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The headline, according to the NSAA Economic Analysis, is record visits totaling 58.9 million boarders/skiers and financial results that improve “on an already strong 2004/05 season.” Good news, obviously. But it’s NSAA’s responsibility to present the industry in as favorable a light as possible. On the other hand, it’s your job to run resorts. Maybe you need a little different perspective on the information in the report. I’m your man!

The EA weighs in at almost one hundred and twenty pages. Yup, I read it all, and now remember why I don’t do this every year. I have no idea how the people at RRC Associates manage to do such a good job collecting, compiling, and analyzing the data year after year without going absolutely nuts. Admittedly, toward the end my pages have a lot fewer notes on them than the ones at the beginning, but I still think I’ve got a pretty good sense of what’s going on.


By the Numbers

Right after I noticed that gross revenues were up by 5. 7 percent and average skier visits were up 5.27 percent and got all excited, I noticed that the season was 4.1 percent longer (from 122 to 127 days). The season ranged from 103 days at the smallest resorts to 153 days at the largest. This is the first time, but not the last, that I’ll point out the significance of the largest resorts from a statistical and operating perspective.

I don’t presume to know exactly what the correlation is, if any, between a longer season and gross revenues and skier visits. But I’m kind of guessing that we did our best to have some visitors and sell some lift tickets during those five additional days. It’s likely, therefore, that a longer season means more revenue and visits. But does it translate into higher profit? That depends on the resort and the behavior of its customers.

It doesn’t seem to have done much for us this year. In spite of record visits and a solid increase in revenue, operating profit margins fell, somehow, from 24.8 percent to 24.4 percent. Actual operating profit (EBITDA) grew only slightly, from $5.2 million to $5.3 million per resort. Pretax profit per resort grew from $2.3 to $2.7 million, or from 11.3 percent to 12.1 percent.

That pretax profit increase sounds great, but you’ve probably noticed that it happened while operating profits rose only slightly. What kind of financial prestidigitation is this?

Interest expense was down 16.6 percent. Depreciation fell by 3.2 percent. I’m all for reducing interest expense, and some fall in depreciation is okay as long as areas weren’t deferring necessary capital spending. But to me the headline is that we had record visitors, good growth in revenue, and a longer season—and in spite of that, dollar operating profit barely grew, and operating profit margins actually fell.

Speaking strictly financially, on average we didn’t run our resorts any better.

What’s up with that?


Size Really Matters

First, note that operating profit margin was up only for the largest resorts, to 28.8 percent from 28.4 percent (Figure 3C). Operating profit margin fell for the other three size classifications. Smaller mid-sized areas averaged 18.4 percent, down from 19.8 percent. Larger mid-sized resorts were at 12.6 percent, down from 14.8 percent. The smallest areas fell to 16.7 percent from 22.7 percent.

Similarly, operating profits fell at all size classifications—except the largest, where it rose handily. For the specific numbers, see 3A, page 70. Once again, it seems good to be big.

The pretax profit margin (Figure 3D) confirms that. The largest resorts had margins of 16.6 percent, up from 14.7 percent. By contrast, the larger mid-size group has margins of only 0.7 percent, but at least that’s up from 0.4 percent. The small and smaller mid-size groups have pretax profit margins of 4.9 percent and 5 percent, respectively, down from 10.3 percent and 7 percent. Yup, good to be big.

While areas hosted more guests, average revenue per skier visit increased only 0.4 percent, from $67.93 to $68.18 per resort. Lift ticket revenue grew, but non-ticket revenue per visit declined. The smallest areas had per visit revenue of $43.26. The next resort size up was $62.09 per visit. Larger mid-size resorts garnered $63.40, and the big boys got $74.45 per visit.

Average resort ticket revenues grew 8 percent, to $10.2 million. But the devil, as usual, is in the details. And guess what size resort really influences that number? You’re catching on, I bet.

