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Red Rock Resorts, Inc. (NASDAQ:RRR) had mixed results in its latest earnings report, reflecting the ongoing challenges associated with economic uncertainty, high inflation, and consumers deciding how they want to allocate their entertainment capital.
While the third quarter was a solid one, it did, in most metrics, slide from the same quarter of 2021, but not by too much in most metrics.
The stock has traded volatile over the last year, with a 52-week high of $55.84 and a 52-week low of $30.98. Since its low on July 11, 2022, it has started a steady but staggered climb, resulting in higher lows and higher highs.
The company should have a good fourth quarter, based upon historical results, but heading into 2023, the question will be how much of a hit will the company take concerning momentum in light of a typically weak first quarter, along with consumers starting to focus more on the economy and its impact on their pocketbooks after the new year.
In this article we’ll look at the recent numbers of the company, its Durango project, and how the company is positioned to endure a prolonged slowdown in business if that’s how it plays out.
Latest numbers
Net revenue in the third quarter was $414.4 million, slightly down from the $414.8 million the third quarter of 2021. For the first nine months of 2022, revenue was $1.238 billion, up from the $1.195 billion in revenue from the first nine months of 2021. That points to growing momentum as the company heads into its historically best quarter of the year.
Breaking down the revenue numbers by segment, Casino accounted for $282 million, Food and Beverage was $70 million, Room was $39 million, and Other was $23 million. During the quarter and Beverage were up 8 percent, pointing to guests continuing to spend.
Its Las Vegas operations accounted for $411.6 million in revenue, up about 1 percent from the $407.4 million last year in the third quarter.
Adjusted EBITDA in the quarter was $182 million, down 1.3 percent from the record adjusted EBITDA of $184.3 million year-over-year. Adjusted EBITDA in the reporting period was 43.9 percent, down six basis points from last year in the same quarter.
Free cash flow in the reporting period was $99.4 million or $0.96 per share, bringing total free cash flow for the first nine months of 2022 to $325.7 million or $3.13 per share.
Management noted that almost every dollar from free cash flow is either being directed toward its Durango project or being returned to shareholders. In the third quarter, including share repurchases and dividends, RRR returned about $46 million to shareholders.
Free cash flow is one of the major strengths of the sector RRR competes in, and in my view, even if there is some substantial pullback in consumer spending at its businesses, it’s going to continue to generate significant free cash flow even if it’s a little lower than it has been. That’s why I see it continuing to buy back shares and pay out and add to its dividend.
What that suggests to me is the worst-case scenario for RRR is a slowdown in its growth momentum; for long-term holders it’s no reason to be overly concerned – the company will eventually pull out of it. That’s probably how it’ll play out in the first and second quarters of calendar 2023 because the company is going is going to have its largest outflows in terms of construction spend. Combined with a seasonal weak period of time, that will likely weight on the performance of RRR in the near term.
Even so, with cash and cash equivalents at the end of the third quarter was $101.1 million, with a revolver of $1 billion, the company is well positioned to go through temporary tough economic times if that’s how it plays out.
Development projects
The Durango project remains the major focus of the company in regard to development, and until that project is up and running, management said it’s not going to consider launching other projects that could distract from that strategy.
Durango is located “on a 71-acre site ideally located off the 215 Express Way in Durango Drive in the Southwest Las Vegas Valley,” which is within the “fastest-growing area of the Las Vegas Valley with very favorable demographic profile and no unrestricted gaming competitors within a five-mile radius.”
At this time construction on the site remains on schedule and is targeted to open in the fall of 2023. All-in costs for the project are approximately $750 million.
Of the $97.2 million in capital spend in the third quarter, about $72.8 million of that was in investment capital predominantly spent on Durango. The other $24.4 million was maintenance capital. Concerning full year spend in 2022, investment spend is projected to be in a range of $275 million to $325 million.
As mentioned earlier, investment spend is probably going to accelerate in the first two calendar quarters of 2023, which will put downward pressure on the bottom line of RRR.
During the quarter the company also acquired a couple of properties that it has plans to develop further out. I included one located on Losee and the 215 in North Las Vegas, which is located in one of the fastest-growing areas of the Las Vegas Valley, and the other was the acquisition of “a large piece of property on the south side of Cactus, which sits between the I-15 and Las Vegas Boulevard.”
The latter sits across the street from a property the company already owns, and has a similar demographic profile to its Durango project, although with more competition.
Last, in September RRR announced it had decided to permanently close its Wild Wild West property. It’s going to totally demolish the facility and the land will be used for future development plans of RRR.
Including other land holdings of the company, it will be the foundation of its future growth going forward as it continues with its strategy of developing gaming properties in “major beltways in Las Vegas Valley.”
Potential one-off sales
Something that could have a short-term impact on the performance of RRR as it increasing investment spending in the next couple of quarters, is concerning approximately 186 acres it currently holds that it has put up for sale.
Management stated that all of that property has attracted interest from buyers, and it’s in negotiations at this time concerning terms of the deals.
With the value of land in the region, this could generate significant revenue in the months ahead, with the impact on a quarterly basis dependent upon the timing of the closes. That could offset some of the expected impact on the top and bottom line in the next couple of quarters.
And if they take longer to close, it would be a boost to the performance of the company as busier seasons attract more visitors and guests.
Either way – whether sooner or later – it’s going to be a boost to the company when the acreage is sold. If it happens sooner, it could offer support on the floor for the company. If sales close later, it would add to better-performing quarters.
Conclusion
Visitation in the third quarter was flat, but average spend per visit was up in the reporting period. I expect that to continue in the fourth quarter, but significantly ease up in the first and second quarters of 2023 as consumers come down from their holiday high and reexamine spending based upon how the economy is performing and its impact on consumer sentiment.
For that reason, I think the company could come under some pressure in the first half of calendar 2023 as spend increases, visitations are down, and concerns over the depth and length of the recession weighs more on the minds of consumers who will have more time to think during down travel time.
Further out, RRR remains a compelling play to me, with the potential to develop a significant pipeline of projects based upon its property holdings. It’s taking a measured outlook for developing Durango, which is a strength as I see it, and being disciplined in finishing that project before launching into another, is the right decision for the company and shareholders.
So, near term there is likely to be some pain, but in the years ahead I see the company continuing to grow, and once the current economic challenges are mitigated, it’s poised to make a solid, sustainable run.
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