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Operator of Five Water Park Hotels, Great Wolf Resorts Inc.
 Blames $2.5 million 2nd Qtr Loss on Competition

By Tom Daykin, Milwaukee Journal Sentinel
Knight Ridder/Tribune Business News

Jul. 29, 2005 - Shares of Great Wolf Resorts Inc. tumbled by 31 percent Thursday after the company reported a larger than expected second quarter loss, and warned investors that its 2005 earnings would be lower than anticipated.

Great Wolf shares closed at $13.65, down $6.12, or 31 percent. Trading volume was very heavy, at 5.67 million shares, compared with an average of 335,849 shares in the past three months, according to Bloomberg data.

Madison-based Great Wolf operates resorts with indoor water parks in Wisconsin and other states.

The sell-off came after Great Wolf, which went public last December at $17 a share, reported a loss of $2.5 million, or 8 cents a share, on revenue of $26 million. That loss, which Chief Executive Officer John Emery called "embarrassing," was more than twice the expected loss of $1 million, or 3 cents a share, the company had forecast in June.

Prior to the June earnings warning, Great Wolf had said second quarter results would likely range from a loss of $400,000, or 1 cent a share, to net income of $200,000 or 1 cent a share.

Also on Thursday, the company lowered its earnings guidance for 2005, saying it could have a loss of up to $3 million, or 10 cents a share, or a profit as high as $500,000, or 2 cents a share. Great Wolf had said in June it would post net income of $3.7 million to $5.5 million, or 12 cents to 18 cents a share, for 2005.

Great Wolf's second-quarter loss was caused by a decline in business in Michigan and Ohio, where two of the company's five resorts are located. The company blamed competition from other resorts and hotels for the decline at its Sandusky, Ohio, resort, and said business was lagging at its Sheboygan property, Emery said.

The decline in leisure travel in Michigan and Ohio might be tied to problems within the auto industry, a big part of the economy in those two states, Emery said.

June bookings from the Detroit area, a primary market for visitors to Great Wolf's resorts in Sandusky and Traverse City, Mich., declined more than 30 percent from June 2004, he said.

"We've never seen a drop like that in any market we've ever operated in," Emery said during a teleconference with analysts. "That took us completely by surprise."

Meanwhile, Great Wolf had hired more workers for its resorts to handle the typically strong summer travel season, driving up expenses even as business fell below expectations, according to a research report issued by Raymond James & Associates.

Also, the Sandusky resort was hurt by increased competition, with that area continuing to absorb a new supply of rooms from indoor water park resorts, Emery said.

Great Wolf's new competitors in Sandusky include the 308-room Kalahari Waterpark Resort, which opened in May. It is owned by Todd Nelson, who also owns the Kalahari in the Wisconsin Dells area, where Great Wolf has a resort.

Finally, the company's Blue Harbor Resort, in Sheboygan, continues to face challenges. Emery said the overall development of Sheboygan as a tourist destination continues to lag the company's initial expectations, even though Blue Harbor has been open for a year.

Emery said the quarterly loss grew beyond the range of Great Wolf's June warning because that month's sales were below to the company's historic trends. June is a critical period , he said.

The company's inability to more accurately forecast the earnings decline was "a pure management mistake," Emery said.

But the problems facing Great Wolf are primarily short-term in nature and the company is taking steps to address them, he said.

Those actions include a revised marketing program; cost reductions; better financial reporting to more quickly recognize shifts in hotel room booking patterns, and continued geographical diversification outside the company's Midwestern base, Emery said.

Great Wolf's resorts include properties in Kansas City, Kan., and Williamsburg, Va. The company has resorts under development in Tannersville, Pa., Niagara Falls, Ontario, Mason, Ohio, and Chehalis, Wash.

Analyst Jeffrey Randall, of A.G. Edwards & Sons Inc., said Great Wolf is facing a long-term competitive threat that is more widespread than the company has indicated.

Randall downgraded Great Wolf's stock earlier this week from a "hold" rating to a "sell." In that report, Randall said competition from other water park resorts is increasing in several markets, including Traverse City, Williamsburg and Wisconsin Dells.

Emery, however, said Randall is overstating the competitive threat. He said some of the resorts cited by Randall are not in direct competition with Great Wolf's properties.


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