We’re coming up on the first-quarter earnings report season, and it might be one of the most informative in a while for brick-and-mortar casinos.
Until now, all the Covid news has come in stages. The first stage was about liquidity. Companies were drawing down credit lines and negotiating with creditors to assure they could survive whatever period of lockdown they were required to endure.
The second stage was about rising margins. Casino operators cut costs dramatically and—lo and behold—discovered that, in many cases, they actually could grow EBITDA on lower revenues.
The last stage, reported in the fourth-quarter earnings season, was filled with hopeful anecdotes that casino customers were returning with gusto, and with promises that much of the Covid-inspired cost-cutting will be permanent, along with the accompanying higher EBITDA margins.
Now, we’re about to hear management teams discuss their outlooks based on significantly more reopening evidence. Here are some questions that should be answered:
- What are visitation and spend-per-customer trends since the loosening of restrictions? Will they soon begin to exceed those in 2019, the last normal year?
- Are young customers returning? One surprise of the Covid year is that young adults began visiting casinos in greater numbers. Now, with competing forms of entertainment reopening, will they return or be drawn to those competitors? If they do return, in what numbers will they do so, and at what level of spending?
- Are older players returning? There’s been a lot of speculation that older customers will be cautious in returning. More recently, there appears to be growing optimism that this core group of casino customers is feeling more confident as they become vaccinated and that they will feed pent-up demand.
- Are conventions returning, or will they continue to postpone? And will attendance fully return, or is that a 2022 event?
- There’s now considerably more experience with sports betting and iGaming. How much cross-play is actually going to casinos?
- For Las Vegas-centric companies: Will baccarat and international visitation return this year, or will the combination of Covid and U.S.-China contentiousness put off full recovery for the foreseeable future?
- For regional operators with sports betting and digital ambitions: Is the business model changing so much that these companies, with their national player databases, are becoming less regional operators and more like multi-channel national operators?
- OK, about margin improvement: Can casinos really keep costs down as their customers return? Can the competitive juices begin to flow again? Will customers themselves demand the old perks that made Las Vegas both a bargain and a worldwide destination in the first place?
CEOs and CFOs have whetted the appetites of investors for big increases in free cash flow, based on much higher percentages of revenues falling to the bottom line. Now, with businesses reopening, it’s natural that more costs come back.
It’s still early in the reopening and recovery, but managements certainly have a better idea today about future margins. No doubt, they’ve penciled out a variety of scenarios. Investors will want to know about them.
Casino stocks have bounced back strongly in the past year. The answer to these questions—especially the near-term future of digital and margin improvement—will go a long way toward determining whether stocks have priced in the recovery, or whether they have more—maybe much more—to run.
