Vegas Strip bullish, locals more bearish; Penn plummets

Nevada enjoyed a $1.1 billion gambling-revenue month in April, an 8.5% increase over last year. Powering this was the Strip with $593.5 million, a 23% improvement. Downtown, by contrast, suffered a setback, down 11% to $67 million. Utahns must have been enjoying some financial good fortune, as both Mesquite ($16.5 million) and Wendover ($23 million) hopped 7%.

Elsewhere in the state, gambling spend normalized with a vengeance. The Boulder Strip declined 10% to $72.5 million. North Las Vegas ($25 million) dipped 6%, Laughlin was flat at $46 million and the balance of Clark County edged up 2% to $140 million. It was much the same up north. Reno was flat with $62 million and Lake Tahoe receded 15% to $18.5 million. With that exception, the border jurisdictions seem to be holding their ground while locals business—crimped by inflation?—softens. Even so, it’s still 14.5% above the previous record in 2019.

“Despite market volatility, we did not find any datapoints suggesting weakness in the consumer. Rather, our sense was that many companies were experiencing sequential improvement in their customer base,” reported Credit Suisse analyst Ben Chaiken from the HALO Conference. “A common thread in our conversations suggested a dichotomy between hard goods vs travel/leisure/experiences.” (We can vouch for that personally.)

In the gaming sector, despite its lack of domestic exposure, Chaiken found Las Vegas Sands increasingly attractive thanks to high-growth opportunities like New York City. As for the company’s Macao battlefront, Chaiken found it difficult to model, thanks to China‘s zero-tolerance Covid-19 policies and to a new crackdown on frequent gamblers: More than nine visits in three months gets you red-flagged, so to speak. On the manufacturing side, International Game Technology “is still one of our best ideas. Despite the stock volatility, nothing fundamentally has changed … Ironically, lottery is probably the most resilient space in our entire coverage should there be a recession, although the stock is not getting credit for that currently, in our view.”

Deutsche Bank‘s Carlo Santarelli visited Las Vegas to meet with gaming execs and saw no signs of a slowdown. “While stock action speaks to a dramatically different dynamic, overall management sentiment remains very upbeat with respect to current trends, and, perhaps more importantly, indicators of future trends for Las Vegas.” Casino leadership said they saw no indicators of softening bookings and were, if anything, even more bullish than they were in recent earnings calls. Group business is described as “strong” and Electric Daisy Carnival engendered a rash of last-minute room reservations, despite higher gas prices. Santarelli added, “Further, the strength in Las Vegas continues, despite some demand channels that are just starting to come online, with international high end business still below prior levels, travel from Canada, a strong feeder market, just starting to accelerate, and group business still in the early stages of its recovery.”

He also found “no evidence” of price sensitivity among customers, although a reversion to an average level of spending is expected at some point. “Gas prices in the Las Vegas valley were north of $5 at nearly every station we passed, but operators have not seen a slowdown in traffic or spend levels, despite the elevated travel costs.”

The one area in which John Q. Public is picky about spending is entertainment, although Santarelli downplayed that, suggesting that a plethora of Las Vegas Strip choices performed a role in the softness. “We were, and we remain fairly confident that large scale shows will return, with a few modest exceptions, though we were somewhat skeptical around the attendance levels.” Another encouraging metric was the low attrition level in advance room bookings. MGM Resorts International, for instance, expected 25% but suffered around just 5%. “While the return of group [bookings] to date has been better than expected from an attendance perspective, management teams remain somewhat concerned about the potential for groups to offer a virtual option to perspective attendees. To date, there has been no sign of this, though we believe it is more likely a 2023 dynamic, should it play out given the pent up demand to travel for business purposes that exists at present.”

A rising tide is lifting all boats. For instance, the opening of Resorts World Las Vegas has improved foot traffic at Wynncore. Speaking of Resorts World, it freshly inked a labor pact with the Culinary Union. Better late-ish than never, we say. Management went with a card-check organizing method, much less stringent than the secret-ballot approach some other companies insist upon. The three-year accord covers 2,000 employees and was ratified by 99% of the affected employees. Meanwhile, over at Fontainebleau, skepticism seems to linger about whether the umpteenth time is the charm. In his most humorous observation, Santarelli wrote, “Most management teams with whom we spoke expect the property to open, though timing remains a question.” That’s not a roaring vote of confidence.

