S&P Global Ratings upwardly revised its base-case fiscal 2021, ending July 31, revenue and EBITDA for Vail Resorts Inc. in light of its stronger-than-expected second-quarter 2021 EBITDA generation and EBITDA guidance for the nine months ending April 2021.
S&P also affirmed all ratings on Vail, including its ‘BB’ issuer credit rating, and removed them from CreditWatch, where they had been placed with negative implications on Dec. 15, 2020.
The stable outlook reflects S&P’S expectation that Vail will maintain leverage near its 4.25x downgrade threshold in fiscal 2021. Additionally, under its base-case assumptions, S&P said it believes Vail could sustain leverage below this downgrade threshold in fiscal 2022 even if dividends resume and with a moderate amount of leveraging acquisitions, as well as a normal 2021/22 ski season with average snowfall.
S&P wrote, “Vail could improve leverage to below the 4.25x threshold in fiscal 2022 under normal snowfall conditions, even if it resumes its shareholder dividend and completes a moderate amount of leveraging acquisitions. We believe that while Vail’s revenue declined 26 percent year-over-year in its second-quarter fiscal 2021, it could flex its cost structure downward because it could offer fewer low-margin ancillary services, and it could hold margin approximately flat compared to the same period in fiscal 2020. We also believe that the company’s third-quarter fiscal 2021 will be easy compare to third-quarter 2020 when it had to suddenly shut down its mountain operations due to COVID-19, which resulted in a sharp decline in revenue and EBITDA compared to fiscal 2019. We expect that the company could increase revenue in the mid-single-digits in fiscal 2021 compared to the prior year. We also expect that the company’s margin will improve in fiscal 2021 compared to 2020 as it anniversaries its third- and fourth-quarter fiscal 2020, when the margin was compressed compared to historic levels due to sudden COVID-19 shutdowns across its resort portfolio. This could result in a full-year margin in fiscal 2021 higher than the company’s 25 percent EBITDA margin in fiscal 2020, but lower than its typical average of slightly above 30 percent. We believe the margin could improve to historical levels of around 30 percent in fiscal 2022 under average snowfall conditions and with operations unimpaired by the COVID-19 pandemic.
“Under these base-case assumptions, we expect the company to generate Resort Reported EBITDA in the first three quarters of fiscal 2021 in line with its guidance of $560 million to $600 million, and we expect the company to maintain leverage in the low-4x area in fiscal 2021, that leverage could improve further in fiscal 2022 even if the company undertook some leveraging acquisitions and resumed its dividend in fiscal 2022 and that EBITDA coverage of interest will be in the high-5x area in fiscal 2021 and higher in fiscal 2022. However, we believe that much uncertainty remains around our fiscal 2022 forecast because we believe the company’s revenue and EBITDA are relatively sensitive to snowfall conditions and that if winter 2021/22 snow conditions are poorer than average leverage could be higher than our base-case forecast. The same could happen if we believe Vail will undertake a large leveraging acquisition or payout higher-than-expected dividends in fiscal 2022.
“We believe that Vail’s Epic Pass products and regional and drive-to resorts may provide some revenue and EBITDA stability, even in challenging years for the ski industry. While we expect a significant impact on the company’s ancillary revenue, categories like food and beverage and ski school as a result of COVID-19-driven capacity and service restrictions, we believe its core lift ticket revenue will moderately decline in fiscal 2021. The percentage of pass product visitation versus daily lift ticket sales has also shifted to 71 percent in second-quarter fiscal 2021 from 59 percent in fiscal 2020. We believe that this mix shift is largely a result of strong Epic Season and Day Pass sales for the winter 2020/21 ski season. This could indicate substantial customer affinity for the company’s Epic Pass products, which could significantly stabilize the company’s lift ticket revenue in future years and reduce revenue and EBITDA volatility going forward. We also believe that the company’s regional drive-to resorts, including its acquisition of Peak Resorts in 2019, has helped it moderate the impact of COVID-19-driven travel restrictions so far in fiscal 2021, and that the transferability of its Epic Pass products between regional and destination resorts could help it stabilize revenue and EBITDA in future periods.
“Vail has not committed to or stated a leverage target, and we believe that large acquisitions or a higher-than-expected dividend could result in leverage higher than our 2022 forecast. We believe that large cash balances at companies across the ski industry could drive up asset prices and result in high acquisition multiples and leveraging acquisitions. In response to the COVID-19 pandemic, all of our rated North American ski operators have issued debt to preserve liquidity in case of mandatory ski resort closures and other disruptions to the winter 2020/21 ski season. However, we believe that these issuers may not have used significant portions of this liquidity and could potentially use excess cash for acquisitions. We believe that these large cash balances could potentially result in competitive bidding for the very limited supply of existing ski resorts, which could in turn result in high acquisition multiples. If we believe that Vail will likely complete leveraging acquisitions resulting in fiscal 2022 lease-adjusted leverage near or above our 4.25x downgrade threshold, we could revise our outlook to negative.
“Key risks for Vail include its sensitivity to consumer discretionary spending, fluctuating weather conditions, geographic concentration in North American markets, and its high fixed-cost structure under normal operations. We believe a large portion of Vail’s revenue comes from its Rocky Mountain and Western North America resorts during the winter months, and its revenue somewhat depends on regional seasonal snowfall. Additionally, Vail is vulnerable to declines in consumer discretionary spending, especially given that ticket prices and related costs represent above-average daily leisure spending compared with more value-oriented alternatives. This was evidenced during the Great Recession when revenue dropped approximately 25 percent peak-to-trough.
“The stable outlook reflects our expectation that Vail will maintain leverage near our 4.25x downgrade threshold in fiscal 2021. Additionally, under our base-case assumptions we believe Vail could sustain leverage below our downgrade threshold in fiscal 2022 even assuming the dividend resumes, a moderate amount of leveraging acquisitions in fiscal 2022, and a normal 2021/22 ski season with average snowfall.”
