What are we to make of the upside surprise Boyd Gaming pulled on Wall Street in the second quarter?
Quite a lot, it would seem.
The NYSE-listed casino giant beat the consensus forecast for revenue and beat it going away. Analysts were expecting something in the range of $178 million. Boyd posted $209.9 million.
In fact, all but one of the company’s 26 reopened casinos (the California in Downtown Las Vegas) were cash flow-positive. The 16 regional casinos were the big driver, growing EBITDAR year-on-year by 16 percent for the weeks they were open.
The Las Vegas locals properties made a decent showing as well, managing a 1 percent gain without contributions from East Side Cannery on the Boulder Strip and the Eldorado in Henderson, which have yet to open. In aggregate, the company finished in the black in EBITDAR terms by $16.1 million.
Mind you, this was accomplished in a quarter that didn’t begin until the latter part of May, that didn’t get much help from tourist-challenged Downtown Las Vegas, and was handicapped, as Boyd put it, by “significantly reduced capacity” across the rest of the portfolio.
Of course, without all the capacity, most of it on the lower-margin non-gaming side, and with little or no competition for people’s wallets from the rest of the economy, spend on marketing and promotions was way down, and labor costs were busily being slashed through the elimination of several thousand jobs.
In essence, Boyd’s story in this truncated second quarter was that of a business that had become much cheaper to run and was focused, of necessity, not having much else to sell, on a “lower cost, higher-value core demographic,” as analyst Barry Jonas of SunTrust Robinson Humphrey described it in a July 21 client note.
Writing at a time when elsewhere in the country regionals like Eldorado Resorts and Monarch were reporting similar results, Jonas said: “Today’s gaming market has essentially morphed back in time to when the main focus was recession-resistant gambling.”
Speaking with GGB News last week, he said, “We’re living in that 80/20 world now”—and he likes the implications. “I think that can get us back, or close enough, to 2019 levels on the revenue side. Then tie in the margins story, and it starts to look encouraging.”
On a July 28 earnings call, Boyd President and CEO Keith Smith spoke in terms of “strong visitation among high-value players” and “average spend per visit and spend per admission” being “up significantly.”
Eighty-eight percent of Boyd’s top line in the second quarter was gambling win.
But in convenience markets, the casino floor has always been the sweet spot. Among regional operators last year, it accounted for 80 percent of total revenues (compare that with the Las Vegas Strip, where it comprised just 34 percent). In the case of Boyd, even with the lockdown and all the dislocation caused by the pandemic, gambling’s 78 percent share of total revenues in the first half was virtually unchanged from the same period last year.
Jonas’ quick take on the history goes like this: In the beginning, there were only two places in the country where it was possible to make a legal bet. Then there were casinos everywhere. The country became “saturated with product.” Gaming became “commoditized.” The compelling need then was to differentiate your product from everyone else’s, and from all the rest of the entertainment options out there, which drove the massive investment in non-gaming and the soaring costs of marketing and promotion that have largely been the story ever since. The evolution of the story made operators cast their nets ever wider in hopes of snagging what Jonas called a “lower-value and more sensitive player base.”
Gaming pre-Covid, he explained, was a “low single-digit top-line environment” in an industry that had come to depend more and more on technology in hopes of squeezing out a bit of margin improvement.
Then came the pandemic. Suddenly, half the capacity was gone. Hotel rooms and restaurants, buffets, theaters, nightclubs, pools, spas and salons and all the rest are closed. Deep cuts are under way in labor and promotional expenses.
For Boyd in the second quarter, operating margins across the 16 casinos of its Midwest/South segment were up 12 percent year on year. In the Las Vegas locals segment, they increased by 13 percent. And the company made money. Because there are a lot of pandemic-weary gamblers out there, and they don’t really care about the bells and whistles, and they’re looking for places to get their flutter that are relatively safe and easy to get to.
“In general, our core customers have not been deterred by the social distancing measures, limited amenities or masking requirements,” Smith said.
“Sustainability is the big question,” added Jonas.
In other words, what happens when the unemployment checks run out, all the pent-up demand plays out, and the recession really starts putting the screws to consumption? Or, to take the longer view, what will happen when there’s a vaccine and a return to some measure of stabilization in the economy and in people’s lives, when movie theaters and sporting events reopen, when gambling isn’t the only game in town anymore, and the industry is back to saturation and the fight for market share?
“Ultimately, you question what needs to come back and what doesn’t,” said Jonas. “It’s a bit of game theory. Net-net, our view is that margins don’t stay at these levels forever. By the same token, there are some amenities that just aren’t coming back.”
Smith made no secret of this on the earnings call. “We intend to keep this philosophy in place after the crisis is over. We think largely that many of the costs will stay out.”
Boyd, he said, “will not simply return to the old way of doing business.”
