Great Wolf Resorts (WOLF)

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Great Wolf attracts families with children that live within a driving distance to its full-service family entertainment resorts. Activities at Great Wolf Lodges include indoor water parks, Wiley’s Woods (an indoor kids entertainment center), and MagiQuest, an interactive, live action fantasy game guests can play. It also earns revenues through its themed restaurants, spas, game arcades, mini golf, and conference facilities.^[3] Its resorts are located in established family vacation destinations, which allows the company to offer a complementary entertainment option to existing venues, such as beaches and amusement parks.^[4]However, as Great Wolf operates in a niche market and its properties lack diversification, its business fluctuates seasonally (the high-season being the summer and other school holiday periods), reacting to changing trends in vacation preferences, consumer spending and general economic outlook.

Great Wolf aims to grow by attracting a wider customer base, as well as expanding its portfolio of resorts. In 2007, the company announced plans to develop another Great Wolf Lodge resort in Concord, North Carolina and is looking into developing resorts outside of North America.

[edit] Business Financials

Great Wolf's revenues by segment (2005 - 2007)^[5]

Great Wolf's revenue vs. operating income (2005 - 2007): the company has experienced net income losses from 2005 to 2007 despite growing revenue^[5]

[edit] Business Segments

Great Wolf resorts earn its revenues through the sale of rooms (which includes admission to the indoor waterpark), as well as from food and beverage sales (from its themed restaurants, snack bars, ice cream shops and confectionery) and fees from other amenities. These amenities cost customers extra fees in addition to room charges and include full-service spa, kids spa, game arcade, gift shops, MagiQuest (an interactive, live-action, fantasy adventure game), minigolf, and conference spaces. The company also generates revenues from licensing arrangements, resort management fees, development fees and construction management fees.

Great Wolf generates the majority of its revenue from room sales. In 2007, room revenues accounted for up to 60% of total revenue, while food and beverage and other amenity sales contributed to 30% of revenues, and the remaining 10% was made up by management and other fees.

[edit] Business Performance

From 2005 to 2007, Great Wolf's total revenues grew at an average of 16% per year. The company however, has had a negative operating income throughout all three years from 2005 to 2007. This is mainly due to the high resort maintenance and operating costs, which in 2007 accounted for up to 59%^[5] of total expenses, and almost 60% of total revenues. There were high depreciation costs (in 2007 as large as 20% of total revenue) involved in the resorts operations, as certain waterpark and games equipment must be retired after only a few years of operation.^[5]

From 2006 to 2007, total revenues increased by 28% to US$187.58 million primarily due to the opening of the Grapevine and Mason resorts in December 2007 and December 2006, respectively, as well as the construction of additional guest suites at the Williamsburg resort that opened in March 2007. These additional resorts and rooms led to more room, food, beverage and amenity sales. Net operating losses also decreased as operating expenses decreased in 2007. However, this is not because daily operation expenses declined but because of a one-off expense in 2006.

[edit] Operating metrics

The key operating metrics used to evaluate resorts and hotel performance include:

• Occupany rate: calculated by dividing total occupied rooms by total available rooms. This measures the general overall demand for rooms at the resorts and the effectiveness of sales and marketing strategies.

• Average daily room rate (ADR): calculated by dividing total rooms revenue by total occupied rooms. This rate includes only room revenue and not revenues earned from other services in the resort.

• Revenue per available room (RevPAR): calculated by multiplying the occupancy rate and average daily room rate.

• Total revenue per occupied room (Total RevPAR): calculated by dividing total revenue by total available rooms.This revenue includes both rooms revenue and other revenue derived from food and beverage and other amenities in the resorts. This is a key performance indicators because hotels and resorts derive a significant portion of revenue from food and beverage and other amenities.

• Total revenue per available room (Total RevPOR): calculated by dividing total revenue by total occupied rooms.

Key operating metrics (across all Great Wolf resorts): ^[6]

The ADR and RevPAR that Great Wolf generates is much higher than the overall hotel industry average, which as of August 2008 had an ADR of US$107.64 and RevPAR of US$76.60 according to Smith Travel Research.^[7] This is consistent with the indoor waterpark resorts, as U.S. Realty Consultants report that occupancy of indoor waterpark hotel and resorts ranging from 5% to 30% over non-waterpark hotels, and average daily rates ranging from $20 to $150 higher. ^[8]

[edit] Trends and Forces

[edit] Great Wolf's revenues are affected by seasonality and changes in holiday calendars

Since most families with young children choose to take vacations during school breaks and on weekends, Great Wolf's occupany rates are affected heavily by school calendars. Occupancy is highest on the weekends and during months with prolonged school breaks, such as the summer months and spring break weeks in March and April. Occupancy is lowest during May and September, which bracket the summer vacation months. Great Wolf's earnings have fluctuated from quarter to quarter due to these seasonal effects, and their revenue is thus vulnerable to changes in school calendars.^[9] Indeed, a shift in the two week nationwide Easter school holiday period from Q2 to Q1 2008 enabled Great Wolf to earn a net revenue of $19.4 million in Q1 2008, an increase of 75% from $11.1 million of net revenue in the first quarter of 2007.^[10]

[edit] Great Wolf benefits from trend of increasing 'staycations'

AUS economic slow down, caused by the 2007 subprime mortgage crisis, has affected entertainment budgets and discretionary spending in 2008. Consumers are switching from expensive air travel vacation destinations to cheaper, regional vacation spots in what has been termed a 'staycations' since people stay close to home.^[11] A survey with rising airline ticket prices caused by increasing oil prices , more than 50% of Americans changed their summer travel plans, according to a survey by TripAdvisor, to lower-cost alternatives.^[12] As Great Wolf mainly targets regional customers located within driving distance of the resorts, far from suffering from the economic downturn, Great Wolf's occupancy rates have actually increased more than 5% to 65.3% in Q2, 2008 compared to the same time last year.^[13]

