Wall Street analysts got an early look at Penn Entertainment‘s 4Q22 earnings, which were mildly adverse and poorer than The Street expected, and which point to a flat trajectory going forward through the early summer. Deutsche Bank analyst Carlo Santarelli described the preview as “realistic, though likely uninspiring guidance.” Revenues were 3% down in 4Q22, revenue was $1.4 billion and cash flow slipped 5%. To encourage stock analysts (per Santarelli), “Management noted challenging weather in December, while also noting strength in the final week of the month and a continuation of strength into January. The Deutsche Bank analyst blamed the underperformance on new competition, “as well as the impact of same-store revenue headwinds on margins.” The interactive segment (excluding Barstool Sports) also pulled down the numbers somewhat, which some fingered on John “Mattress Mack” McIngvale and his big World Series win.
Credit Suisse stock boffin Ben Chaiken took a more favorable—even apologetic—view, writing that “the guide assumes a continued macro deceleration (vs reflecting January trends, which sound better than December).” It’s a time-tested managerial ploy to show a bit of ankle for the next (better) quarter when the one in question is disappointing, and it seems to have worked again. Chaiken did note that Bally’s Corp.’s temporary casino (above) in Chicago might hit Hollywood Aurora and Ameristar East Chicago (below) hard, so we hope that will be baked into future Wall Street revenue projections. Chaiken did also observe that the Midwest and South (and West) segments underperformed in 4Q22, though he muddled the issue by blaming Wall Street for not anticipating bad December weather and concluding, “a majority of the miss was in the South segment, where there is less visibility with state reporting, which may have also contributed to the dichotomy.”
Charting a middle course was J.P. Morgan analyst Joseph Greff, calling the revenue shortfall explicable and saying Penn’s forecast “likely has some conservatism baked in given an uncertain and evolving macro (and we ask ourselves this—how many gaming operators are proving full-year 2023 guidance this earnings season? One, and that’s PENN).” A ballsy move, that. The company came justthisclose to hitting Greff’s revenue target, although there was a mid-sized miss on cash flow ($468 million actual verses $480 million predicted).
The company told Greff that 2022 “ended on a high note with strong performance between Christmas and New Year’s across the portfolio, which has continued through January.” For 2023, it is prognosticating $6.1 billion to $6.5 billion in revenue, with cash flow as high as $2 billion. It’s a conservative forecast as it factors in “the potential for further economic headwinds as well as increased supply in a few of our markets.” At least the youngest cohort of its players is staying faithful through thick and thin, and that’s cause for optimism, too.
At bottom, Penn is essentially healthy, momentary adversity not withstanding. If you’re an employee at DraftKings, you might have been pinked-slipped this week. 140-odd vassals were laid off in a “reorganization” of the money-bleeding company. Wall Street loved the news, boosting DKNG share prices 10%. The layoffs don’t affect DraftKings core operations but appear to represent a reining in of its global ambitions. The job cuts fell upon the European, Middle Eastern and Asian offices, concentrated in human resources and engineering. Any cost control at DraftKings is welcome, as the company itself has predicted an $800 million negative ROI this year, despite forecast revenues of $3 billion.
While nobody likes to hear the word “reorganization” in their workplace, it sure beats “Chapter 11.” That is the fate that befell Aruze Gaming this week, a story so far under the radar that only Vital Vegas appears to have picked it up (it certainly hasn’t made the Google newswires). The proximate cause for the filing hasn’t been disclosed but it coincided with President Robert Ziems being shown the door. Aruze itself blamed the downfall upon “a recent garnishment judgment against Aruze resulting from a separate judgment against Aruze’s shareholder,” Kazuo Okada.
CEO Yugo Kinoshita fell back upon defensive rhetoric that seeking bankruptcy protection was “a critical business strategy we were forced to make due to external factors outside our control … This restructuring has no reflection on the health of Aruze.” Uh-huh. Concluded the CEO, “we are assured that Aruze will emerge as an even stronger company.” For the sake of Aruze’s employees, we hope so and we wish them well through this impending time of uncertainty. Unlike Aruze, the slot sector is very healthy right now so it’s unfortunate that the firm has to miss out on the prosperity.
