I swear I have to be the only person in the industry who has actually read this report page by page. Well, two of us. I made my editor, Rick Kahl, read it, too. It was my revenge for letting him talk me into doing this for a second straight year. As usual, the reward for slogging through it is a lot of good information, some questions and, I hope, some insights into the industry.


Good News and Bad

Though it doesn’t quite come right out and say it, the report validates the success of the strategy that we’ve been pursuing as an industry for maybe 10 years. All the money we’ve spent on lifts, lodges and terrain parks—not to mention stuff like putting up signs to the rest rooms and simplifying the rental and lesson process—is paying off. We’ve improved our competitive positioning. The 105 resorts in the survey reported 55.1 million skier visits. That’s down 6.5% from the record 58.9 million in 2005-06, but we’ve had 57-plus million visits in five of the previous six years. Remember when we were struggling around 50 million?

Even with the decline in visits and a season five days shorter than in 2005-06, operating profit as a percent of revenue grew from 24.4 to 24.8 percent. The peak was 25.1 percent in 2004-05. Profit before tax grew from 12.1 to 12.3 percent. And total revenue per skier visit was up a whopping 10.3 percent to $74.94. Lift ticket revenue grew 9 percent to $34.52, and non ticket revenue rose to $40.42, an 11.4 percent increase.

Before I become positively giddy here, there’s a little perspective I want to give you. It’s important we realize what this report is and isn’t.

This is a report on the performance of 105 mostly larger areas. “Clearly,” the report states, “this report as a whole contains more large resorts and fewer small areas than the overall distribution of U.S. ski areas…”

That’s putting it mildly. The average annual skier/boarder visits for the 105 areas that participated in the survey was 307,571. As the report points out, the national average is about 124,000 visits. Areas that participated in the survey represent 32.3 million visits, or 58.6 percent of total annual visits. And the 29 largest participating resorts, averaging 680,793 visits each, account for 19.7 million visits by themselves. That’s 35.8 percent of total visits in the U.S., and 61 percent of the visits represented in the report.

More perspective: NSAA’s website says there are 485 areas in the United States (down from 720 in 1984-85). Of these, 326 are NSAA members and, according to NSAA, account for 90 percent of annual visits. Using my trusty Hewlett Packard financial calculator I conclude that 159 areas in the U.S. do not belong to NSAA, and that in the 2006-07 season, they hosted an estimated 6.12 million visits, or 38,490 each.

RRC Associates (which conducted the survey) also included in one of the appendices the 10-page survey instrument, which requires quite a bit of detailed information. Looking at it, I’m thinking that if you don’t have the systems and personnel to conveniently complete it, you are less likely to respond.

Okay, I’ll just come out and say it. For all the good information this report contains, it is simply not representative of the industry as a whole. I suspect most of us already knew that, but it helps to really understand how strong the bias towards big resorts is.

With that little piece of perspective as a foundation for the discussion, let’s move on.


The Five Year Table/Results by Size

I love the Five-Year Financial Data table. I’d love it even more if the same data could be broken down by resort size. Maybe next year.

The chart shows that since the 2002-03 season, profit before tax has increased at an annual rate of 13.3 percent. And we do that how? Well, by increasing gross revenues 4.3 percent a year while operating expense grows by only 3.9 percent a year. But that leaves operating profit (EBITDA) only increasing by 5.6 percent a year. It takes a small annual increase in depreciation (0.6 percent), a 3 percent annual decline in operating lease payments, and interest expense going up only 2.4 percent annually to get us to a 13.3 percent increase in pretax profit.

“It is clear,” according to the report, “that the industry as a whole has shown substantial improvement during the past five years.”

By now you know I don’t think this performance represents the industry. And while we’re at it, what does “substantial” mean? Our pretax profits were up 66.4 percent over these five years. If you’d put your money in a NASDAQ index fund on January 1, 2003 and left it there until December 31, 2007, you’d be up 80 percent with a lot less risk. So it may or not be substantial, but it’s not all that impressive from a strictly financial point of view.

One more thing about the five-year table before we move on: of the 66.4 percent five-year increase in pretax profits, 38.3 percent occurred between the 2003-04 and 2004-05 seasons.

Last year, as one or two of you may recall, we observed that the success of the large resorts overshadowed and obfuscated the financial performance of the other size categories. From the discussion above, we know that’s still true, but how big are the differences this year?

Huge. To see for yourself, check out the table I’ve created below.

I guess I’m supposed to analyze this and say something sage about it. But you can read as well as I can. The good news is largely clustered in the Super Size Me category. We’re getting more visitors, and they are giving us more money each time they come, but the bottom line benefits are accruing almost exclusively to the largest resorts. Unless, of course, the picture is different for the 78 percent of resorts in the country who don’t participate in the survey.

I wonder what the profit after tax numbers look like? They are lower than the pretax, of course. Boy, returns like this really make you wonder why some of these resorts are in business. But as we’ve seen above, the answer seems to be that a lot fewer are. Perhaps they are making it up in real estate, which isn’t tracked in this report.