Ticket revenue at the largest resorts only grew by 7.5 percent, but average revenue was $25.6 million. That’s 3.1 times the revenue of the next largest category, which grew 6.8 percent, to $8.3 million. One step down we find growth of 5.3 percent to $4.2 million. Revenue at the smallest category actually shrank by 7.2 percent to $2.1 million, a troubling result. If we average the averages of the three smaller resort groups, we come up with average revenue of $4.8 million. That’s less than one fifth that of the largest resorts.

The only other revenue category I want to specifically comment on is summer revenue (you can pore over all the details on the other categories in your very own copy of the report). Seventy-five percent of resorts reported summer revenues. “The average proportion of total revenues from summer operations among reporting ski areas is 7.1 percent (up from 6.8 percent),” the report tells us. But note, that 7.1 percent includes the 25 percent of reporting resorts that have no summer revenue.

As a finance-trained guy who’s run a couple of snowboard companies with absolutely no summer business, I can’t begin to tell you how lovely just a few bucks to meet some expenses during the off season would have been. Those of you who manage cash flow know that the positive impact of some money coming in during the off-season goes beyond any impact on your P & L statement. In the resort business, I can imagine it might allow you to keep some of the employees you really don’t want to let go and have to scurry around to replace in the fall.

Oh, and “...the smallest areas [are] least likely to operate revenue centers in the summer months (only 40 percent) and the largest ski areas the most likely to have summer revenue streams (93 percent.)”

One caveat before we move on. Remember RRC does its best to remove real estate from the numbers it collects. But some resorts depend on real estate as a major profit center. I can imagine there are some resorts out there where, if you look at their operating results without the real estate component, you wonder what the hell they are doing in business. The real estate component, not reported in the Economic Analysis, completes the picture.

Let’s talk straight about ticket prices for a moment. According to the report, ticket prices in general rose 3 to 6 percent in each region of the country. But lift ticket revenue per visit grew only 2.6 percent, and ticket yield fell from 60.6 percent to 59.3 percent. Well, obviously, if you increase ticket prices and your revenue goes up less than that increase, your yield falls. But I find this a bit of a stalking horse, as it’s not clear to me just how published ticket prices impact what tickets actually sell for. I think the correct way to state this is that ticket prices rose 2.6 percent, since that’s the actual revenue gain that was recognized.

I also worry that the industry has managed to create in the mind of its customer the perception that the single-day lift-ticket price is what they will pay. Obviously, it’s not. It would be valuable to know how many single day, full price tickets are actually sold as a percentage of total skier visits. I hope our pricing structure doesn’t start to completely mimic the airlines.


Those Pesky Expenses

As we begin to talk about expenses, I want to remind you that operating profits were up only slightly, and operating margins actually fell. The report lays the increase in profitability largely at the feet of the decline in interest expense and depreciation. Performance at the largest resorts was much better than in the three other classes and, as the reports points out, skews the national numbers.

On the theory that a picture, or even a chart, is worth a thousand words, take a look at Table 7B, next page, “Expenditure Patterns—What a Dollar Pays For.”

There are 16 expense categories listed. In all but three, the largest resorts have expenses that, as a percentage of revenues, are below the average for the industry. Place a ruler under each category. Study the percentages of each expense for 2005-06 across the size categories. You might pay particular attention to direct labor (because it’s such a large dollar number) and to general and administrative expense (because of the percentage differences). Also look at cost of goods sold. By the time you get to the bottom of the list, you won’t be surprised to see that the largest resorts have a profit before tax percentage that’s more than three times as large as the next closest resort.

Next, scan the changes for each resort class between 2004-05 and 2005-06. What do you see? What I see is that in percentage terms, expenses at the largest resorts are overall trending down. In the others, I’d say they are trending up. This seems to be confirmed later in the report where it shows total expenses by skier visit. They were down 2.5 percent at the largest resorts. At the next largest resorts, they are up 0.9 percent. At the smaller mediums and smallest resorts, they are up 2.4 percent and 2.8 percent respectively.

