Stay Away from this Dangerous Gamble
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gambling is often done when people, especially the rich, have unusually large amounts money in their accounts and no worries to save for. It comes at a time when losing some funds would not make much of a difference. But with economic conditions playing havoc on consumers and denting their confidence, it is definite that there will be a pullback on the frequency of people visiting casinos. This is exactly what happened with Wynn Resorts (NASDAQ: WYNN), owner of a chain of destination casino resorts, which posted disappointing results recently, failing to meet market expectations.
Into The Numbers
A tough economic environment took a toll on revenue which plunged 8.4% to $1.25 billion, beneath estimates of $1.36 billion. Las Vegas operations continued to be weak, declining 11.6% to $345.6 million, but the main shock was the 7.1% drop in Macau operations to $907.6 million. Firstly, business in Macau is two-thirds of Wynn’s total revenue which comes as a hard hit to the casino giant. Secondly, Macau had been doing a great job for the last three years but failed to keep up the standards this time.
Along with slowdown in China, competition has played a very important role. Wynn has been feeling the pinch of the strategies of its rival, Las Vegas Sands (NYSE: LVS). The rival came up with new casino resorts in Macau which attracted consumer’s attention and led Wynn to lose some of its market share. This is surely a matter of concern since it is not a one-time phenomenon and is likely to affect future quarters.
Also, MGM Resorts (NYSE: MGM) has a strong foothold in China and has been coming up with new strategies to attract more crowds in its casino resorts. Its premium loyalty program, called Mlife, rewards its members for using social networking and mobile technology. It also provides regular offers to members, enhancing their experience.
If we look at earnings, we might get excited at first, but not so much when we dig deeper. Though earnings stood at $138.1 million, compared to $122 million last year, after ignoring one-time expenses for both periods we find that the bottom line is depressing. Last year’s income was affected by a hefty charge related to a charitable contribution. Excluding the effect, it was $200.8 million, way above this quarter’s net income. Hence, the company was hit hard on both lines.
Wynn Resorts witnessed a huge decline in casinos revenue and revenue from baccarat, a gambling card game believed to be highly volatile by management. Even the table games’ VIP segment performed badly, with a 7.2% decline in revenue. In fact, the win rate for the segment was also below expectations. The only segment of relief was the accommodation, food and beverage segments, which were in the green. REVPAR (Revenue per Available Room) for both the Macau and the Las Vegas operations increased, providing a slight respite.
Plans in Progress – Cotai Project
The company has been planning to run another Macau resort, called the Cotai Project, with a total spend of around $4 billion. This is definitely a bold step, since it has already been facing difficulties in fighting a slowdown in the region. Spending so much on a huge project like this does not look acceptable at this point of time, though it might come as a strong move against competitor Las Vegas Sands’ recent initiatives.
Wynn has been losing on almost all grounds. Las Vegas operations have been worsening every quarter and unfavorable impacts on Macau have already started showing up. With a lackluster quarter and concerns over its plan to expand into a region that is already showing signs of weakness is a matter of concern. Moreover, it has not been very strong on the competitive front either. It seems that staying away from this gamble would be the right decision for now.
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