The failure of a costly nightclub at Las Vegas’ Palms Casino Resort is adding to mounting concerns among investors about the off-Strip property’s ability to deliver on the nearly $680 million that owner Red Rock Resorts has plowed into remaking it.
Locals giant Red Rock Resorts reported a $26.8 million loss in the third quarter, most of it stemming from the decision to close the venue, Kaos, a flashy 73,000-square-foot indoor-outdoor playground that included a pool and day club and was known for shelling out millions for big name acts such as DJ Marshmello and singer Cardi B.
Costs associated with terminating long-term agreements with several artists and employment agreements with Kaos’ management accounted for most of the losses, Red Rock said. The company expects to pay similar one-time charges of between $16 million and $22 million over the next two quarters.
Speaking on the quarterly earnings call earlier this month, CEO Frank Fertitta III said the club’s customers weren’t spending enough to justify the cost, and may have even discouraged other guests from coming to the resort. They “did not have spendable money, we didn’t see the crossover into the casino,” he said, adding that Las Vegas’ nightlife boom with its superstar DJs and high-priced bottle service may have peaked.
“It doesn’t appear that the market has grown enough for the amount of supply,” Fertitta said. “The cost of entertainment is excessively high, and we just made the decision to focus where the fish are.”
Developed by George Maloof Jr., the Palms opened in 2001 under the ownership of the Maloof family, whose fortune, like the Fertittas’, also was based in casinos catering to the Las Vegas locals market. The property helped establish the city as a nightlife destination with its rooftop Ghostbar, a popular hangout for a youthful cadre of A-listers and the setting for the MTV reality show Real World: Las Vegas. Maloof was mostly able to offset the notoriously low returns of celebrity cachet with a solid trade in slot play and food and beverage aimed at the city’s residential gamblers.
Red Rock had other ideas in mind when it bought out Maloof in 2016 for $313 million and committed nearly three times that to renovate and expand, adding high-end restaurants and pricey works of contemporary art, among them a 60-foot-tall bronze sculpture to adorn Kaos.
Red Rock grew net revenue company-wide by 13 percent in the quarter to $465.9 million and cash flow was up 1.5 percent to $119.5 million. But a shadow is hanging over the near-term outlook on the stock, mainly because of the Palms, whose GM Jon Gray was fired last month ahead of the bad news.
“Red Rock’s core business (excluding the Palms) continues to grow nicely in Las Vegas,” Union Gaming Group analyst John DeCree noted. “However, the many moving parts at the Palms right now make it difficult to forecast when that property will begin contributing meaningfully to the bottom line relative to its capital investment.”
Stifel Financial gaming analyst Steve Wieczynski said he views it as a work in progress. “We believe margins could remain a little uneven over the next several quarters as the company works to fine tune costs while figuring out the proper product offerings.”