Have I mentioned that it’s good to be big—in any consolidating industry?


Balance Sheet Ratios

I never quite know what to do with the balance sheet ratios in this industry. This is a seasonal, cash flow business, with balance sheet numbers changing in the normal course of a year. And it’s good to keep in mind that a sale/acquisition/big financing may have a significant impact on the numbers nationally. The impact of a single transaction will be even more pronounced when you break the resorts down by size or region. The report cautions us on that.

The net working capital numbers illustrate what I mean (Table 4B, opposite page). I am not prepared to believe that average working capital fell from $2.8 to $0.4 million at the largest resorts—in a good year with record visitors—just as a result of operations. The swings are dramatic in other size categories as well. The smallest resorts went from $174,000 to $416,000—a 139 percent swing. The small mediums went from $(731,000) to $381,000 and the large mediums from $(1,113,000) to $(532,000). While these working capital gyrations are going on, average working capital nationally fell from $381,000 to $254,000, or by 33 percent. That drives home to me how cautious you have to be using national numbers to reach any conclusions as a resort manager.

The current ratio managed to stay above one at 1.06 for a second consecutive year. Leverage grew from 40 to 44 percent and was higher at the two smaller sizes of resorts.

Debt to cash flow—what the report calls “health”—rose from 1.77 to 2.21 in 2005-06. The report calls this increase “slight,” but it’s 25 percent, so I’d have to disagree. The term is also a bit of a misnomer, as it’s unhealthy to have a higher ratio. At this point, I doubt anybody will be surprised when I report that the health indicator was lowest (best) at the largest resorts. Overall, it was 2.21. From smallest to largest resort size, health came in at 2.19, 2.89, 3.49 and 2.02, respectively.

There’s a lot more good data in the report, but my job is to write one article, not the whole magazine. Let’s move on to how you might make use of the report.


If I Were a Resort Manager...

The first thing I’d do (if I didn’t run one of the resorts in the largest group) is find a bottle of my favorite beverage and strap on an adult diaper. Because after I read that my expenses were going the wrong way and my pretax profit was only up (if it was; in many cases it wasn’t) because of declining interest expense and depreciation—in what the report characterizes as “another strong year financially”—I’d probably need both.

The second thing I would do, as I’ve said, is ignore the national numbers for decision-making. Next, I’d recognize that by the time the numbers get segmented by region and resort size, some of the sample sizes are too small to provide useful data.

So the fourth thing I’d do is call up RRC Associates and ask them to do a special report for me that compared my resort with those that I think are most like me. They do and have done that. I don’t know what it costs, but it sounds like a great idea.

While I was talking to them, I’d ask them why they don’t provide some means and standard deviations, rather than just averages, for certain key numbers. That would tell us something about the dispersion of the results around the means. We’ve already seen how important this can be when we compared the national results with the results by resort size.

To use a trivial example, if we have two values in a sample, say 1 and 100, the average is 50.5. In this case so is the mean. But the dispersion around that mean of the values—that is, the standard deviation—would be huge. You wouldn’t want to use the average value of 50.5 to make a decision if you knew that the two data points were 1 and 100. But if all you have is the average value, you can’t know that.

I’d also ask RRC to provide some five-year numbers. These two-year comparisons are just too easily influenced by a good or bad snow year. It should be possible for some clever statistical/analytical type to adjust for the quality of the season in different regions. Would it be as simple as scaling financial results based on the change in the length of the season? Probably not, but we can come up with something, I bet.

While I was waiting for my new report from RRC, I’d take a couple of the excellent charts in the report—maybe Critical Ski Area Ratios and the appropriate Summary of Expenditures by Department chart for my resort’s size—and fill in my own numbers to see how the comparison looked. And I’d factor any real estate impact back in.

