Second-quarter LV casino results show slow improvement

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This year, like 2011, is expected to be remembered as a transition year for Las Vegas resorts, during which casinos slowly built back from the depths of the recession.

While visitation to Las Vegas during the first half of 2012 grew at a modest pace compared to 2009 to 2011, weakness in the U.S. economy continued to limit spending by travelers. With the second half of the year well under way, it remains to be seen whether the overall gaming win in Clark County will gain from 2011, be flat or even decline.

On the Strip, The Cosmopolitan of Las Vegas and MGM Resorts International fared the best in the second quarter, delivering surprisingly strong financial results, according to recent earnings reports. Wynn Resorts Ltd. and Las Vegas Sands Corp. produced solid local numbers, while Caesars Entertainment’s results were disappointing.

Among locals casino operators, market leader Station Casinos posted the strongest profit as it kept costs in check while growing revenue – likely at the expense of competitors Boyd Gaming, Cannery Casino Resorts, the Rampart Casino, Terrible’s Las Vegas and Arizona Charlie’s.

Executives at casinos that struggled both on and off the Strip blamed losses on a soft U.S. economy during the April-to-June quarter.

“This was a difficult quarter for virtually every market in the gaming industry, and we weren’t immune to the effects of a slowing economy,” said David Ross, CEO of Affinity Gaming of Las Vegas, which owns casinos in the Midwest, Colorado and Nevada, including in Las Vegas and Primm. “The second quarter saw a more cautious consumer, which in turn substantially slowed our overall growth rate.”

MGM Resorts International CEO Jim Murren, however, said his company perceived just a “pocket of softness” in May and June. He noted that consumer sentiment firmed up as the second quarter progressed.

Murren had good reason to be optimistic as his company’s big Strip resorts, such as Mandalay Bay and Bellagio, boosted hotel revenue by 5 percent on a year-over-year basis. That’s an indication that, at least for MGM, travelers were willing to spend a bit more to stay at its properties.

In another positive sign, MGM’s CityCenter produced income of $642,000 — a reversal from the year-ago quarter when the company posted a $32.5 million loss from the $8.5 billion resort complex.

Still, overall net revenue for MGM Resorts was flat at $1.5 billion because of lucky play by gamblers, a phenomenon largely out of the casino group’s control.

Overall, analysts were pleased with the company’s numbers. Some anticipated that strong operational results, coupled with a boost from its Macau casino, will help MGM return to profitability. Deutsche Bank analysts expect MGM Resorts’ EBITDA to grow 5 percent, from $1.8 billion in 2011 to $1.9 billion this year.

EBITDA is a key performance measure for casinos. It stands for earnings before interest, taxes, depreciation and amortization.

MGM’s cash flow — its EBITDA minus interest costs, maintenance and other expenses — is also projected to improve, from a $344 million loss last year to break even this year and a $128 million gain next year.

Caesars, meanwhile, saw a decline in revenue during the second quarter. Even as visitation to its Las Vegas resorts such as Planet Hollywood and Caesars Palace grew more than 2 percent, spending per trip fell 3 percent, led by declines in the VIP market. Caesars’ overall net revenue in Las Vegas fell 0.7 percent to just under $781 million.

Company officials said disruptive work on the Linq shopping and entertainment complex behind Imperial Palace and the Flamingo cut revenue by $10 million to $15 million.

Unlike MGM, analysts weren’t so pleased with Caesars’ results. Standard & Poor’s, the debt rating agency, on Aug. 15 revised its company outlook from stable to negative. (Two other agencies, however, maintained stable outlooks for Caesars).

“We believe (Caesars’) operating performance in Las Vegas reflected a broader weakening in the macroeconomic environment, as gaming revenue on the Las Vegas Strip declined 6.4 percent in the second quarter,” S&P said in a report. “Although gaming revenue on the Las Vegas Strip overall is down only 0.6 percent through the first six months of 2012, gaming revenue is underperforming our 2012 expectation for modest, single-digit growth in 2012, and we are cautious about the prospects for improvement in the second half of the year.”

While gaming revenue isn’t as important as it used to be for Strip operators, thanks to the proliferation and profitability of shopping malls, restaurants, nightclubs and performance venues, it still is a key financial metric and accounted for 72 percent of Caesars’ net revenue in the second quarter.

Locals casinos for the most part struggled as well, as Las Vegans continued to contend with foreclosures and a 12.9 percent unemployment rate.

Still, Station Casinos bucked the trend, posting a quarterly profit of $7.5 million. The company saw an $11.4 million loss during the same quarter a year ago. Station said net revenue grew 4.5 percent year-to-year to $312.2 million in the second quarter, thanks to a solid business model and aggressive marketing.

The company held costs in check as Station’s EBITDAM showed a big improvement. EBITDAM stands for earnings before interest, taxes, depreciation, amortization and management fees. For Station, it grew 15.8 percent year-to-year to $92.4 million.

Despite the solid performance, Deutsche Bank analyst Andrew Zarnett said he remains wary about the strength of the recovery in the locals market.

“We continue to believe the locals market will continue to experience a period of slower growth in the second half of 2012 as consumer spending moderates and comparisons (to 2011) get more difficult,” Zarnett wrote in a research note.

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