AGB 2020.2 - Vail Resorts (MTN)
AGB 2020.2 - Vail Resorts (MTN)
Membership Model + Scarcity of Assets = Increasing Recurring Revenues
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Vail Resorts
There are three hallmarks of a great membership program.
The value to members continues to increase every year, resulting in low cancellation/high renewal rates.
Members are encouraged to spend more time with the service or purchase more inside the ecosystem.
The membership program is able to leverage incremental data to improve its ability to market/service its members.
A gym membership is not a great program. The value to members doesn’t increase over time and interestingly there is a small reverse network effect, where each incremental member actually detracts from the value to all existing members. Gyms are in the business of selling memberships but hoping that members don’t use their service.
As counter examples, Amazon Prime and Netflix are great membership programs. Prime members get more value every time Amazon adds new features (Prime video, Twitch Prime, Prime Now, Prime Music) at no additional cost. Eventually the value to members got to be too high and Amazon raised prices for Prime memberships. Prime members are also reported to spend almost 3x their non-prime counterparts. And Amazon has so much data around your shopping habits that their recommendation engine gets more effective every day.
Netflix subscribers continually have access to more original content. This has also led Netflix to raise prices for subscriptions. Subscribers continue to binge watch more hours of content within Netflix, which we can argue is good for Netflix (but bad for productivity). The data that Netflix collects allows them to improve their recommendation engine and gives guidance to the type of content created at the company.
If you spend your winters in the mountains, you’ve probably skied at a Vail resort within the past 10 years. Vail changed the season pass game in 2008 when the Epic Pass was introduced. At the time, season passes were available for a single or a small group of resorts at a very high cost to the pass buyers. The Epic Pass was priced lower than most season passes at the time and gave access to many different resorts across regions, something that was unheard of in the industry.
Each year, the value to the Epic Pass holder increases as Vail acquires independent resorts and/or partners with other resorts to be on the Epic Pass program. Epic Pass holders are encouraged to increase their days at a Vail resort and to spend more on ancillary services like retail and dining with the membership discount. Vail in turn is able to transfer the risk of snow fall onto its ever increasing base of Epic Pass holders and is able to leverage personalized data to market to members for subsequent ski seasons.
Vail’s Epic Pass offering coupled with the company’s aggressive acquisition strategy has created one of the highest returning businesses within the lodging and leisure sector. As of 2019, Vail is the dominant player in North America with over 20% market share (29% of U.S. market share). As Vail acquires more mid to large resorts, improves the facilities and ski runs to Vail’s high standards, the market share numbers should continue to increase over time.
Even in a stagnant North American ski market (by annual skier visits), Vail has been a market share gainer and has been able to increase spending per skier by offering ancillary services and a superior skiing experience. Industry level effective ticket prices (ETP) have increased 4% annually since 2009 and Vail commands a premium to the industry average.
Why is it a good business?
Vail’s business model is to acquire underperforming scarce assets, improve them and offer more value to its customers, especially its Epic Pass holders. Vail gains skier visit market share and keeps up with industry price increases. With the cash flow generated by its existing and new resorts, Vail repeats the cycle, spreading its fixed costs over a larger base (improving margins) while also increasing the value of its Epic Pass offering.
The ski resort industry is supply constrained by geography. Because ski resorts typically operate with the grant of government approvals on public lands, there hasn’t been a new ski resort built in North America in over 35 years. A mid-sized independent ski resort could choose to invest capital in improving its operations and thereby increase pricing and skier visits, but they are usually undercapitalized. Even with access to capital, at a certain point, growth will be capped without acquiring new ski resorts. Acquisition is the only path to expand the base from which to grow.
Since 2002, Vail has acquired 12 ski resort companies for a total of $2.9 billion at an average multiple of 8.5x EBITDA. After completing the acquisitions, Vail spent additional capital for improvements (lifts, hotels, retail, restaurants, etc.) and integration into the Vail network of resorts. This meant standardizing best practices and making sure the technological backend was up and running for the new resorts. Post integration, Vail was able to increase skier visits and pricing at these resorts, drastically reducing the purchase price multiple.
Through this expansion strategy, Vail’s skier visits have increased by 156% from 2009 to 2019, or 10% per year. Keep in mind that the industry has seen flat to slightly declining skier visits during this period. For the newly acquired resorts, skiers are presented with an option to purchase the Epic Pass and are also encouraged to take advantage of the other ski resorts offered on the Epic Pass program. These new customers soon come to understand that all of Vail’s resorts have a similar level of quality.