When I’d looked at that comparison and gotten my nice, new, shiny report from RRC and studied it, I’d call up the people who run the resorts I’d had RRC give me data for and see if they wanted to get together for a couple of days and maybe talk about what it showed. Don’t call it a conference or a trade show; we all have too many of those to go to already. But I can imagine a lot of value in a smaller, focused meeting with resorts of similar size and circumstances. Trans­world’s Snowboard Industry Conference lost a lot of its value once it grew to 600 plus attendees. In its early days, as a smaller, more intimate gathering, a lot of good information and ideas were exchanged.


The Impact of Consolidation

Around 1996, I wrote that there wasn’t room for 250 snowboard companies in the industry. Shortly after, in what remains the fastest industry consolidation I’ve ever seen, the Japanese stopped prepaying for snowboards, and 200 of those brands disappeared more or less overnight.

Now, all industries are different. But they are also all the same. The resort industry consolidation has been going on for years and, the numbers above suggest, seems likely to continue even before we throw any kind of global warming impact into the mix. I know it won’t be as precipitous as in snowboarding. But it seems likely to change the industry in ways I’m sure I don’t understand yet.

In snowboarding, the death of a couple of hundred brands just meant that a few of the remaining companies moved in and made all the snowboards anybody could want—and more besides, as it turned out. Prices came down and all the equipment is basically great.

But when a resort goes out of business, nothing takes its place. Sure, its customers can and do go to another resort and maybe, with less competition, those other resorts even benefit. But participation gets less convenient and, I think, it gets harder to entice new participants and to make existing ones spend more days on the mountain.

Because resorts are tied to a place, the consolidation is different from an industry that makes a thing. The product doesn’t go to the customer. With resorts it’s the other way around. In most industries, consolidation means broader distribution of the product.

The numbers in this report say that consolidation is likely to continue. As a manager, you can’t look at this report’s first summary page, say “Hey! We had a strong season financially!” and throw a party. In the first place, it looks to me like a lot of resorts didn’t. In the second, lower interest expense and depreciation, though a good thing, will not make the industry grow.

Smaller resorts are taking too much risk for the financial return they are achieving. I suppose our goal as an industry is to try and help resorts that are going to be “consolidated” to be bought rather than just closed.

If you want to avoid either of those fates, your goal as a resort manager is to figure out what makes your resort unique and communicate it to customers. Winter resorts have a special and exciting product to sell that’s damn hard to duplicate. At the end of the day, that’s what we have to work with.


To butt heads or otherwise communicate with consultant, writer, and investor Jeff Harbaugh, know that he maintains a presence at www.jeffharbaugh.com.



The Guest Editor’s Take
The winter sports market, despite last year’s record national number, remains highly competitive. When it comes to the financial performance of operating a winter resort, I don’t think it’s much of a surprise that financial efficiencies improve with volume. How do those of us that aren’t 800 pound gorillas survive? More and more, resorts target every niche market they can, from gold coast real estate investors to park rats and powder hounds, with different mediums and messages. But as most savvy resort execs already know, the key to maximizing financial efficiencies is flexibility. In our ever-changing weather environment, the ability to react quickly to the weather, manage variable labor expenses and leverage promotional opportunities is often the difference between financial success and failure. You have to make the most of the current hand you’ve been dealt. Knowing who you and your clientele are helps in knowing where to cut and where to spare. The management challenge becomes a war of tactical cost-cutting and creative promotion. But even the best management can’t fully offset the impact of bad weather—you can’t afford to react too quickly to what could be a short-term weather issue.

A case in point, this past winter the Tahoe region struggled with the driest January on record, followed by record high temperatures in March. Visitation plummeted throughout the region. No amount of marketing could drive resort attendance with 80-plus degree temperatures in the Central Valley and the Bay area. The only option was to reduce labor and overhead expenses while doing everything possible to maintain acceptable service levels and pound the free press with positive and targeted messages.

A final thought: While good times can provide the needed capital for lifts and other investments that contribute to long-term bottom-line growth, these can also strain the best of operations in a downturn like we’re currently experiencing.

—Greg Murtha