MORE MARGIN CONTEXT FROM A SLIGHTLY OLDER ANALYST

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 we 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.

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