What Would Happen if SeaWorld Freed the Whales?

<b class="credit">seaworldentertainment.com</b>A SeaWorld show called "One Ocean" stars killer whales.
seaworldentertainment.comA SeaWorld show called "One Ocean" stars killer whales.

SeaWorld Entertainment (SEAS) is all wet these days. Shares of the theme park operator hit a new all-time low last week after it served up another rough quarterly report. Folks just aren't visiting its gated attractions the way that they used to, and it's hard to deny that activists have succeeded in tarnishing the brand.

At some point SeaWorld has to ask if it's all worth it. Is keeping its iconic killer whales in captivity hurting more than it's helping? Could it stand to gain more than it would lose if it put an end to the orca shows and habitats? The synchronized leaps and refreshing splashdowns are crowd-pleasers, but the once-thriving chain appears to be losing more than it's gaining from its marine life shows and attractions.

Something has to change, because it's been more than a year since the "Blackfish" documentary drew attention to SeaWorld and the plight of killer whales held in captivity, and the public isn't showing any signs of letting that go.

Belly Flop

SeaWorld's third quarter was another disaster. Last week's report showed revenue falling 8 percent over the prior year to $495.8 million as a 5 percent dip in attendance combined with a 3 percent drop in revenue per guest. Adjusted earnings plunged 27 percent, falling well short of analysts' expectations.

This was SeaWorld's potent summer quarter, and it blew it. Attendance has been sliding for more than a year, and SeaWorld has now missed Wall Street's profit targets for three consecutive quarters.

Income investors have learned to overlook SeaWorld's professional shortcomings for the sake of a lofty dividend, but even those payouts may prove to be a challenge. SeaWorld can't declare the distribution that it was going to announce in December until early January. It has to do it this way so it doesn't violate debt covenants that dictate how much it can shell out in any particular year based on its performance. This should be a warning sign to anyone thinking that today's 5 percent yield will reward patient investors. If SeaWorld's performance continues to deteriorate, those fat dividends are unlikely to continue.

Tanks a Lot

SeaWorld thought it had the perfect compromise in August, announcing that it would expand its killer whale habitats. Activists have argued that the tanks are too small, but that will change in the coming years as the orca environment will have its capacity nearly double to 10 million gallons of total water volume. Viewing areas will also expand, giving guests the ability to enjoy the majestic splendor of Shamu and friends without necessarily checking out live performances.

The first of the makeovers will be completed in 2018 at the original SeaWorld San Diego park. The environments will then be updated at SeaWorld Orlando and SeaWorld San Antonio.

The new habitats and SeaWorld's decision not to appeal the Occupational Safety and Health Administration-fueled ruling to keep trainers out of the water during killer whale performances should have silenced the critics. However, SeaWorld doesn't appear to be bending enough. The August announcements didn't result in patrons lining up to enter its parks.

Attendance declined 4.1 percent across its family of parks last year, and it's off by another 4.7 percent through the first nine months of this year.

Shows Are the Main Attraction

Even if SeaWorld were to make a radical move by eliminating its killer whale performances, that might still not satisfy the naysayers. Before "Blackfish" we had "The Cove" wagging its finger at marine life parks for how performing dolphins are acquired. Would activists settle for SeaWorld eliminating the performances, keeping animals in natural habitats like the hundreds of zoos that line the country with more local support than critique? If the unrest doesn't settle soon and the turnstiles don't begin to click in the right direction again, that would be one option before eliminating the animal environments entirely.

Marine life shows are the main attraction at SeaWorld, and while one can argue that this would be the equivalent of Six Flags (SIX) scrapping its coasters, we've never seen an activist group demand that amusement parks set their roller coasters free. SeaWorld will need to keep bending, and hoping that it doesn't break in the process.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. He's a seasonal resident of Central Florida, living in Celebration -- near SeaWorld Orlando -- when he's not in Miami. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check outour free report.