S&P Global Ratings said that following strong ski season results reported to date, it upwardly revised its base-case revenue and EBITDA expectations for fiscal years 2022 and 2023 (ending July 31).
S&P affirmed all ratings on Vail, including its ‘BB’ issuer credit rating and ‘BB’ issue-level and ‘4’ recovery ratings on Vail’s senior unsecured notes due in 2025.
The stable outlook reflects good anticipated visitation and revenue growth through fiscal 2023 and its expectation that Vail will maintain leverage of 2.5x-3x, incorporating a resumption of its dividend and modest merger and acquisition (M&A) activity.
S&P said, “The rating affirmation reflects our expectation Vail will maintain leverage of 2.5x-3x through fiscal 2023, incorporating a resumption of its dividend and some leveraging M&A. Through its fiscal second quarter (ended Jan. 31), Vail’s total revenue increased 32.5 percent compared to the same period last year. The company benefitted from increased lift revenue and the recovery of ancillary segments such as food and beverage and retail. Ancillary segments such as food and beverage and retail have recovered from fiscal 2021 lows, including COVID-related operating restrictions, and are generating revenue just under prepandemic levels. Additionally, the company is generating historically high EBITDA margins despite early season challenges due to lower staffing driven by a smaller employee base and COVID-19-related exclusions. We expect Vail’s total fiscal 2022 revenue to increase 25 percent-30 percent, including a 15 percent-20 percent increase in lift revenue and further recovery in its ancillary revenue. We also expect the company’s S&P Global Ratings-adjusted EBITDA margin will improve in fiscal 2022 to approximately 35 percent. Under these base-case assumptions, we expect Vail to end fiscal 2022 with a leverage of approximately 2.5x. While we expect Vail to maintain leverage of 2.5x-3x through fiscal 2023, below our 3.25x upgrade threshold, the stable outlook reflects the risk that Vail pursues a more aggressive M&A strategy that we haven’t incorporated into our base case. Additionally, uncertainty remains around our fiscal 2022 forecast because we believe the company’s revenue and EBITDA are relatively sensitive to snowfall. If winter 2022/23 snow conditions are poorer than average, leverage could be higher than our base-case forecast.
“We believe Vail Epic Passes may provide some revenue and EBITDA stability, even in challenging years for the ski industry. Vail has successfully transitioned a significant portion of its skiers to advance commitment passes since 2019. The company expects to derive 62 percent of its lift revenue, which accounts for just under half of total revenue, from the sale of passes compared to 47 percent in fiscal 2019. Vail also expects the percentage of pass visitation versus daily lift ticket sales to reach 71 percent in fiscal 2022 from 58 percent in fiscal 2019. We believe higher pass sales are largely a result of the 20 percent price reduction in the Epic pass program that Vail enacted before the 2021/22 ski season. As a result, Vail brought lapsed pass users back into the program, and in general pass buyers opted for higher-priced Epic Passes instead of lower-cost Epic Local passes. This could indicate substantial customer affinity for the company’s pass products and significantly stabilize the company’s lift ticket revenue and reduce revenue and EBITDA volatility.
“Vail’s investments in its labor force and mountain operations could reduce profitability and cash flow in the near term.
“Vail recently announced a series of investments and capital projects designed to improve its labor force and increase capacity at its resorts. Vail will spend approximately $175 million to restore its seasonal labor force to normal levels in anticipation of the 2022/23 ski season and retain employees from year to year. The majority of the investment is by means of approximately 30 percent higher seasonal hourly wages to a $20 minimum and restoration of its prepandemic employee base. Due to a tight labor market, especially for seasonal labor, Vail was understaffed for a majority of the 2021/2022 ski season. Secondly, the company increased its capital investment plan for the calendar year 2022 to approximately $320 million with a focus on increasing capacity at its resorts through new and upgraded lifts. The company will also open new terrain and add food and beverage locations at some resorts. Historically, the company has spent between $150 million and $200 million each year. We believe Vail’s investments will improve its guest experience and could result in higher retention rates in its pass program and a more loyal customer base. However, increased wages in salaries and staffing will reduce EBITDA margins in the near term, and its increased capital plan will reduce cash flow in 2022 and 2023.
“Vail has not committed to or stated a leverage target, and we believe large acquisitions or a higher-than-expected dividend could raise leverage higher than our 2022 forecast. Vail has been highly acquisitive throughout its history, seeking to expand its portfolio of resorts and increase the value proposition of its Epic Pass. Since 2019, the company has made three acquisitions totaling over $500 million. Furthermore, we believe Vail’s recent majority stake in Switzerland resort Andermatt-Sedrun could signal a desire to expand its presence in Europe, a highly attractive market with about 195 million total skier visits compared to 70 million in the United States. Additionally, Vail recently reinstated its dividend, at a higher rate, after suspending it during the COVID-19 pandemic. The higher rate represents more cash flow from both its core portfolio and acquired resorts since 2019. While not currently incorporated in our base case, to the extent that Vail uses its cash balances or raises debt to finance acquisitions, investments, or share repurchases, net leverage could be higher than we assume through 2023.
“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. Its revenue somewhat depends on regional, seasonal snowfall. Additionally, Vail is vulnerable to declines in consumer discretionary spending, especially since ticket prices and related costs represent above-average daily leisure spending compared with more value-oriented alternatives. During the Great Recession, revenue dropped approximately 25 percent peak-to-trough, including its real estate segment, which can be more volatile than its mountain resort segments.
“The stable outlook reflects good anticipated visitation and revenue growth through fiscal 2023 and our expectation that Vail will maintain leverage of 2.5x-3x, incorporating a resumption of its dividend and modest M&A.”