Epic Pass holders are more likely to repeat as customers the following season and typically take more visits during the ski season. A 2nd season guest to a Vail resort is more than 3 times as likely to become an Epic Pass holder and a 3rd season guest is more than 7 times as likely. Visitations per year increase with Epic Pass memberships, which repeats the cycle of likelihood to renew for next season’s Epic Pass.
Returns on capital?
Over the past 10 years, Vail’s capital spending can be broken up into 4 buckets.
Maintenance capex – 20% of total capital deployed at above its cost of capital
Discretionary capex for improvements of existing resorts – 16% of total capital deployed at high ROIC
One time improvements post acquisition – 9% of total capital deployed at much higher ROIC (60%-70%)
Acquisitions of new resorts – 55% of total capital deployed – 15%-18% ROIC
Maintenance capex is required to fix any wear and tear on the facilities and make them run smoothly over the next year. The return is modestly above the cost of capital because Vail has benefited from prices increases of 4% annually for lift revenues and 1% for all other ancillary revenues. Netting the 5% benefit from pricing and we estimate that maintenance capex returns is near the cost of capital.
Discretionary capex improvements include building new lifts, expanding skiable areas within the resorts limits, investing in snow making capabilities, upgrades to retail stores and restaurants nearby, etc. These improvements lead to an increase in skier visits and higher spending per skier. Discretionary investments have high ROIC.
One time improvements post acquisition have been historically correlated to size of the deal. The two largest improvement projects have been in Utah for the Park City resorts (2015) and in Canada for the Whistler Blackcomb resorts (2017/2018). Both of these projects resulted in improvements to productivity post the deal closure. Park City skier visits are expected to increase 18% from FY15 to FY19 and Whistler Blackcomb is expected to increase by 20% from FY16 to FY19. One time improvement capex has proven to have high returns on capital in the range of 60%-70%.
Acquisitions are the growth engine for the company but they come with modest returns. An average acquisition multiple of 8.5x EBITDA implies a return of 12%, not that great at face value. Vail has been able to lower these acquisition multiples if you consider the improvements made post acquisition. Park City (2014), Whistler Blackcomb (2016) and Peak Resorts (2019) were acquired at an average EBITDA multiple of 12x, which is much higher than the company’s average multiple for its deals. However, these deals were all transformational to the company, giving footholds in key ski regions like Utah, Canada, and the Eastern U.S. Taking into account the improvements made post acquisition, the average multiple is lower by 35% at 7.7x EBITDA. Perhaps a 35% reduction in acquisition multiple isn’t easy to achieve for all acquisitions. If we apply a reasonable 20% multiple reduction to the average acquisition multiple of 8.5x the implied returns post acquisition would be near 15%.
We’ve calculated that over the past 10 years, the average annual return on incremental capital invested at the company level is between 25%-30%, much higher than the acquisition returns of 15%-18%. So where is the excess return coming from? The main difference in returns come from the discretionary capex at its acquired and existing resorts. As the network of resorts increases, these types of project opportunities also increase. The smaller part of the difference is the price increases. 4% ETP growth and 1% ancillary revenue growth has contributed nicely over the past decade. We can’t assume that the company and the industry will able to continue with these price increases, especially during a economic recession.
Reinvestment potential?
As mentioned before, the most important growth engine for the company is acquiring new ski resorts. Total North American ski visits have been flat for the past 20 years and the younger generations aren’t skiing more than their older counterparts. Most of the industry growth has been from rising ticket prices as well as ancillary services such as ski school, retail and restaurants.
Because Vail has been aggressively acquiring ski resorts and subsequently improving these resorts, the company has grown faster than the industry. Without the acquisition engine, however, growth would slow down materially. This is because the high returning discretionary investment opportunities would become limited over time without new resorts to improve.
Within North America, Vail still has opportunities to make acquisitions even though it already owns many of the top resorts in the region. Vail commands 20% of the market, while its largest competitor, Altera Capital, commands 11%. It’s good to know that the global ski market is much larger than North America. European resorts get 200 million skier visits each year and Japan gets another 30 million, compared to North America’s 70 million. Some of the largest European resorts include Verbier and St. Mortiz in Switzerland and Zermatt in Germany.
In the medium term, we expect Vail to be able to deploy 40%-50% of its annual capital spend on acquisitions. This part of the business is lumpy. With the recent acquisition of Peaks and the uncertainty around the impact from Covid-19, it may mean that 2020 and 2021 could be leaner acquisition years. However, Vail will continue to improve its existing resorts with high returning discretionary investments during that time.
