The Parks America Turnaround: Fixing a Mismanaged Business

During their recent episode, Taylor, Carlisle, and Ralph Molina discussed The Parks America Turnaround: Fixing a Mismanaged Business. Here’s an excerpt from the episode:

[Ralph] So I started working with Focus Compounding at the end of 2020. They made their investment in the fund in Parks America at the beginning of 2020. So this was already a legacy position for them.

They were attracted to it because of the idea of just local economies of scale, usually in a theme park or even a smaller park like the ones that Parks America had. They own and operate three regional safari parks, one in Georgia, one in Missouri and one in Texas. And usually for we’ll use Missouri for an example.

Usually if you have the right positioning of the park, there can only be so much supply that can actually facilitate all the demand. And you are creating the demand because no one has ever seen a safari park or regional safari park in their local area.

[Jake] There are only so many tigers to go around. What’s this?

[Tobias] There’s more tigers in private homes in Texas than around the rest of the world.

[Ralph] There’s got to be that is true, especially in South Texas. Don’t go there. But because of those supply demand economics, there’s only so many people that are willing to put up a safari park.

And that’s only if they have the will to do it. A lot of people don’t have the will to do it. And the people who start these kinds of things are usually suboptimal scale on their mom and pop kind of shops.

That’s the stuff that you see on Tiger King. All the other parts that we’ve had have been owned and operated for many, many years and long established as a just a proper organisation. And so in terms of Jeff Gannon, the portfolio manager is hyper focused on competitive dynamics, durability.

And when they initially made the investment, they liked those competitive dynamics. The quality of those businesses were also actually very good. So at the Georgia Park, which was their cash cow, the company was doing that park alone on a second basis was doing upwards of 50, 60, 70 percent return on assets.

And for public investors, you can kind of use that as an approximate for return on this capital. And so this thing was generating so much cash flow. And they believe that there was a possibility that the management team could do the same thing at those other parks.

So that was in 2020 and when they made the investment. But fast forward to 2020, I believe end of 2022, definitely in 2023, and then for sure hitting in 2024, there was a change in the dynamics. And this is kind of what you see in micro caps.

There were initially two other investors who own similar amounts of focus compounding who at the time in 2020 owned 20 percent. There was the founder, essential founder of the company, he owned 20 percent. And then there was one other kind of micro cap, no name investor who also owned 20 percent.

But the focus compounding did not have a board seat at that time. They didn’t want a board seat at that time because they trusted the founder who was the CEO and chairman of the board. But then as the CEO and chairman started to have health issues because he was getting quite old, there was a dynamic between the other shareholder, the other micro cap investor, and essentially ousted the chairman and CEO and the founder of the company.

And right before the founder passed away, sold his shares to focus compounding, which gave focus compounding 40 percent ownership of the stock. And that’s when they decided to use that voting power to try to get a board seat. And through many attempts for settlements and negotiations, it had to go all the way to an annual meeting.

And that’s when focus compounding took control of the board. So that’s initially why they’re interested in the company, because of the competitive dynamics where there was a few new entrants and then a highly profitable asset base that they believe they can grow it. How was it being mismanaged?

It was being mismanaged primarily because of a bad capital allocation. So you’re taking these profitable safari parks and then trying to make it into something that it simply could not be based on the income in the surrounding area and the natural entertainment kind of behaviour in each area. So, for example, the prior CEO, who’s no longer with the company, which is different from the founder, the other investor brought in an outside management person from a very large theme park who is doing like ESG kind of stuff and nothing related really to being on the grounds general manager kind of stuff or anything to do with capital allocation.

And their belief was, oh, maybe we can build lodging and other things to increase the revenue per capita. But you have to do feasibility studies for things like that. And you have to talk to customers and really see what the appetite is in the area.