Getting back to MGM, the company’s goal at The Cosmopolitan of Las Vegas is to drive higher convention business, currently just 10% of the guest mix. It also intends to umbilically link the Cosmo to Vdara, creating a unified CityCenter. Bad news for potential guests of The Mirage: Santarelli expects the property to go dark once Hard Rock International takes control in the latter half of this year, reopening under a rebranded identity … in 2025.

There’s nothing new to report on the Flamingo sale, although Santarelli pegs the price at 12X to 13X cash flow. And with Caesars Entertainment bugging out of The Rio next year, they don’t seem to be putting a lot of energy into marketing it. An S&G source passed along a 30% discount offer for military families over Memorial Day weekend. George, yes, but why should The Rio be having such trouble filling rooms on a holiday?

Speaking of special events, the NFL draft is officially a flop. The league projected 600,000 attendees and drew fewer than half that number. Since it was a for-free event, it attracted mostly low rollers, with anemic room rates to match. Even Caesars CEO Tom Reeg conceded that, from a gambling standpoint, it basically sucked. While on the subject of low rollers, Santarelli theorizes that they are a smaller portion of the Vegas tourist mix, since there are fewer buffets and minimal-value comps to attract them. “As such, we think the perceived excess in spend per unique customer is likely far greater than the reality of the average increase,” he concluded.

Even some locals properties that feed off of the Strip—specifically The Orleans and Palace Station—are described as seeing a pickup in business. Core locals patronage is “consistent” but that Strip-driven trade is expected to increase further as convention traffic ramps up.

Aside from Durango Station, no new product of significance is to impinge on the locals market. The reopening of Palms Casino Resort has had minimal impact so far, with Boyd Gaming reporting little or no differential in Gold Coast business—ditto other Boyd or Station Casinos properties. This was attributed to the Palms’ current customer base being the same as when Station was running the show. As for Station, Santarelli doesn’t expect it to reopen its three closed casinos, as it has retained 90% of their customers and they’re sitting on 110 acres of fungible real estate. As for the attrition of Station’s low-rollers (4% of customer base) they’re being offset by the gradual return of Baby Boomers. Broadly speaking, operators foresee low rollers and grind joints as the segment most likely to face difficulties as we move into 2023, although Santarelli believes it’s happening already.

Finally, don’t expect further consolidation: “We don’t get the sense that the broader M&A landscape is active, given disconnects in economic views and seller asks, which have yet to
adjust for the changing valuation landscape.” (See: $1 billion asking price for the Flamingo.)

One company absent from the discussion was Penn National Gaming, which is having more Dave Portnoy issues. Put differently, Barstool Sports appears to be acting as a drag anchor on PENN stock, which just fell to its lowest point since the Barstool buy-in. Portnoy is a cretin, it’s true, and Penn CEO Jay Snowden‘s man crush on him is worrisome. But the business model is sound: Use Barstool’s media platform to acquire sports bettors in lieu of low-return marketing outlays. And it appears to be working, provided a 5-7% market share is acceptable (which we think it is). Still, Penn is trading way, way down from its year-ago high of $136/share. What does Wall Street know that we don’t?

Despite its Chicago triumph and much-proclaimed Windy City labor accord, Bally’s Corp. is having problems on its home front. Some 200 employees marched on corporate headquarters, demanding higher staffing and lighter schedules at Bally’s flagship casinos in Rhode Island. Argued Unite-Here local veep Michael Kramer, “Bally’s Twin River Casino is one of the biggest employers in the state and they are doing very well economically. Their business would only improve if they reopened fully and brought everyone back to work.” Out of 260 workers at Twin River, only 64 are full-timers.

“There have been times when I can’t even take a bathroom break or have a sip of water,” complained one bartender. “When I work on a weekend night, there are no food runners, so I have to do that work.” Another staffer had been cut from 34 hours a week to six. Perhaps Unite-Here should send some emissaries to Chicago and Las Vegas, to alert regulators to Bally’s pinchpenny ways.