[edit] Great wolf is affected by increased competition in family destination resorts market

The number of indoor waterpark destination resorts (defined as hotels that have a waterpark of at least 10,000 square feet) has grown from 41 in 2006 to 49 in 2008. An additional 15 new indoor waterpark projects are projected to open in 2008.^[14] In particular, the competition within Great Wolf's markets Wisconsin Dells and Ohio Sandusky has increased steadily, as the total area of waterpark space within those regions has grown an average of 31% from 2003 to 2007^[8]. Besides these independent developers, Great Wolf will also face competition from a number of other larger resort operators that are developing indoor waterparks for their existing resorts.^[15]. Revenues from its Sandusky property have already decreased since 2005 as a result of increased competition in the area.^[16]

[edit] Competition

Great Wolf's resorts compete with other forms of family vacation travel, including theme parks, waterparks, amusement parks and other resorts located near these types of attractions. ^[17] Most of these competitors are relatively small, privately owned companies that operate regionally.

[edit] Regional

In most of the regional markets Great Wolf operates in there are few other family entertainment resorts featuring indoor waterparks due to the high entry-costs associated with building the resorts. However, the company faces direct competition from other similar indoor waterpark destination resorts in the Wisconsin Dells, Sandusky, Mason and Traverse City areas.^[18]

Great Wolf's main regional competition include:

• Kalahari Resorts: The Kalahari Resort is a chain with waterparks that has locations in Wisconsin Dells, Wisconsin and Sandusky, Ohio, with a third resort opening in 2010 in Fredericksburg, Virginia. Both its Dells and Sandusky resorts are African themed, and are the two largest indoor waterparks in the U.S., thus competing with Great Wolf's Dells and Sandusky properties.^[19]

• Castaway Bay: The Castaway Bay Resort is tropical-themed resort that operates in Sandusky Ohio. It also competes with Great Wolf's Sandusky property.^[20]

[edit] National

Although there is no other national chain of indoor waterpark resorts, Great Wolf competes with other resorts and travel companies that also target the family vacation market.

Great Wolf's national competition includes:

Six Flags (SIX):Six Flags operates 20 regional theme parks across the U.S., including in Virginia and Pennsylvania, the regional markets where Great Wolf also operates. The theme parks offer thrill rides, water attractions, themed areas, concerts and shows, restaurants, game venues and retail outlets.Although Six Flags does not provide lodging services, it attracts the same target market (families who wish to vacation close to home) as Great Wolf.^[21]

Cedar Fair, L.P. (FUN):Cedar Fair is one of the largest regional amusement-resort operators in the world. The company owns and operates 11 amusement parks, six outdoor water parks, one indoor water park and five hotels. The amusement parks and resorts are located across the country, including in Ohio, Pennsylvania, Michigan and Virginia, all markets where Great Wolf competes. In 2007 it earned a total revenue of US$986.97 million.^[22]

[edit] Market Share

U.S. Hotel Industry: Market Share 2007^{[23][24][25][26]}

Although Great Wolf is a leader in the indoor waterpark resorts industry, it is still a small player in the overall U.S. hotel and resorts industry, earning only 0.13% of total market share in 2007 based on its revenue^[5]. The overall U.S. hotel industry earned $139.4 billion in total revenue according to the 2008 Hotel Operating Statistics (HOST) Study issued by Smith Travel Research. ^[27] Market share for each company below is based on their net revenue as a percentage of the total US domestic gaming revenue in 2007.

[edit] References

1. ↑ WOLF 2007 10-K, Item 1, Page 14
2. ↑ WOLF 2007 10-K, Item 1, Page 2
3. ↑ WOLF 2007 10-K, Item 1, Page 6
4. ↑ WOLF 2007 10-K, Item 1, Page 15
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} WOLF 2007 10-K, Item 6, Page 40
6. ↑ WOLF 2007 10-K, Item 7, Page 51
7. ↑ Hospitality Net Industry News, "STR reports U.S. hotel performance", Aug 7 2008
8. ↑ ^{8.0 8.1} U.S. Realty Consultants: Indoor Waterpark Resorts Overview, May 2007
9. ↑ WOLF 2007 10-K, Item 1A, Page 24
10. ↑ Seeking Alpha, "Great Wolf Resorts, Inc. Q1 2008 Earnings Call Transcript", May 23, 2008
11. ↑ Cleveland.com, "Ohio's vacation destinations say they're benefiting from trend toward local travel", Aug 5, 2008
12. ↑ Daily Herald, "Settling for a staycation? Hardly. There's lots to do in the area", Aug 5, 2008
13. ↑ CNN, Great Wolf Resorts Reports Second Quarter 2008 Results, Aug 7, 2008
14. ↑ WOLF 2007 10-K, Item 1A, Page 15
15. ↑ WOLF 2007 10-K, Item 1A, Page 22
16. ↑ WOLF 2007 10-K, Item 7, Page 44
17. ↑ WOLF 2007 10-K, Item 1, Page 17
18. ↑ WOLF 2007 10-K, Item 1, Page 18
19. ↑ [www.kalahariresort.com/]
20. ↑ [www.castawaybay.com/]
21. ↑ Reuters Company Profile: Six Flags
22. ↑ Market Watch, "Cedar Fair Announces 2008 Second Quarter Results", Aug 5, 2008
23. ↑ Google Finance: Starwood Resorts
24. ↑ Google Finance: Host Hotels
25. ↑ Google Finance: Wyndham
26. ↑ Google Finance: Marriott International
27. ↑ Hotels Magazine, "STR: U.S. Posts Record Revenue In 2007", Jul 17, 2008