New Management

In 2005, following several years in turmoil that amassed to more than $2 billion in debt, some of the company’s largest investors began a proxy battle to gain control of the board and to remove former CEO Kieran Burke. The current executive officers, including CEO Mark Shapiro and CFO Jeffrey Speed, were primarily recruited from Disney and ESPN - new minds that came from enterprises that specialized in superior products and superior marketing of those products.

Niche Market No Good

Shapiro’s plan seems to be focused on tapping new revenue sources while strengthening the core. This translates to increasing the overall quality of the parks but veering away from the nausea-inducing thrill rides in exchange for more family-friendly entertainment options. This approach is much like the Nintendo Wii’s successful reach to a much wider audience by simplifying and de-threatening the act of playing video games. Six Flags does have a devoted niche of predominantly teenage thrill-seekers, but in order to survive and actually make more than they are spending, expansion is the only route.

Five Golden Goals

In an effort to gear the company’s path towards this goal, Shapiro and company designed a set of five key strategic objectives for their three-year plan shown below, most of which should be fulfilled by the end of this year. This is an incredible feat considering the fact that they came on board basically inheriting a $120 million capital plan for the first season that constructed 4 of the huge class of coasters that Shapiro believes do not provide a return on investment.

1. First and foremost: clean-up the parks and improve the overall guest experience; reposition the brand by diversifying the product offering. For the second consecutive year, the company’s key guest satisfaction scores are at or above record highs.
2. Become free cash flow positive, which has not been achieved in the company’s history. For 2008, if the company maintains its current trends with regard to revenues and cost control, the company should be free cash flow positive with an adjusted EBITDA nearing $280 million.
3. Achieve total revenue per capita of at least $40, or 20% cumulative growth from 2005. With approximately 1% guest spending growth and $56 million of sponsorship and licensing revenues, this objective is within reach this year.
4. Create and grow new high margin and low capital sponsorship and licensing businesses and achieve annual revenues in excess of $50 million. For 2008, management is currently targeting revenue of $56 million.
5. Operate at a profit margin for modified EBITDA of at least 30%. If the company sustains its current trends and achieves its target of being free cash flow positive for the year, then its modified EBITDA margin will likely top the 30% margin objective.

Source: Six Flags, Inc.

Although there is a story, Six Flags comes with extreme risks. For one, their inability thus far to achieve positive free cash flow is a testament to the high expenses required in this industry. Total revenues also have a relative dependence on many chance-based events, such as weather, accidents, and natural disasters. One thing is for certain, however, and it is that Six Flags is undergoing a massive makeover under solid management. The years of negative earnings are beginning to sprout into profits, though at this stage in Six Flags’ transformation it is important to keep in mind the risks.

Disclaimer: The author does not hold any positions in the stocks mentioned above.