The numbers were stunning.
Casino operators have said that lower costs would offset lower revenues. And so they did, at least at Boyd and Red Rock Resorts.
Boyd’s third quarter EBITDA grew over 12 percent from last year on a 21 percent revenue decline. EBITDA margins soared 10 percentage points to a record 36.6 percent.
Red Rock’s numbers were even more impressive. EBITDA soared 45 percent despite 24 percent lower revenues and margins hit a record 46 percent.
More important, they promised this was the start of a new business model and not just a temporary effect that will disappear when the COVID-19 pandemic disappears.
Here were Boyd CEO Keith Smith’s comments on his company’s investor conference call, “Today is our new normal. We have established a more efficient and more focused business model over these past several months and we are determined to sustain higher margins going forward.”
Smith discussed the lower costs, in part a result of marketing focused on high-value customers, several times in the call, then reiterated: “We are committed to sticking with this refined business model. So right now, the model is creating profits in excess of last year’s profits and we are pretty pleased with that.”
In Red Rock’s call, CFO Steve Cootey said the company expects more than $150 million a year in permanent savings through streamlining operations, more focused marketing and renegotiating vendor contracts. Higher margins are here to stay, he declared.
Clearly, these are encouraging trends. But they are not unalloyed. Some of the reasons for the higher margins may be the reasons for future concern.
Take labor as an example. Casino companies have reduced work forces. Good for expenses now. And government aid has helped consumers continue to spend, and another round of stimulus is almost universally expected.
But lower permanent employment does not fuel future consumer spending. And gaming isn’t the only industry reducing employment. Millions of unemployed people is not a recipe for success for consumer discretionary industries, or their stock prices.
In other words, as encouraging as the efforts and results being achieved by American businesses may be, there is still risk of recession after recovery.
Green Shoots?
While the public is focused on the rising number of COVID cases there may be some reason for encouragement that the American economy will muddle through.
Mainly, governments are slowly allowing businesses to reopen, improved medical treatment is dramatically reducing the fatality rate and people in general are learning to live with the virus being around.
Nevada is an example. Already problematic group and convention business disappeared when the state imposed a limit of 50 people at gatherings. When that cap was raised to 250, events such as weddings quickly started coming back.
Now, Governor Steve Sisolak says he will allow convention business to return at 50 percent capacity starting in January.
We see similar loosening in other areas. Baseball played without fans until the playoffs moved to Texas and more than 10,000 people were allowed to attend. It will not be surprising to see greater numbers allowed in more cities for more sports as time goes on.
All of that might not make for exuberance, but it can bring significant relief to entertainment and leisure industries.
So, What Is Adelson Up To?
The Bloomberg story that Las Vegas Sands is in early discussions to sell its three Las Vegas properties was treated at face value by the rest of the media, but should it have been?
Las Vegas remains a vibrant profitable and growing casino market in normal times, but Strip properties are highly dependent on the convention business, and Las Vegas Sands is more dependent on conventions than any other casino company.
Saying his properties are for sale might have been CEO Sheldon Adelson’s way of sending the message that if government isn’t going to allow businesses to operate profitably, he doesn’t have to stay around and put up with that.
It is interesting that just a day after the story broke, Sisolak, who took so long to raise the group gathering cap to 250 people, announced that conventions will be allowed at 50 percent capacity, and as soon as January.
