3 Causes to Keep Away From Six Flags Inventory

Six Flags (SIX -1.00%) is in the course of a turnaround effort that goals to shed the theme park operator’s popularity as a low-rent vacation spot. Crowds have been culled by elevating ticket costs and placing an finish to heavy reductions, facilities have been improved, and the atmosphere has been made extra engaging to households. If the plan works, Six Flags could be a great long-term investment.

However there’s so much that would go mistaken, and there is nearly no room for error. Whereas Six Flags inventory may very well be fascinating for these prepared to take some threat, there are just a few causes for less-daring traders to remain away. Listed here are three to contemplate.

1. Premiumization may backfire

For years, Six Flags’ modus operandi was to extend attendance ranges at its parks in any respect prices. That technique was profitable within the sense that attendance was certainly sky-high, however throngs of friends who received in free or with severely discounted tickets had been unlikely to spend some huge cash. Worse, they clogged up traces and made the expertise worse for everybody.

Six Flags is now doing the alternative. Gone are the times of free and discounted tickets. Ticket costs have been raised, resulting in an enormous drop in attendance however an enormous enchancment in per-guest spending. Whereas attendance plunged 25% 12 months over 12 months within the first 9 months of 2022, per-guest spending jumped 22%. Six Flags has improved its parks, reduce approach down on wait occasions for the whole lot, and positioned itself as a protected, enjoyable vacation spot for households.

The large query is whether or not this technique will finally result in larger income and revenue. Whole income sank 9% 12 months over 12 months within the first 9 months of 2022, and internet revenue was down 23%. Six Flags’ attendance has fallen beneath what the corporate views as an optimum stage, and per-guest spending might want to proceed to rise significantly to make up for it. That is removed from a assure.

In-park spending per visitor was $27.27 within the first 9 months of 2022, so there is a ton of room for enchancment if Six Flags can efficiently draw within the forms of high-spending friends it is going after. However that may require Six Flags to shed its popularity of being an affordable, crowded, and hectic vacation spot. As a result of the corporate has a number of debt and is going through a troublesome financial atmosphere, it is a race towards time to make all of it work.

2. A mountain of debt

Six Flags has little money on its stability sheet and roughly $2.4 billion in debt. Curiosity funds over the previous 12 months totaled $146 million. The corporate earned internet revenue of $94 million over that point, so curiosity is a big expense that vastly reduces the corporate’s profitability.

The excellent news is that Six Flags has no significant debt maturities till 2024. The dangerous information is that, relying on the trajectory of rates of interest, it is seemingly that refinancing that debt will end in larger curiosity funds. Six Flags generates optimistic free money movement, however not sufficient to meaningfully pay down this debt.

Debt makes an organization fragile. That fragility would not matter a lot when occasions are good, however it might probably turn out to be an enormous drawback if the atmosphere deteriorates. It isn’t a lot that Six Flags’ debt is an enormous threat by itself. It is a huge threat when mixed with the truth that a recession is an actual risk subsequent 12 months.

3. Recessions and theme parks do not combine

The theme park enterprise depends on the well being of client spending. Six Flags’ premiumization technique may assist the corporate climate an financial storm a bit higher than up to now, provided that its attendance base is shifting towards extra prosperous friends. However a recession will nearly actually take a chunk out of income and revenue.

We are able to look again to 2009 to get a way of how Six Flags performs when the financial system is in bother. Income tumbled 11% that 12 months, pushed by a 6% drop in attendance and a 5% decline in per-guest spending. Firms, faculties, and different organizations reduce on group outings, hurting gross sales. Six Flags filed for bankruptcy in that 12 months, unable to beat a stability sheet loaded with debt. The corporate had $2.4 billion of debt on the time of its chapter submitting, about the identical quantity that it has now.

It is unlikely {that a} potential recession in 2023 could be as extreme as the worldwide monetary disaster, and Six Flags is in higher form total now than it was again then. The corporate is worthwhile and producing money movement, neither of which was the case in 2009. But when that money movement dries up subsequent 12 months, Six Flags might be in bother.