One of the most important metrics investors monitor when assessing financial performance of a casino is the trajectory of earnings before interest, taxes, depreciation and amortization (EBITDA) margins. Rising margins will generally coincide with a rising stock price. While many factors contribute to a casino’s margin profile, one lever that management teams have full control over is promotional spending. Promotional tools that casinos use to draw gamblers into their property include free buffets, subsidized gaming play, tickets to shows and free hotel rooms.
After several years of weak revenue growth coming out of the recession, management teams began to more closely scrutinize their promotional spend in an effort to drive margins higher. While giving away hotel rooms to their best customers had been standard practice for decades, many operators have been pulling back on such behavior. Casino executives have found that they were losing money on the gamblers that would only come when offered discounts. This change in industry mindset has resulted in a significant reduction in promotional allowance over the last few years (Exhibit 1).
Exhibit 1: Promotional allowance as % of gross revenue for the 7 largest publicly traded gaming operators
Source: Company reports, Bank of America Merrill Lynch Global Research
Some companies have found so many unprofitable customers to “fire” that they can generate meaningful earnings growth even with a shrinking revenue base. With the best operators spending only 5% of gross revenue on promotions, we expect that the industry has more room to keep optimizing their spending. Unfortunately for gamblers, this means that the free buffet offers may be a thing of the past.
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