Operating margins have been front and center over the last two years, as companies grappled initially with supply chain issues stemming from the pandemic, and then accelerating inflationary pressures due to the war in Ukraine. There were numerous moving parts in 2021 and 2022 but the overriding theme was reasonable revenue growth alongside persistent margin pressure.
Dispersion among companies has been evident in terms of their ability to control costs and inventory levels, pass on price increases and adapt business models to the new remote workforce. One sector on the plus-side of the ledger has been the casino gaming industry.
Gaming was one of the industries that completely shut down for a few months in 2020 at the height of the pandemic, and then it only gradually began to entertain a limited number of visitors amid strict social distancing requirements. As vaccines rolled out and the economy opened up, casino executives reexamined their businesses and experimented with new practices. Among the most significant changes was the elimination of “loss leaders” — offerings such as huge buffets and other money-losing and/or low-margin marketing tools that used to be necessary to drive foot traffic.
As seen in this week’s chart, EBITDA margins for a cross section of public casino companies averaged a healthy 26% in 2019 — the last full year prior to pandemic-related shutdowns in the U.S. Despite elevated labor and other cost pressures in 2022, average EBITDA margins for these companies improved to 33%. It’s worth noting that the comparable set excludes Macau-exposed operators. The 700 basis-point margin improvement is an impressive outperformance compared to other industry sectors.
When playing games of chance, luck is just as important as skill. Similarly, while casino executives were proactive in dealing with the new operating environment, they clearly benefited from changing consumer preferences and the need for less marginal promotional spending in the post-COVID-19 period. The structural margin improvement appears permanent, which could enhance profitability and free-cash-flow profiles, boost valuation multiples and make the sector more defensive over the course of a business cycle.
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