DraftKings isn’t the only company pleading poverty right now. Profitable FanDuel went to Albany to rattle its tin cup for tax relief in New York State. Both companies are making the argument that the Empire State’s 51% levy on OSB revenues is excessive (which is true). This would be a more credible plea had they not been among the first to wallow up to the trough when OSB was being legalized a couple of years back. This is a particularly familiar refrain in New York: Casino companies agree to lofty tax rates, discover that they can’t balance the books, then squeal for tax relief. Nobody forced them to pay those rates. They volunteered, usually quite eagerly. Should the OSB tax rate in New York be lower? Yes. Do we believe it coming from FanDuel? No. It’s not like either of the leviathans was blindsided by then-Gov. Andrew Cuomo‘s 51% rate; he broadcast it far and wide. We’d rather hear about it from providers who kept their fiscal sanity and stayed home.
It would also help if the OSB titans marshaled better arguments before lawmakers. For example, FanDuel’s Christian Genetski threatened that his company would spend less on player promos and marketing if it didn’t get a tax break … but isn’t that the fiscally responsible thing to do, regardless of the size of the impost? He also menaced solons with the prospect of deliberately worsened odds, which would drive players back to the black market, the rhetorical equivalent of brandishing a lead sap. DraftKings CEO Jason Robins (above) took the role of good cop, advising legislators that their revenue projections were, over the long term, a mirage and that the New York market won’t sustain itself at its present, nation-leading level. Because New Jersey, among other reasons.
State Sen. Joseph Addabbo (D) is offering a compromise whereby existing operators agree to more competition in return for a sliding-scale tax reduction, all the way down to 25%. The more providers that enter the market, the lower the tax goes. However, this hasn’t been means-tested and Addabbo allowed, “We cannot go back to our constituency and say we did something that reduces revenue as well as education funds.” Even Genetski signaled a willingness to compromise, pointing to Pennsylvania‘s 36% tax rate as a reasonable one. If the figures can be made to add up, Addabbo’s proposal deserves serious consideration.
However, between Addabbo’s advocacy of Internet casinos and a new push by Empire State restaurants for sports betting, the gambling market in New York could become unsustainably diluted. Cherry-picking the example of a Washington, D.C., bar that made $1.5 million off sports wagering, restaurants want their state to follow suit. “We understand sports betting terminals and kiosks might not have a place in every restaurant and expanding available licenses may not be a silver bullet for the industry,” allowed New York Restaurant Association CEO Melissa Fleischut wrote. “However, for those where this is a fit, the additional revenue from on-premises sports betting could mean the difference between closing and survival.” She’s obviously not acquainted with the low margins in the sports betting biz. We’ll leave this one for the lawmakers to sort out.
Gambling is back on the legislative docket in Hawaii, although it never gains much traction in the Lege. On the theory that this year could be different, here’s look at some of what’s being discussed. One bill would authorize a single card room, dedicated to poker. A protectionist bill by state Sen. Stanley Chang (D) would effectively keep Nevada-based companies out of the islands by forbidding them from advertising their gambling product. (What’s the point then?) According to PlayUSA, Chang would also levy a 30% excise tax “on companies advertising casino-related vacation packages and gaming devices in Hawaii.” Blech. This should be a non-starter as far as the industry is concerned. Since Chang’s bill doesn’t target gaming companies not headquartered in the Silver State, some of the major OSB providers (bunched along the East Coast) ought to love it. Vice Speaker of the House John Mizuno harrumphed shortsightedly, “We don’t want a mainland corporation coming in and just taking all the money.” With a parochial attitude like that, from exactly where does Mizuno think the casino and sports betting expertise is going to emanate?
In closing, we’d like to note that veteran casino consultant Dennis Conrad singled us out for one of his first-annual Denny Awards. It’s an honor that we share with many others, including beloved LVA colleague Jean “Queen of Comps” Scott. In our case, S&G gets kudos that read: “No one in the casino-industry press knows more about more aspects of the casino world (and will talk more candidly about them) than David. Whether its politics, finance, development, breaking news, even gossip, David gives you the straight scoop. Since some consider him a too-harsh critic and others view him a little like an industry apologist, I’m thinking he speaks the truth just about right. Put Stiffs & Georges (Las Vegas Advisor) on your daily must-read list!“
We’re trying not to blush.