Before moving on to the balance sheet ratios, I want to focus your attention on a table in the appendix called Average Ski Area Characteristics By Profitability. It divides all the participating areas into top half profit, bottom half profit, and loss. It shows that 34 of the resorts in the survey lost money, up from 32 last year.

The table doesn’t include financial data. But it does have some interesting information on resort sizes and visits. To nobody’s surprise, the resorts in the top half of profits are the largest areas in terms of average acres, visits, capacity and employees. The bottom half profit areas are smaller. For example, the top half has average skiable/boardable acres of 1,553, and visits of almost 530,000. The bottom half profit areas have 420 acres, and average visits of 155,000.

But the really interesting thing is that the 34 areas with losses are in between those in the top and bottom halves of profit in terms of acres, visits, and employees. They have, for example, 904 acres and average visits of 229,000. Some wise person once said that it’s bad, in any industry, to be “stuck in the middle.” Feels like we’ve got a bunch of resorts with physical plants more like large resorts, but revenue opportunities closer to that of the smaller ones. That’s a bad place to be. (For more discussion of this, check out RRC’s sessions at the winter trade fairs; the presentations are available on the NSAA website.—Ed.)

You know what I’d really like to see? Some numbers on maybe a dozen of those small resorts that aren’t members of NSAA and average something like 35,000 visitors each. I wonder if we wouldn’t find them doing just fine.

I don’t usually spend any time focused on the results by region, but as long as I’ve included it in the subtitle, I guess I should point out that resorts in the Rockies had a pretax profit (20.5 percent) that blew all the other regions away. The Midwest, at 5.6 percent, was the next largest.


Balance Sheet and Cash Flow

I have no idea what to make of the net working capital and current ratio numbers (all numbers in thousands, losses in parentheses). Net Working Capital grew from $235 to $2,157 for all resorts. For small resorts, it declined from $376 to ($36). For mediums, it grew from $324 to $1,148, and for larges, fell from $272 to ($1,189). The Super Size Me group went from ($20) to $7,236. The current ratio numbers jumped all over the place, too, but I won’t bore you with the specifics.

Maybe some balance sheet dates changed. No doubt some deals impact this. These numbers in businesses this seasonal just aren’t worth much. RRC acknowledges this when they state, “Some of these ratios change throughout the year, and the situation as of fiscal year end might not typically be consistently the case throughout the operating cycle of the year.”

Some of the other ratios based on the balance sheet (see Table 2, below) give us a better picture of what’s going on, and are consistent with the trends we saw in Table I.

Health is how many years it would take to retire long-term debt using current cash flow (defined as profit before tax plus depreciation and amortization). Lower is better. GFA stands for gross fixed assets.

Anybody notice a consistent trend here? The Super Size Me guys are way ahead, and their results bias the overall result. And then there’s the large resorts which look, to continue the analysis above, suspiciously like they might be “caught in the middle,” showing the worst overall performance of the four size categories.

In talking about the Health ratio, RRC notes that “the cash flow calculation is approximate” because it doesn’t take into account changes in working capital accounts. That’s all they say about it, but I’m sure they’d share my point of view that this business, seasonal as it is, is all about cash flow.

I wish, somehow, the report could provide more comparative cash flow information even at the expense of balance sheet data—though of course cash flow and balance sheet are two sides of the same coin. I’d start by collecting the working capital account data and seeing what that showed you. But the more data you try to collect, and the more detail you want, the harder it is to get. It’s a major success that RRC gets over 100 areas to return good data.


Spending Patterns and Gross Margin

The report starts this part of its analysis by noting that across regions and sizes, “resort groupings that improved profit margins were generally able to reduce depreciation and insurance expenses as a percentage of revenue, while those resort groups that saw a decline in pre-tax profit tended to experience a proportionate increase in interest and amortization (though they reduced payroll taxes and general and administrative expenses).”

I’d like it better if improved profitability was the result of resorts being run more efficiently.

The report goes on, “The primary expenses that declined in gross terms were insurance, depreciation and payroll taxes. Interest was the primary expense line item to increase compared to last year, with cost of goods, direct labor, and other direct expenses also growing in actual dollar amounts. Other expense items were flat or relatively flat as a proportion of total revenue.”

Once again, I see more non-operating items in here than I’d like. I’m also wondering how payroll taxes go down when direct labor increases. The increase in interest expense was almost entirely the result of an increase in the Pacific West region from $525,000 to $1,576,000 due to some transactions that occurred there. Other regions were down or up only slightly.

I hate to be predictable, but once again when you look at cost categories as a percentage of total expense, you see the advantage of the largest resorts. They are below the average in everything but payroll taxes, land use fees, depreciation, amortization and interest. Payroll taxes, at 5.3 percent of total expense overall, is by far the largest of those categories, and the largest resorts only exceed that by 0.1 percent. Their advantages are particularly notable in Other Direct Expense and General and Administrative expense. Other Direct is 14.5 percent of cost overall, but only 12.9 percent for the largest areas. G & A averages 8.5 percent, but for the Super group is only 7 percent. And remember that the largest resorts are part of the average and pull it up. If you just compare the largest resorts to the other sizes, the advantage is even more notable.

