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SeaWorld: The Silence Is Deafening

|About: SeaWorld Entertainment, Inc. (SEAS), Includes: DIS
Summary

SeaWorld management has stuck with a simple, repeated message that lacks the detail necessary for investors to understand and appreciate the changes made at the company.

It appears, SeaWorld’s new CEO is behind the continued and enhanced use of last Summer’s dynamic promotional strategies to drive attendance.

A large majority owner recently doubled their position in SeaWorld Entertainment, Inc to 34.5%.

It has been over 18 months since former CEO Joel Manby presented SeaWorld Entertainment’s standard investment deck at the ICR Conference. Since then the company hasn’t participated in any investor conferences and has held six (6) quarterly conference calls. During these calls management uses the same script of canned talking points. Phrases such as ‘marketing and communication initiatives’ and ‘new rides and attractions’ are the go to verbiage. This is followed by the analyst Q&A part of the call where management adeptly dodges giving direct answers without causing offense. At the completion of the call the listener is left with a feeling of déjà vu. Why even bother having the conference calls? The only sliver of real insight on any of the calls was last August when the company issued an EBITDA target for 2020 with underlying assumptions.

In our opinion, this company is past the point of operating in crisis management mode and should start to give more details to help investors understand the future prospects of the business. We applaud the execution of the turnaround, but it seems as if management and the Board of Directors do not understand that most investors view SeaWorld as the JC Penny of the theme park industry. Until it’s explained to investors why that is not the case, the short interest will remain artificially high and the only way the stock will ever reach fair value is through buybacks or a buyout that will eventually force short sellers to give up.

As investors, we don’t mind looking for information. We will share a sample of what we’ve gathered about the business, management and the Board. In order to provide clarity on our analysis, we view annual passes and similar tickets as something like a Costco membership. When we use the ‘$ per month’ metric, we simply mean the total cost of the pass divided by the amount of months in the pass.

SeaWorld has used the most aggressive and consistent pricing and promotional strategy we have seen during the recent peak Summer time period. The market either views the sales and promotions as desperation or they aren’t paying attention to the details. It’s difficult to come to conclusions without much information, but judging by his background, we believe the new CEO was brought in to execute these types of promotions and to provide a level of dynamic thinking that the company has lacked in the past. We don’t panic when we see a blackout period lifted because this seems to be the way the industry is now using it’s seasonal passholders to manage attendance. In 2018, Disney lifted the blackout on silver passholders for the Summer (Disney kept the blackout on those same passes this Summer, but ran other promotions for Florida residents). SeaWorld, with the new tiered annual pass structure, now has the same ability to better manage crowds at peak times. The company cannot sit around and hope that enough people just show up and spend $100 on same day tickets - it’s fantasy-land type thinking.

Below we will focus on pricing and promotions at SeaWorld Orlando, which could be argued is the company’s most important park, however, we have noticed similar execution across their entire portfolio of parks.

Last year, Seaworld Orlando only ran two sales. The first sale ran for five (5) days in late May, was offered to Florida residents only and had a must visit date of July 1. Then in the last week of July, they ran a Christmas in July promotion.

What is most encouraging is that this year's initial early ‘flash’ Summer sale was open to ANY visitor and ticket prices were higher than the previous year. SeaWorld Orlando single day tickets and SeaWorld + Aquatica tickets were ~15% and ~31% higher, respectively, with a must visit date of June 23. Annual pass* prices were ~7% higher. This same sale was then extended for an extra week only changing the must visit date from June 23 to July 14.

*For comparison, we are using a 2019 Silver Annual Pass vs the 2018 Annual Pass (tiered annual passes introduced in late 2018)

Next, they ran a 4th of July Sale. The promotion was two (2) park single day tickets for $99.99. It also included an annual pass offer with three (3) extra months for free. The 15-month Silver Level Pass was priced at $182 or $12.13/month over 15 months compared to the earlier flash sale which had a Silver Level Pass at $127 or $10.58/month for 12 months. The deals and promotions for this sale apparently caused the ticketing website to crash on July 4th due to ‘a high volume of traffic’. The company extended the sale for those who couldn’t execute their purchases on the website.

As we are writing this, the current sale at the end of the peak Summer period is single day tickets for $64.99, which is ~10% higher than last year's Christmas in July Sale. Additionally, they reintroduced the Fun Card for $79.99, which is only offered to Florida residents, includes blackout dates and is valid until the end of 2019. Since there are only 5 ½ months remaining this year, the Fun Card is $14.54/month with no extra benefits such as free parking. When compared to the entry level Bronze annual pass at $131.88 or $10.99/month, which includes ½ off parking and 10% off in-park spending, is the Fun Card offered out of some sort of desperation? Or is it a well-thought-out promotion toward the end of peak Summer in order to fill a spot in the lineup of offerings? We believe it's the latter.

