With the release of NSAA’s annual Economic Analysis report for 2001-02, we turned to Chris Brink, a former senior executive for American Skiing Company, to give SAM readers his insights into the new numbers. Chris took our assignment one step further and here presents some of the data in the “top-down” format of the financial statements that are familiar to most executives, rather than in the dense and somewhat impenetrable “bottom-up” format used by NSAA and RRC Associates, the report’s producers. This is the first of a two-part series by Brink designed to enhance the practical value of this highly informative report for all levels of the industry.
NSAA’s annual Economic Analysis Report is an extremely useful tool. Ski areas can benchmark financial performance both nationally and against resorts of similar size and in their regions. They can even benchmark the financial performance of individual profit centers. It’s an ambitious and valuable undertaking which produces a performance standard for the industry. RRC does a great job pulling the information together.
Unfortunately, the report is also the world’s most effective soporific. Plow through three pages, and you nod right off. That’s because the data is presented in different forms and methods, which are applied to five regions and five size groupings.
Simplifying the report would help. It’s time to change how the data in the Economic Analysis is presented, and this article identifies how that could work.
The Economic Analysis could be even more useful if it analyzed the health of the industry over time. Currently, the report only compares year-over-year performance, and it doesn’t point out long-term industry trends. In the next issue of SAM, we’ll show how that would work by presenting a five-year analysis.
Presentation of the Report
For starters, the report should present the numbers first, then a written summary of conclusions. Most executives want to see the numbers before someone else attempts to explain them. Today, each section starts with a written summary of the data. This makes the Report a bottom-up analysis, made more difficult by the fact that the narrative summaries tend to be extensive, discussing five regions and five categories by size. You can’t see the forest for the trees—and it’s a really big forest.
As for the data itself, it’s presented in several different forms that do not relate to one another. For example: “What a Dollar Pays For” is presented differently from “Expenditures by Department.” We’re presented with “Expenses by Skier Day” and “Expense as a Percentage of Total Expenses” in separate sections. We humans aren’t wired to absorb this much information in so many different ways.
A simplified and standardized report would be easier to understand and more useful to the average manager. The Economic Analysis is a financial report, and should be presented as such. After all, ski area execs are familiar with financial statements. Present it as a top-down analysis, with a summary of the key financial data, and then move into more detailed analysis of key areas, such as Revenue, Expenses, Balance Sheet and Key Ratios. It would be helpful to start with the industry as a whole, then present results in matching format by region. Comparison of resorts by size could be a tertiary analysis, used for benchmarking purposes only.
Most important, a standard financial statement format should be used. This will ensure the information is presented in context and eliminate redundancy.
To try to implement this approach here would be to recreate the Report. But as an example, consider the following tables and analysis, which use a profit center financial statement approach. In this more useful form, instead of the information putting you to sleep, it might keep you up at night.
By presenting the data in a standardized format, it’s easy and comparatively painless to gain a real understanding of year-over-year performance. But that’s only part of it. To be truly useful the report needs to show results over a longer period of time, as discussed earlier. That’s especially important in a weather-affected business like skiing, which can experience an entirely different set of operating conditions each year. Again, look for the five-year financial trends in the next issue.
Industry Average — Financial Results 2001-2002
Overview — The average resort realized 301,176 skier days, down by 6.7% from the year before. However, Revenue only fell by 2.2%, due to a decrease in discounting and increases in ticket prices. Total expenses were flat with the previous year’s levels, but profits plunged by 37%. Pre-tax Return on Equity is an anemic 3.1%.
Revenue Analysis — Revenue is the key driver of financial results, directly affecting the performance of all operations. With skier days down, the industry generated revenue through price increases and the elimination of discounting.
- Skier days were down by 6.68%, but combined revenues were down only 2.2% due to increases in Yield.
- Lift Ticket Revenue was only down 2.8%, due to an increase in Skier Day Yield from $27.15 to $28.26 or 4.1%. This Skier Day Yield increase of 4.1% came from an increase in Average Lift Ticket Price of 2.86% and a decrease in discounting of 1.24%.
- Other Operation Revenue was down only 1%, due to an increase in Other Revenue Skier Day Yield from $29.74 to $31.36, or 5.4%.
- Areas particularly hard hit in revenue were F&B, Retail and Lodging. F&B was down 4.5%; Retail down 13.2%; Lodging down 14.2%.
These are usually the first profit centers to feel the pinch. Since season passholders usually buy early in the season and their purchases are not affected by weather, skier days from this source are generally constant. This means paid skier days were probably down more than 6.68%. (Assume that a normal year is 100 skier days, and that season passes make up about 35 of those days, and paid days 65. In a below-normal year, if season passes stay the same and total skier days are down, the 6.68% drop comes mostly from paid days. That means that paid days probably dropped nearly 10% last year, and would total less than 60% of total visits.) Paid-day skiers buy lodging. Paid-day skiers buy retail. In addition, retail and lodging are subject to discounting in a down year, to attract guests or dump inventory.
- The lone bright spot was the increase in rental revenue. This indicates a continuing trend of skiers renting equipment vs. buying. However, rental revenue only makes up 4.7% of Gross Income.
- Other operations now make up over 52% of gross revenue.
Expense Analysis
Expense Analysis. The industry was relatively good at keeping direct expenses in line with decreases in volume. The industry held expenses below last year’s levels by 3.6%, as volume declined by 6.68% and revenue by 2.2%. This allowed the Gross Margin to actually improve slightly in 2002. Other good news: interest rate declines allowed resorts to pay less interest in 2002.
On the downside, G&A continued its rapid growth, even in a down year, with an increase of 5.9%. Property Operations continue to be a major drag on Profitability with a negative gross margin of over $500,000.
Profitability. The profitability of the industry declined significantly. EBITDA continues to suffer. EBITDA was only 19.2%, down 11% from the prior year. Pre-Tax profit Margins declined 36.8%, to 3% of Revenue. Both these measures continue to be anemic.
Gross Margins. A continued investment in Other Operations Revenue centers has reduced the profitability of the industry. Not all profit centers are created equal. Mountain Operations achieves 58% margins, while Other Operations contribute just 28.8%. An incremental dollar in mountain operations contributes twice the margin of a dollar in Other Operations.
How should a manager analyze his operations? Benchmark his performance against the industry. First, look to see if his percentage of revenue is as good as the average. For example, if he is getting only 3% of revenue from lessons and the industry is getting 9.6%, he has a problem—and a potential opportunity. Can he improve the percentage? Possibly. His clientele may be different from the average, and that could explain the difference. Joe Sixpack is going to provide a different return from Vail’s doctors and lawyers for lessons. Second, look at his margins. Is he doing the same percentage or better compared to the industry average? If not he may not be controlling labor and will need to create more efficiency in that area.
The gross margin story also means that the goal should be to get more skiers and riders on the slopes, not to get more Other Operations revenue from whoever shows up. Profit growth is only going to come from putting more skiers on the slopes.
The decline in recent years in profitability can be traced, to some degree, to the investment in Other Operations that have a lower Gross Margin. Other Operations have grown to represent 52% of gross Revenue.
Property Operations is clearly the biggest drag on Other Operations. The definition of this line item is broad—the cost and maintenance of buildings. What seems to be happening is that the retail and village components that resorts are adding have carrying and maintenance costs that are not fully paying their way. We’ll look into this more in our five-year analysis in the next issue.
Chris Brink, former Senior Vice President of marketing and sales at American Skiing Company, is President of White Fire Resorts, specializing in resort acquisition and in providing operational, real estate and financial consulting to resorts. He has an MBA from Cornell University.