RRC uses a lot of space, time, and effort to produce the Summary of Expenditures by Department. Their reward for all their hard work is going to be to hear me bitch and moan about it. There’s good information in here, but it’s complex and hard to understand. They calculate something they call gross margin, but especially when they do it in percentage terms, they are really calculating contribution or maybe pretax margins.

A gross margin for a specific product is revenue less direct costs. Some of their calculations include marketing and G & A expense. So the first thing is they should stop calling it gross margin. Next, they calculate what they call gross margins for different pieces of what they call mountain operations. There’s a gross margin for lift operations, for snow play, for vehicle maintenance, and for others. Some of these have no revenue obviously.

There are also some allocation issues. For example, the snowplay category shows no cost of goods, but I would think at a minimum the cost of buying tubes has to be in there. They’ve also broken out, somehow, electric power and report it as $3 on average. I could go on with more examples, but I’m getting to the end of this article, and I’m starting to get cranky.

Why don’t they just resolve this by recognizing Mountain Operations as the product with revenue from Ticket Sales and Snowplay? Everything else is part of the cost of goods sold of Mountain Operations, isn’t it? They would simplify the presentation, make it more useful and consistent with typical financial presentation, and maybe even simplify the data collection process. That would make everybody happy. Well, me, anyway.

To end on a positive note, I’m happy to see this year that RRC has offered more analysis, explanation and judgment on what things mean and why they happen. It’s still sort of buried, but I’m very happy to see it. Given the amount of time they spend staring at these numbers, they are likely to see relationships and trends none of us will ever spot. I know the report is just supposed to be the presentation of data, but I’d sure like to see them pull their insights, speculations and analysis out of the depth of the report and put it in a separate section. Or in a separate report. It would make the Economic Analysis more useful and make us think about some important issues. If we don’t do that, what’s the point of the report anyway?

The headline is some strategic success and financial improvement. But the largest resorts simply overwhelm everybody else. Overall, 34 of 105 are losing money, and a bunch (maybe the same group) are caught in the middle. Looking at some of the figures makes it seem clear why the number of areas has declined by a third since 1984-85.

We’re doing a lot right, but it’s no time to have a big party and sit on our butts (actually, I’m all for the party, but no butt sitting). We have to keep pushing. People will pay for a superior product. Make that your mantra. We can’t always count on snow, but there’s always something else you can do to improve the customer’s experience. And if you can hold down costs at the same time, good things will happen.

Credit Crunch Coming?
Though not exactly related to the Economic Analysis, a few words about the credit and banking situation might be useful. The “subprime crisis” goes beyond mortgages. If you’re following it beyond the headlines, you’ve read about stuff like derivatives, counter party risk, leverage, and bond insurers. To make a long story short, the credit markets are somewhat frozen, the bad news is by no means all on the table yet, and banks are scrambling for capital and tightening lending standards—for everyone.

I had a point of view on how this might impact the resort industry, but thought I’d better talk to some people who were dealing with it up close and personal. Turns out we agree: The system doesn’t have a liquidity problem, it has a confidence problem. That means if you’re a solid performer with established financial relationships, getting money shouldn’t be a problem. In fact, you’ll probably have lots of choices.

But if you’re losing money (like 34 of the areas in the report), or don’t have a banker who understands the industry, it could be tough to find credit lines. I’m not saying the interest rate would be a point higher—I’m suggesting you might not be able to get credit at a cost that makes operational sense (remember the ASC story?). This is a really good time to think about getting your financial ducks in order.

—JH



Guest Editor's Take
First, a note of thanks to Jeff Harbaugh. His summary and observations of the economic information provided within the NSAA Economic Analysis are both accurate and candid. I agree that the reported numbers in the study may not be indicative of what is actually occurring in a significant cross section of the industry. But the reason for this goes beyond the fact that the NSAA report is skewed toward the larger areas.

As the ski industry has evolved, the operational categorizations utilized for the past two decades in the Economic Analysis (as Jeff calls them, small, medium, large, and super-size) may no longer reflect the industry's current business activities. At a significant number of areas, the business model has expanded from ski area operations to "resort operations," including real estate, hospitality, conference services, property management, clubs, off-mountain food and beverage, commercial leasing, retail, and golf, with the associated accounting challenge of revenue and expense recognition and reconciliation.

While the current Economic Analysis provides industry benchmarking statistics for mountain operations, the shift within the industry to a broader resort-based business model makes the Analysis suspect from a balance sheet, pre and after tax profitability, and interest expense perspective. Therefore, as a report on overall resort performance, readers should employ a reasonable level of skepticism.

—Bill Jensen