On average, Vail has historically reinvested 50%-60% of their cash flows each year back into the business in the form of capex and acquisitions. With average returns of 25%-30% on these capital investments, Vail can compound intrinsic value between 13-17% over the medium term. Factors that could meaningfully impact these returns year to year include the acquisition pipeline, how impactful the improvement and integrations are post acquisition and the returns from the discretionary capex projects each year.
What else is important?
Economic recession’s impact on skiing
When analyzing a lodging and leisure business, you also have to consider how resistant it is to an economic recession. The company was much smaller in scale back then, but in 2008/2009 Vail saw skier visits decline by 5%. While that may not seem like a lot, revenues for the company were down 15% from 2008 to 2009 and then down another 11% from 2009 to 2010, even though skier visit were up by 2% that year.
This current economic recession is having an even greater impact than in 2008/2009 so far. Because the lockdowns in the U.S. started in March, Vail was open for most of the early ski season. Heading into the summer, it remains to be seen how the summer activity sessions at these resorts perform as many resorts have been impacted by either government mandated shutdowns or from customers’ reticence to travel. Vail has responded by assuring its most important customers, its Epic Pass members, that a portion of this season’s pass can be applied to next season, up to 80%. Vail has also cut costs where necessary to keep operationally lean and secured financing from the capital markets to shore up its cash position.
If there is a bright side, skiing when compared to other lodging and leisure activities benefits from being mostly outdoors. Destination travel is down by a considerable margin but local participants still make up a large part of the customer base. Because this recession is driven by a health crisis, it’s difficult to know how the 2020/2021 season will play out just yet.
No acquisition opportunities?
If and when Vail eventually runs out of ski resorts to acquire (won’t happen for many years at the current trajectory), the company will be much larger in size. Growth will slow to 5%-7% annually and will come from mainly price increases and modest skier visit share gains. As discussed above, while the acquisition of resorts usually return 15%-18% in terms of EBITDA, the large returns come in the form of improvements that Vail makes subsequent to acquisition. Without making new acquisitions, these discretionary improvement opportunities will diminish over time.
Epic Pass will allow Vail to spread the risk across its properties and perhaps as the network of resorts grows large enough, the company will figure out ways to increase effective pricing for pass holders. Capex investments will come down as most of the capex will be spent on maintenance. We expect that the company’s reinvestment rate will come down to 20% of cash flows and that intrinsic value will increase in the high single digit range annually.
Is Alterra and the Ikon Pass a Threat?
Alterra was formed in 2017 by a consortium of Ski Resorts to compete against Vail and is currently the second largest player within North America at 11% market share. Its Ikon Pass has similar benefits to the Epic Pass. In 2019, Ikon Pass volumes were a quarter of the Epic Pass. Market shares differ across regions, but the Ikon Pass commands 35% market share in Colorado and 52% in Utah. It goes to show that having high prized assets such as Aspen Snowmass and Copper Mountain can garner defensible share, even against Vail.
Alterra is likely here to stay and while it may seem like a threat to Vail’s quest for dominance, we estimate that the negative impact on Vail’s growth trajectory is not as meaningful as some would think. The Ikon Pass is great for skiers that want to experience a new set of ski resorts but Alterra isn’t likely to engage in a price war to bring season pass prices down. If anything, both season pass offerings are already underpriced.
What would have an impact to Vail’s growth is if Vail were to start losing acquisitions to Alterra or if Vail would have to pay higher multiples for acquisitions in the future. The multiples that Vail has been paying on its recent deals are higher than its average, but it’s uncertain if Alterra had an impact. Recent deals have been larger in size and the market is getting more expensive. Alterra is a competitor to keep an eye on, but the focus should rest on the potential impact to Vail’s acquisition strategy.
Optionality
It’s difficult to see a large second wave product for Vail because the company’s business model is asset constrained. The one area that we could see Vail adding incremental value is their summer program, Epic Discovery. Vail has been investing steadily into Epic Discovery since 2014, adding summer specific activities at its resorts like zip lines, climbing walls and rope courses at Vail Mountain, Heavenly and Breckenridge.
From Vail’s FY17 projections, the company expects to invest $80 million to $85 million in capital for an incremental EBITDA at maturity of $15 million at Vail and another $15 million at Breckenridge and Heavenly. That’s a capital return (by EBITDA) of 35% when it’s all said and done. Not all resort locations will have that type of investment opportunity, but we can estimate that Vail will have similar returns for each subsequent Epic Discovery investment. Keeping to the theme of the newsletter, if Vail were able to expand its footprint into Europe, Asia and Australia, there would be even more resorts to build out summer activities for incremental capital returns.
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awesome. Do you have any valuation for the business?