bought and there were no transportation revenues in earlier years. One could argue that lodging revenues are really up only about 3.5% over five years, similar to the Mountain segment.
Real Estate
Real estate is the development and sale of homes and condos of various sizes. Look at the 2008 peak in real estate revenues in the chart above. 2010 real estate revenue, at $61 million, is only 3% below the 2006 amount of $63 million. But the 2008 real estate revenue peak of $297 million is almost 5 times the 2006 or 2010 levels. You don’t see that level of rise or fall in either the Mountain or the Lodging segments.
Though accounted for separately, the three segments are closely related as Vail discusses. Selling real estate and increasing the lodging options increases the bed base and options for customers. Putting in a new high speed lift or opening new restaurants or retail makes the resort more attractive and may increase the value and desirability of the real estate. At the risk of oversimplifying, mountain development makes the real estate more attractive and real estate development can make the mountain more attractive. The trick is to coordinate development so as to maximize the value of both. 
The real estate revenue stream is highly variable due to the nature of the business. Even when you get deposits and sign sales contracts for a property, you don’t recognize any revenue until the title to the property passes to the buyer. Your revenue depends on when you start the project, how big the project is, how well it sells, and any delays you incur in completing it. When you do close a sale and recognize the revenue, it’s in amounts of at least hundreds of thousands of dollars (the recently completed One Ski Hill Place project had an average selling price per unit of $1.4 million). You don’t have thousands of closings of similar, smaller amounts like you were selling lift tickets.
With that as background, what’s Vail’s take on real estate and real estate development? The first thing I’d note is that “Real estate held for sale and investment” was $422 million at July 31. That’s up 35.7% to $311 million from the same date last year. The amount the previous year was $249 million. Vail specifically states that “…we currently do not plan to undertake significant development activities on new projects until the current economic environment for real estate improves. We believe that due to our low carrying cost of real estate land investments combined with the absence of third party debt associated with our real estate investments, we are well situated to time the launch of future projects with a more favorable economic environment.”
Talking about their One Ski Hill Place project, they note that they “… closed on 36 units, or 61% of the 59 units that were under contract…while 23 units that were under contract defaulted. Additionally, we have another real estate project substantially completed (the Ritz-Carlton Residences, Vail) which units under contract will begin closing during the first quarter of Fiscal 2011. We have increased risk associated with selling and closing units in these projects as a result of the continued instability in the credit markets and a slowdown in the overall real estate market. Certain buyers have been or may be unable to close on their units due to a reduction in funds available to buyers and/or decreases in mortgage availability and certain buyers may successfully seek rescission of their contracts…We cannot predict the ultimate number of units that we will sell, the ultimate price we will receive, or when the units will sell. Additionally, if a prolonged weakness in the real estate market or general economic conditions were to occur we may have to adjust our selling prices in an effort to sell and close on units available for sale, although we currently have no plans to do so."
Back in April, when I wrote about Vail’s January 31 quarter, they had reported 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. I wrote,
“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.”
The problem appears to be worsening and I’m quite certain Vail isn’t the only resort that develops real estate that has these kinds of issues.
The Financial Statements
I hate resort balance sheets. When you see a current ratio that’s deteriorated from what, in traditional financial analysis, would be called a dangerous current ratio of 0.91 to an even worse 0.51 over the year you get worried. But then you remember (especially if your introduction to this industry was trying to run an equally seasonal snowboard company) that it’s all about cash flow, and you don’t borrow money and pay interest just to make your current ratio look better at the end of the year.
The total liabilities to equity ratio improved slightly from 1.44 to 1.40. Debt maturities are only $1.87 million in 2011, but increase to $35 million in 2012.
The decline in current assets is almost completely the result of a fall in cash and cash equivalents from $69 million to $15 million. Total liabilities have hardly changed at all.    I would note that cash flow from operations has fallen from $217 million in fiscal 2008, to $134 million in 2009 to $36 million in 2010.
You’ve seen the revenue and expense numbers by segment in the table above. Vail worked hard to reduce and manage its expenses, but income was down.   Operating income was $69 million, down from $106 million the previous year and $176 million the year before that. Net income was $30 million, down from $49 million in 2009 and $103 million in 2008. Net income as a percentage of revenue fell from 8.9% in fiscal 2008 to 5.0% in 2009 and 3.5% in 2010. 
As explained above, Vail’s three business segments each support the other. The Mountain and Lodging segments took a hit in the recession and are still impacted, but are starting to recover. The real estate is not and I don’t see that happening in the immediate future. As Vail management notes in the lengthy quote above, real estate development is off the table until the economic improves. They are uncertain about their ability to sell or close on sold properties and are concerned that prices might have to be reduced. They’ve got a lot of cost in completed units and undeveloped property and at some point could have to recognize some reductions in carrying value.
As I said when I started, we don’t get to see the numbers for most of the large resorts. The value in looking at Vail is not just in knowing how Vail is doing, but in understanding some of the pressures that any resort with real estate is likely to be under.         



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

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 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?