Red Rock Shares Slump on Durango Cannibalization Concerns

Posted on: May 8, 2024, 12:26h. 

Last updated on: May 8, 2024, 02:34h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Red Rock Resorts (NASDAQ: RRR) tumbled Wednesday after the casino operator delivered first-quarter revenue that missed analyst estimates while noting the new Durango Casino & Resort in Southwest Las Vegas has pilfered business from its other properties.

In midday trading, shares of Red Rock are off 7.5% on volume that’s already exceeded the daily average. Wednesday’s weakness in the gaming stock extends a slide in which it has shed 18.8% over the past month. Durango opened last December, meaning the first three months of 2024 represented the first full quarter of results for the new casino hotel.

On a conference call with analysts late Tuesday, Red Rock CFO Stephen Cootey noted that Durgano’s initial financial and operational performance has been strong and that some pressure on the operator’s other Las Vegas venues was expected in the wake of the Durango debut.

That said, and as stated in the past earnings calls, we expect to experience and we have experienced cannibalization, primarily at our Red Rock property due to the Durango opening, but this has been largely in line with our expectations,” said Cootey.

Due to its location in Southwest Las Vegas, the venue Durango would be most likely to steal business from is the operator’s namesake property in Summerlin. Cootey said Red Rock can “backfill” the revenue Durango is swiping from sister properties with the help of Las Vegas’ fast-growing population and the company’s other casinos being located in some of the corners of the city that are adding the most new residents. By some estimates, the area in which Durango is located is growing at a rate that’s double or triple that of Las Vegas in aggregate.

Red Rock Still Bullish on Durango

While Durango might be a near-term headwind for some other Red Rock venues, cannibalization isn’t expected to be a long-term hurdle, and the longer-ranging outlook for the new property is bright.

“In past earnings calls, we have stated that we believe Durango will be one of our highest margin properties over the medium to long term and will generate a return consistent with, or in excess of, our prior greenfield developments,” added Cootey. “With one full quarter under our belt, we are confident that Durango is well on its way to achieving both its margin target and return goal even faster than originally planned.”

Though not yet confirmed, there’s scuttlebutt that new amenities at Durango could include a bowling alley, movie theater, and other nongaming fare.

Red Rock Not Expecting to Up Promo Spending

In addition to Durango, the other dynamic at play in the Las Vegas locals’ market is increased promotional spending by some operators. Boyd Gaming (NYSE: BYD), Red Rock’s most direct competitor, mentioned that issue on its first-quarter earnings call last month.

Red Rock President Scott Kreeger acknowledged increased promotional spending among Las Vegas locals’ operators, but added it’s mostly attributable to independent companies behind a small number of casinos.

“I think when we talk about competition from our view, we’re not seeing anything in the market that would change our strategy or we’re not seeing anything in the market that we haven’t seen over the last couple of years,” observed Kreeger. “We’ve said before that there are some one-off single operator properties within the local market that are competitively promotionary and have been, but we’re not seeing anything out of the norm there.”