Vail Resorts Was Struggling, Now It Is In A Perfect Storm
- When I covered Vail earlier this year, I detailed its rising labor costs and growing difficulties attracting new customers.
- Vail Resorts has aggressively pursued growth through leverage and margin expansion which is now starting to backfire.
- COVID made a bad situation worse by abruptly ending the spring ski season and likely setting the scene for poor 2021 pre-sales.
- Most skiing profits come from older customers who will likely avoid making winter travel plans and are cutting discretionary spending.
- Vail has made significant defensive measures to maintain liquidity, but its mountain of debt and negative working capital remains extreme.
- Looking for more stock ideas like this one? Get them exclusively at Core-Satellite Dossier. Get started today »
In January I wrote an in-depth short article on Vail Resorts (NYSE:MTN) called "An Avalanche Is Coming For Vail Resorts As Labor Costs And Economic Risks Rise". The core of my short thesis is that the company is expensive, struggling with growing revenue, and is facing rising labor costs. Even more, it has very high leverage and has a high chance of needing to cut its dividend.
My price target range for the company (when it was worth $250) was between $75-$150. The $150 price reflected the company's fair-value given no economic recession, only a rise in labor costs and a drop in its growth expectations. The $75 target reflects a recession-outcome based on a decline in margins, valuation, and a realization of its potential debt refinancing issues.
Of course, I did not adjust for the impact of a global economy-halting pandemic like COVID. The virus not only spurred a recession but also rapidly ended the 2020 winter sports season. It forced the company to furlough the majority of its part-time employees, cut the pay of year-round employees, cut its cash dividend for two quarters, and reduce capital expenditures.
If the virus manages to last until 2021 as an increasing number believe, Vail will struggle to hire seasonal workers as they often live in dorm-like housing. Even more, if the economy is still in a recession by then (which I believe is likely), far fewer will likely be willing to pay the increasingly expensive entrance fees (let alone hotels, restaurants, and other higher-margin products). This was already a slow-growing problem, but now it is a much more immediate one.
As mentioned in their COVID response, many season pass holders were very frustrated to not be able to receive a refund on the shortened season. It would be lethal for the company to do so, but this will undoubtedly harm sales and customer loyalty going into the 2021 winter season.
Frankly, the present situation for Vail is worse than my past expectations. As such, a $75 price target seems like the most likely scenario for the company.
Vail Resort's Liquidity Preservation Strategy
The company has gone into a defensive mode which will help it with liquidity this year. Between the CapEx cuts and dividend cuts, the company is expected to improve cash flow by around $220-$225M this year. That said, it will still likely see significant losses due to its high overhead. Further, the company has furloughed the majority of its part-time employees for a month or more (likely more). It also implemented a six-month salary cut for year-round employees with higher cuts for higher-paid employees.
The company's summer season came essentially a month early. During a normal off-season, Vail usually sees around $100-$125M in operating expenses, essentially no gross profit, and a 100M net loss:
The impact of COVID will likely add on about $50M of extra losses on the next quarterly report. This is estimated by simply extrapolated the 1-2 months of sales losses due to the virus. Given the dividend cut, this is a loss the company can absorb and it is quite possible that labor and salary cuts will largely offset the sales losses.
However, I believe the longer-lasting impacts will be more problematic. Some salaried employees will likely leave due to salary cuts. Part-time hiring will likely be more difficult going into the new season. Most of all, a cut to most people's incomes and financial stability will likely cause a significant drop in the 2021-season pass sales.
Further, Vail has deeply negative working capital due to its successive dividend hikes. It also has a mountain of liabilities and cannot stability pay if its profit margins return to pre-2015 levels as I suspect.
On a TTM basis, the company has a "Debt/EBITDA" of 2.68X which is manageable. However, due to new pressures and those explained in my previous article (rising labor costs, stalling sales volume, lower secondary revenues) EBITDA margins are likely to fall back down to 20% or lower. See margins below:
Personally, I do not believe the company's efforts to boost margins in 2015 are sustainable. They have increased labor issues and have priced-out most middle-class level would-be customers. In particular, those under 40 who will they will rely on upon after baby-boomers skiing days are over (As a generalization, very soon). Add on the jarring financial impact of a virus, and the road to lower (or "normal") margins is much shorter.
According to the company's last 10-K, they have strict covenants on some of their financial debt. This includes "interest margins may fluctuate based upon the ratio of our Net Funded Debt to Adjusted EBITDA on a TTM basis" (10-K Pg. 30). This does put the company in jeopardy if its margins fall as much as I suspect. Vail will be unable to take on new debt and may be forced to sell assets. Combine this with its negative working capital, and liquidity problems seem likely to occur by year-end.
The Bottom Line
Vail was in a difficult position going into 2020 and it has now become much worse. The company is defensively positioning which will likely help it this quarter, but if the 2021 season passes sales decline as much as I expect (due to lasting COVID travel avoidance and lower discretionary spending) it will have deeply negative cash flow by year-end.
The company has $45M in minimum lease payments this year as well as $63M in current maturities. However, it has a $1.2B term loan due in 2024. This is still a way away, but it is unlikely the company will be able to refinance on strong terms. Thus, it will need to not only get out of its working capital deficit but also raise significant cash. This may mean the company's dividend will remain in jeopardy for some time and asset sales are possible.
Obviously, this is a difficult situation to predict, but it is clear that MTN should have a lower TTM "P/E" than 21X. Its valuation continues to price in growth that is highly unlikely. Even more, it fails to account for the possibility of a drastic drop in EBITDA that would raise its leverage ratio even more. I am bearish on the company with a price target of $75 per share. If/once we hit that level, I'll provide another update to see if the company is headed even lower or has made a bottom.
Interested In More Tactical Ideas?
My fellow contributor BOOX research and I run the Core-Satellite Dossier here on Seeking Alpha. The marketplace service provides an array of in-depth portfolios designed using the academically-backed Core-Satellite approach. This involves creating a base long-term portfolio (the core) and generating alpha using unique well-researched tactical trades (the satellite).
As an added benefit, we're allowing each new member one exclusive pick where they can have us provide in-depth research on any company or ETF they'd like. You can learn about what we can do for you here.
This article was written by
Analyst’s Disclosure: I am/we are short MTN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.