Tuesday, December 23, 2008

Wynn's (WYNN) Encore Casino Struggling to Fill Rooms During Launch

For those of you who have been following the blog for a while you know my fascination with Las Vegas as part of the American fabric and as an economic indicator. We predicted a level of localized recession that was to be far more brutal than they had seen in a long time, by a confluence of events - both cyclical (recession) and structural (our "Pooring of America" theme). [Stuff I've Been Negative on Since Last Fall] When we have a true rebound I have a group of markers I am looking at that will signal it's not just Obama hype or hedge fund thesis; and the resurgence of Americans flocking to Las Vegas will be one of them. [Oct 3, 2007: A Top in Casino Names?] That, much more than desperate Americans thankful the government will lower interest rates to the lowest possible number, so they can refinance for the upteemth time, will be a truer indicator of health.

With that said, Wynn Resorts (WYNN) has one of my favored managers at the helm, Steve Wynn - he is a guy you want on your side as a stock owner and also seems like a decent fella for a boss. The following article shows why that is; along with some background on just how bad things are on the ground - a spanking brand new casino, Encore cannot sell out and the discounting going on is a complete anomaly versus what is expected in the industry. (keep in mind the pricing for Encore is "premium")

I wrote my "top in casinos" piece when Wynn was in the $150s, today it is in the low $40s. And it's been "best in class" compared to some of the other names in the sector. Keep in mind as you read this, the date of story is December 17th
  • Wynn Resorts Ltd, which next week is opening the Encore casino on the Las Vegas Strip, will sacrifice high room rates, and profit, in order to boost occupancy at its Vegas resorts, according to Chief Executive Steve Wynn.
  • "The last couple of weeks have been the worst I have ever seen. We had 53 percent occupancy for a couple of nights," Wynn told Reuters in an interview. He referred to the Wynn Las Vegas resort, which opened on the Strip in 2005. The $2.3 billion, 2,000-room Encore sits just north of the older property. (not to worry, "in 6 months" everything will be fine again - Ben B will make it so; Obama too)
  • (re: Encore) "We'll be in the high 80s, low 90s (occupancy percentage) right away," Wynn said. To accomplish that, the company is offering rooms at $199 a night.
    "I've always opened up hotels in boom periods. It is a fascinating moment to open a hotel in a market that's extremely tough," he said. Reasonable rates for luxury accommodations at Wynn and Encore will put downward pressure on prices for hotel rooms all along the Strip, the CEO said.
  • "This is the first time I've said 'fill all 4,700 rooms'... I will trade profit on the hotel business for job protection." Wynn repeated that he has never laid off employees and will do everything he can to make sure that guest satisfaction remains the company's No. 1 priority.
  • "We can overcome low room rates when the market goes up, but it can take years to rebuild employee morale," he said during the interview, held in the Encore's Frank Sinatra-themed Italian restaurant. "The DNA of this place is in the details ... In the hospitality industry there is nothing left except to do but the basics better."
  • He also bragged about the 3 percent interest rate on the project, which was secured before the current credit crisis dried up funding. "Imagine that -- we raised the money before we started the project ... the alternative is ridiculous," he said. (no Steve, it is business as usual in America since there is never a rainy day in a world where Alan Greenspan does not allow us to have real recessions - we're conditioned now; the nanny state will stop the business cycle)
  • Competitors like MGM Mirage and Las Vegas Sands have been caught short by the lack of construction financing, leaving them to raise cash through expensive debt offerings, asset sales like MGM's sale this week of the Treasure Island resort, or even cash infusions from majority owners like Sands' CEO Sheldon Adelson's recent $520 million investment in that company.
  • The CEO also said that paying down debt "will be all I'll be doing for the next couple of years -- that's our corporate strategy."
A few CEOs remain who do not consider humans a simple commodity. Even in the service industry - imagine that.

One word about hedge fund thesis; one of the sexy themes of the summer 2008 when oil first began to break down (July/August) was "lower oil prices = consumer spending galore" i.e. all that was holding back the consumer was $4.00 gas! (nevermind the employment picture, a country of indebted consumers in upside homes or minor details like that) $2.50 gas will cause the spigot of spending to return. One such beneficiary of course would be Vegas. I said at the time, as I say every time a pretentious thesis dominates the airwaves and media outlets - it's nonsense, but it is what it is - play it if you will, but don't believe it for one momemt. It's a hedge fund trade, nothing more. Perception is reality; perception is all that matters at the time even if months later you see the thesis was a complete hoax. So.... per hedge fund thesis, if that $2.70 gas from late summer was going to cause hordes of travelers to flood Vegas (and malls), I can only imagine what $1.60 - $1.80 gas must be doing the past few months? I mean the thesis is, cash flush Americans will act like locusts descending on the gambling mecca. Reality? Not so much.
  • Las Vegas visitation fell 10.2 percent to 3 million people in October, the biggest drop since a 14.1 percent decline in September 2001.
  • The report is yet another painful indicator the Las Vegas economy is suffering a massive hangover from several years of living high on cheap gasoline, easy mortgage money and generous airline service.
The reason I post that is not to say "look I was right that the stupid thesis that drove some of these consumer related stocks up 50% in 5 weeks was a joke", but to be wary of all the thesis you hear each and every day - for example the infrastructure thesis, the 4.5% mortgage rate will cause housing inventory to fly off the shelves thesis, the "2nd half 2009 recovery" thesis, the China is safe and shall roar based on government spending thesis, and many others we point to each week. Maybe in the old days the "stock action" would actually mean something; a precursor to a real change in character. Nowadays, 90% of the time these stocks movements mean very little in the big picture - it's just hedge funds jumping in and out of (or short covering) and running themes based on a "theory" - most of which prove false within months, but by then they are onto the next. And this is why Wall Street has become no different than the casino's in Wynn's resorts. Hopefully as more of the hedge fund herd, ever focused on the 1 month returns, is eliminated in the next 12 months - the markets will begin to take on a more rationale "old school" flavor into 2010. But who knows.

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