Six Flags Entertainment (SIX) is trading modestly lower today (-4%) after reporting Q4 earnings this morning. You're probably familiar with Six Flags, but just in case, a little background would help. Six Flags (SIX) is the world's largest regional theme park. It operates 20 parks, with 18 in the US, one in Mexico City and one in Montreal.
Its US theme parks serve each of the top 10 metro areas, serving 100 million people and 175 million people within a radius of 50 miles and 100 miles, respectively. Its parks generally offer a broad selection of state-of-the-art and traditional thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets. It holds exclusive long-term licenses for theme park usage of Warner Bros and DC Comics characters, including Bugs Bunny, Daffy Duck, Tweety Bird, Yosemite Sam, Batman, Superman, The Joker and others. It also has rights to use Hanna-Barbera and Cartoon Network characters, including Yogi Bear, Scooby-Doo, The Flintstones and others. SIX uses these characters for advertising, as walk-around characters and in theming for rides.
SIX benefits from limited direct theme park competition. A limited supply of real estate appropriate for theme park development, substantial initial cap-ex, long development lead-time and zoning restrictions provides each of its parks with a significant degree of protection from competitive new theme park openings. SIX estimates it would cost $400-600 mln and take a minimum of three years to construct a new regional theme park.
Six Flags is the foremost brand in the regional theme park space, a segment benefiting from a growing trend of consumers favoring experiences over possessions. SIX provides family entertainment that is affordable in any economic environment and they do a good job keeping the parks clean and they try to add a new ride every year to each park to keep guests coming back.
A strategy that SIX has been pushing has been to pretty aggressively upsell guests to multi-visit passes. SIX calls this its Active Pass Base, which includes both season pass holders and members. Just to explain the difference between Memberships and Season Passes: Memberships have all of the same in-park benefits as Season Passes (unlimited admission, in-park discounts, free admission to other Six Flags theme parks, free tickets for friends on certain dates).
However, there are some differences. Memberships do not expire until you decide to cancel it (must wait at least 12 months). A Season Pass expires at the end of the current park "season." Members can keep their Membership cards from one year to the next and never need to get a new ID made at the park. Memberships have a low monthly cost. Season Passes must be purchased in advance via one upfront payment for the season and it cannot be cancelled or returned.
Turning to the Q4 results, EPS came in at $1.14, although that was helped by a large income tax benefit related to tax reform. Revenue rose 7.3% YoY to $256.8 mln, which was better than market expectations. The growth was primarily driven by a $9 mln increase in international licensing revenue and a 7% increase in guest spending per capita, which improved to $37.90, driven by both higher ticket prices and higher in-park spending.
The company's Active Pass Base, which represents the total number of guests who have purchased a season pass or who are enrolled in the membership program, increased 10% to a new all-time high. Increasing season pass and membership penetration is a key tenet of the company's growth strategy, providing a recurring revenue stream and a platform to further grow attendance as the company expands its network of parks.
In fact, SIX sees season pass holders and members as its most valuable guests, generating more than double the revenue and cash flow of a single-day guest over the course of a season. They are also the company's most loyal guests, serving as an excellent hedge against inclement weather throughout the season.
Overall, despite the modest decline in the stock price today, this was a decent quarter for Six Flags. The growth in guest spending per capita was nice to see. One of the arguments that SIX has been making in recent years is that it has a lot of opportunity for price increases and that seems to be playing out. The upcoming summer season will hopefully show a continuation of this trend.