Citing “static conditions” in the third quarter, Deutsche Bank analyst Carlo Santarelli wrote that while “trends have remained broadly stable … signs of a slow deterioration remain more prevalent than inklings of improvement.” He published these findings in a Friday investor note.
However, Santarelli continued, the declivity would be modest in September, a one percent rate, compared to the two percent downturn seen so far in the third quarter. Noting that states such as New Jersey, Maryland and especially Louisiana have performed “to the downside,” Santarelli said the problem was more one of slowing growth rather than outright decline.
To wit, while gambling revenues grew 10 percent in the first quarter of the year, that has decelerated to seven percent in the second quarter and four percent in the in-progress third trimester.
The problem, Santarelli wrote, wasn’t comps or coupons. “While [gross gaming revenue] can often mislead and lull investors into a false sense of security,” he penned, “we don’t believe promotions are materially different in the 3Q23 to date, relative to the levels experienced in the 2Q23.”
The analyst continued that stock assessments were beginning to “embed a recessionary environment” for the gaming group. “Net-net, we continue to view the regional gaming complex as one that is out of favor with investors, given the perceived higher likelihood of negative revisions,” Santarelli explained.
While spend per visitor had remained positive from September 2021 until this year, barring a brief decline in October 2022, Santarelli now sees nine months of consecutive downturn for that metric. He cautioned, “It is important to note that spend per visitor declines have a greater impact on margins than changes in visitation.”
Santarelli continued by pointing out that, compared to 2021, spend per visitor was still 30 higher, driving growth in gross gambling revenues. This was despite foot traffic that was 20 percent below 2019 visitor volumes.
Most of the falloff in spending was attributed to low-margin customers, who traditionally spend less, “while the remaining customers spend only marginally more.”
Santarelli’s figures show a close (0.88) correlation between average weekly salaries and gross gaming revenue. “Thus, we believe it is reasonable for investors to contemplate the relationship between real wages and [revenue] performance when looking ahead.”
Even though wages have proven to be lower over the long term (through last June), gambling revenues have remained largely stable, which Santarelli found “somewhat surprising. With inflation cooling, real wage growth could potentially flatten out, in the absence of a recession, something we believe would be a modest net positive for the group,” Santarelli wrote.
Turning to individual operators, Santarelli noted that Boyd Gaming’s regional properties had come in $4.1 million below projections through August, with a further, 1.8 percent decline forecast for September. Caesars Entertainment fared worse, $19.3 million under the forecast amount. Still, Santarelli modeled a 4.1 percent increase in this month, thanks to new casinos in Danville, Virginia, and Columbus, Nebraska.
Regional giant Penn Entertainment came in $5.7 million below the Deutsche Bank forecast. Due to heavier competition in major Penn markets, Santarelli foresees a 1.2 percent dip in September. MGM Resorts International, meanwhile, is headed to close out the third quarter with a four-tenths-of-a-percentage decline, having finished August $600,000 under the forecast.
Santarelli concluded that MGM’s results this month were riskier, “given the cyber issues,” an allusion to the company’s ongoing recovery from a September 10 cyber assault that crippled MGM electronics from coast to coast.
