- Margin mean reversion is a scary thought. Revenues get all the attention since they are released monthly. However, I do not believe enough focus has been placed on the margin side of the equation. Hotel margins in Las Vegas have expanded almost 10% in 15 years while F&B margins increased 15%. We all know hotels and restaurants are two of the most cyclical industries out there in consumer land. In fact, other than in 1998, the only other year that hotel margins contracted were during the 9/11 induced travel slowdown in 2002. While casino revenues are certainly not recession proof, they have proven to be somewhat recession resistant. Hotel and F&B margins were significantly above their 15 year mean in 2007 while casino margins were less than 1% above.
- Some on the sell side have defended the recent only modest drop in Las Vegas' monthly casino revenues. The fact that casino revenues are down just slightly is not terribly surprising considering the historical resiliency of the casino to economic cycles. However, the revenue and margin contribution of Hotel and F&B has never been higher than now. That is terrific in an expanding economy, but last I checked the US consumer was facing stronger headwinds than they have in the past 15 years. I am obviously concerned about falling airline capacity, the rising airfares to Las Vegas, housing, inflation, etc but I'll leave that analysis for a later posting. Here I've looked at what happens if margins revert to the average of the last 15 years. F&B contribution falls by 67%, hotel contribution by 10%, and total EBITDA by $869 million or 17%. Take it a step further and assume 2002 margins, EBITDA for the industry in Las Vegas would fall by a whopping $1.9 billion or 37%.
- Gaming companies have done a phenomenal job transforming the product and developing other profitable revenue sources. The downside is that they have tied the industry much more to the economy. I'm really showing my age here but I still remember when Las Vegas was the city of great deals: $3.99 buffets, $75 hotel rooms, and $0.25 craps. Those days are long gone and good riddance. There hasn't been a time over the last 5 years that I've gone to Las Vegas and haven't been astonished at how expensive everything is. Indeed, hotel and F&B margins expanded 590 and 400bps in the last 5 years alone, all due to pricing. How will pricing and margins hold up with the US consumer under siege? We haven't had a consumer recession in 15 years but I have a feeling we are going to find out.
- This is a gross exaggeration I know, but I am increasingly alarmed by the junket price war. Our sources indicate that LVS may have boosted its commission again, from 1.25% of roll to 1.3%, and I think that MGM may have moved even higher than LVS. No indication on Crown but if I had to guess I'd say MPEL will or already has followed suit. The first exhibit examines the relationship between escalating junket commission rates and declining theoretical EBITDA margins on VIP revenues. I estimate the casino's break even on VIP business around a commission rate of 1.5%.
- No word yet on WYNN but I'm skeptical that they can hold out any longer. WYNN has proven to be the best operator in Macau and their performance resilient despite an uncompetitive junket rate. At some junket rate, price will win over product, at least with some junkets and players. I'm not sure we are there yet but any market share loss or softening of its junket position could be a major dent to this Bugatti. WYNN's stock has been a massive outperformer relative to the group and deservedly so. Could WYNN's stock become a victim of its own success? Follow the junket rates and market share.
- Todd Jordan Managing Director Gaming/Lodging/Leisure
Additionally, Pike Place was outlined as one of SBUX's turnaround initiatives to improve the customer's coffee experience. After launching Pike Place, SBUX had stopped brewing a second roast in the afternoon so the company will now resume brewing an additional bolder coffee along with it.
Although SBUX also stated that overall [Pike Place] has had impressive success, this customer demand for more of the familiar, bolder roasts might signal that Pike Place is not providing the sales lift management had hoped for. We will learn more about Pike Place's initial performance when the company reports it 3Q08 results as the brand was only launched at the beginning of the quarter. On a more positive note, it is impressive to see such a quick response on the part of management to meet its customers' requests, which is reflective of the company's renewed customer focus.
Here are the levels to watch:
1. The SP500 level i issued wednesday, 1322
2. The VIX, breaking out through 22.21
3. The US Dollar Index breaking the 73.04 line
Gold works today. So does cash. Manage risk; this is not a time to take it.
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