Perhaps some of the promotions were in direct response to the offers of some competitors. We tend to think that management decided that last Summer's sales were effective, so this year they rolled them out the entire Summer to drive attendance and then upsell in-park add-ons, food and beverage. This strategy is in line with management “focusing on driving total revenue and not admission per-caps.” It would be fair to say that if the initial early flash sale was a failure in comparison to last year, the company wouldn’t have extended and continued their slate of sales and promotions. The fact that they increased prices as this Summer went along, in our view, is a positive indication that there wasn’t an absence of demand. Another positive fact is that the Orlando International Airport reported record passengers with a forecasted 4.3% increase from the previous year (June 29 to July 4). Also, from monitoring social media activity and observing high ride wait times at SeaWorld Orlando and Busch Gardens parks, it gives us even more confidence that it was a successful strategy.

In addition, we are impressed with the transformation in the functionality and layout of the website this year. The process to buy tickets, passes and upgrade your visit with ‘quick queue’ skip the line passes, the all-day dining and animal tours is much easier than in the past.

With all the variables that we don’t know, it’s difficult to model the effects of this year’s sales and promotions. However, what we do know is when you make these types of changes, the expected variance of the end result is higher (good or bad).

We believe that the market is not appreciating the potential upside in the results for 2019 and beyond as the business is streamlined and more rides and attractions come online.

Now given all the positive developments and changes since early 2018, we are left to wonder why management and the Board has a ‘loose lips sink ships’ policy.

For the sake of brevity, a better use of time is to analyze the actions of a group who has complete and total information about the business. That group is Hill Path Capital Partners who came into the year with one (1) Board seat and ~16% ownership of the company and now has three (3) board seats and a 34.5% stake. It’s easier to show the progression of how things developed using a timeline.

October-December 2018

  • SeaWorld repurchases $98 million in stock in the open market

December 28, 2018

  • Hill Path Capital established second fund - Hill Path Capital Partners II

February 28, 2019

  • the Board authorizes $250 million for future buybacks

April 16, 2019

  • Reported that Hill Path Capital raised $359 million for Hill Path Capital Partners II
  • SeaWorld announces Q1 2019 earnings call for May 7th

May 6, 2019

  • SeaWorld files Form 8-K & Form 3 - reports Pacific Alliance Group becoming owner of Zhonghong shares

May 20, 2019

  • a Form S3 is filed for Pacific Alliance Group shares

May 28, 2019

  • Hill Path Capital buys ~$353 million in stock from Pacific Alliance Group, which takes ownership up to 34.5%
  • Hill Path Capital receives two more Board seats to bring their total to three (names one affiliated Director but does not name the Independent Director)
  • SeaWorld purchases ~$150 million in stock from Pacfic Alliance Group

June 12, 2019

  • Annual Shareholder Meeting - Hill Path Capital’s Independent Director still not appointed

July 17, 2019

  • SeaWorld announces Q2 2019 earnings call for August 6th

July 19, 2019

  • Scott Ross of Hill Path Capital appointed Chairman of the Board and fills 3rd Board Seat with Charles Koppelman

The Q4 2018 stock repurchases surprised us because of the imminent foreclosure of the Zhonghong shares to three (3) separate lenders, who we weren’t sure would want to hold the stock. The buyback made it probable that some type of transaction was going to happen because it was highly unlikely the company was buying stock in the open market knowing the Zhonghong shares could soon become a problem. (the buyback capital could've been used to buy some of foreclosed shares on open market)

From October 2018 - May 2019 SeaWorld retired ~10% of the shares outstanding and Hill Path Capital was quietly able to secure a controlling stake in the company. How long this recent Hill Path Capital transaction has been planned is anyone’s guess but given the timeline of events, we are led to believe that it has been in the works for quite some time. One would think the market would be giving this stock a closer look. This is an investor who has total and complete information about the business and they purchased ~$353 million in stock, more than doubling their ownership at a time when the Board has a no investor roadshow policy and abruptly cancelled a scheduled Q&A session with an analyst shortly after the Hill Path Capital transaction. There are some cases when an investor doesn’t mind their stock price trading lower or below fair value - generally it’s when they want to buy more.

The Board and management is mistaken if they think that investors are going to dig really deep and put the pieces together to understand the value in this business. Due to the lack of information provided, we can understand why there isn't a stronger shareholder base - outside of Hill Path Capital.

On June 12th during the annual shareholder meeting, we asked if the company would be updating the 2020 guidance and didn’t get a response. We think it’s probable that the company should have a lot of positive talking points on August 6th. If so, we will hope to see revised guidance and perhaps some details that will highlight this company’s transformation and future growth prospects.

Disclosure: I am/we are long SEAS.

Additional disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

This article is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. This is not an advertisement. Although the data in this article is taken from sources believed to be reliable, no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Thomas J. Segedin or Segedin Capital Management, LLC or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.