And it was clear based on the way they were spending, the level of spend, and then also the plans that they had outlined, it simply wasn’t going to be feasible. And after two years of turning a profitable business with lots of free cash flow to almost negative, that’s when Focus Compounding decided to step in because the CEO almost had two years to prove her worth and it wasn’t happening.

[Tobias] And did they reverse course on the policies? Did they reverse course on those efforts?

[Ralph] Yeah, that was a big focus in the first year, which I was a part of. And as a board, we’re just assessing a lot of, you know, what is the right way to think about capital allocation here? And immediately, something that we, you could see it, and this was communicated in the public transcripts of the earnings calls.

There have to be tests of some sort in order to know what is actually supporting the demand in customer traffic, and what is not. So we did tests with marketing, we did tests with catbacks, and we did tests in other ways. Some were more aggressive tests, some were more subtle tests, like, oh, we’re gonna pull back the spending, and we’ll see if traffic or attendance continues.

So those are the kinds of things that helped me understand that capital allocation exercise is not as simple as what Thorndike kind of says in the Outsiders. It’s not just what is the IRR, you have to, you do have to think about it kind of like the art of war, right? It’s all about how can you ensure staying power and durability, and then through that of the core, drive more economic growth.

And that’s something that we’re keenly, keenly focused on. The one other thing that was really helpful is that both Jeff, who was a CEO, but unpaid at the time, because he was still running Focused Compounding, and me, who is kind of the strategy guy, my official title as a management personnel was Head of Corporate, Head of Investor Relations and Corporate Strategy. And one thing that we both had alignment on was a little quote from this very obscure book.

The author, the title of the book was called Walt’s Revolution, Disney by the Numbers, and the author of the book was the actual feasibility consultant to Walt Disney, and he was the one responsible for picking the Disneyland consultant for many other theme parks in the late 1900s. But he kind of outlined this thing, which kind of became a framework as a management team, which was these theme parks are actually much more predictable than other people think. In fact, he was able to almost do like over-under bets that, oh, I bet attendance will be this at this park that I’m consulting for if they make these things based on this level of investment.

And he told companies, if you don’t make this level of investment, you’re not going to hit that attendance that you want. It’s going to be misaligned in terms of your economics. So, the key component that he said there was that the actual potential attendance demand can actually be very predictable because these theme parks operate within a regional or local cosm of very predictable factors like summer break, spring break, amount of kids in the area, traffic flows from other nearby attractions.

And so, using that, we were able to build kind of competitive analysis and attendance analysis for each one of those parks and really ascertain how much capex or marketing can each one of these parks sustain in order to generate x revenue. And so, we knew that there was probably a level that we could not spend over simply because it would be unlikely, low probability to get that. And I know the management team in the past and the board wasn’t thinking like that.

[Tobias] And was it successful?

[Ralph] Oh, sorry. That was your question. So, the first year, we came in July 1st.

And by that time, the season of the business is kind of already over. Really, you’re talking about a season that really peaks spring break and then end of May, which is kind of Memorial Day up until kind of some part of the school, the summer season. But then there’s a point in Georgia where things are just too hot and too humid.

Same with Texas. And Texas is, the Texas Park was part of the College Station, Texas A&M community. And so, there’s a lot of people that aren’t in there.

So, the first year, you can kind of see some things. But in the second year, you could see that the Texas Park, which was negative EBITDA since its acquisition, is now actually turned positive and almost at the same level as the Georgia Park, which is, some will say, a complete miracle because no one thought that would be possible. And in fact, through the proxy battle and through the proxy campaigns, focus compounding slate always said that our highest consideration is to sell the Texas Park because it has the most amount of assets out of any one of these parks.

And it’s the one that’s losing all the money. So, the story is still to be played out there. It’s a slow, slow turnaround simply because it is a seasonal business.

And you have to kind of build mindshare and reputation over time. But five years, three years from the initial date, I think that’s when you could start to see things really accelerate.

[Jake] It’s that age-old story, good zoo, bad zoo.

[Ralph] I don’t know if I know that one.