Caesars Entertainment Corporation’s (CZR) shares plunged 7.28% in after-hours trading on Monday as the company posted lackluster third-quarter results.
Adjusted loss per share of $2.35 was wider than the Zacks Consensus Estimate of a loss of $1.68 as well as from the year-ago quarter’s loss of 87 cents. Caesars was hurt by higher interest expenses and sluggish revenue growth at its casinos.
Adjusted earnings excluded gain or loss on early extinguishments of debt, impairment of intangible and tangible assets, write-downs, reserves, and project opening costs, along with acquisition and integration costs.
Sluggish VIP volumes, the reduction of room nights available in Las Vegas as a result of The LINQ Hotel renovation, and business disruption at Caesars Palace due to construction and show cancellations resulted in lower core business volumes. Marketing expense also increased due by marketing programs aimed at retaining guests in Atlantic City following the closure of the Showboat Atlantic City casino. This lowered the company’s profitability in important markets.
Including certain one-time items, net loss per share was $6.29 per share, wider than the year-ago loss of $6.03.
Net revenue of $2.21 billion increased 6% year over year, driven primarily by growth in the Caesars Entertainment Resort Properties (CERP) and Caesars Growth Partners, LLC (CGP). However, revenues missed the Zacks Consensus Estimate of $2.27 billion by 2%, which was possibly due to lower room revenues.
Behind the Headlines
Casino revenues moved up 0.3% to $1.39 billion, while food and beverage sales increased 7.4% to $394.3 million. Room revenues fell 0.4% to $301.3 million as renovations at some locations left fewer available rooms.
Interest expenses increased 26% year over year to $708.3 million.
Adjusted EBITDA was $442.5 million, down 12.9% year over year. The decline was primarily due to a decline in the adjusted EBITDA at the Caesars Entertainment Operating Company, Inc. (CEOC).
The adjusted EBITDA was negatively impacted year over year by approximately $39 million of unfavorable hold, nearly $23 million in bad debt expense, and about $52 million driven by lower volumes and lower marginal returns on marketing investment.
However, these negatives were partially offset by the addition of The Cromwell, Horseshoe Baltimore, and The LINQ, which together added roughly $20 million in EBITDA. Furthermore, strong growth in CIE provided approximately $23 million in incremental EBITDA.
Total operating expenses declined 2.7% year over year to $2.5 billion. This decline was mainly due to lower reimbursable management costs and lower impairment of intangible and tangible assets.
The company is aiming to cut expenses and increase EBITDA through a variety of initiatives in operations, marketing and corporate expenses. Management targets an incremental $250 to $300 million of EBITDA in 2015 as a result of these actions, which primarily will be driven by cost savings.
Segment Details
CEOC adjusted revenues were $1.25 billion, down 17.5% year over year. Adjusted EBITDA was $232.2 million, down 34.15% from the year-ago period.
The CERP segment reported revenues of $535.7 million, up 5.6% year on year. Adjusted EBITDA was $122.6 million, down 1% year over year.
CGP LLC’s revenues were $485.8 million, up from $80 million in the year-ago quarter. Adjusted EBITDA was $105.4 million, up 33.9% year over year.
Our Viewpoint
Caesars Entertainment (formerly known as Harrah’s Entertainment) was taken private in 2008 by private equity firms Apollo Global Management and TPG Capital in a leveraged buyout of around $30 billion. However, it launched an Initial Public Offering in 2012 and restarted trading.
The company has been unable to curtail its debt despite several attempts. The company has designed a comprehensive plan to aid independent stock listing and significant deleveraging of its subsidiary, Caesars Entertainment Operating Co. Also, the company is in discussions with its creditors to pay off its debt.
Moreover, the global financial slowdown had a severe impact on the U.S. gambling and casino industry. This accompanied with the highly leveraged nature of the buyout has kept Caesars Entertainment under pressure. Furthermore, the company is heavily spending on renovation of its properties to boost traffic, which is currently hurting its profits.
The company runs casinos across the U.S., primarily in Las Vegas and Atlantic City. Unfortunately, Atlantic City, once East Coast's gambling hub, is currently facing stiff competition after gambling was legalized in the neighboring states including Pennsylvania and New York, thereby hurting the revenues of the companies operating in the region.
Caesars Entertainment currently carries a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry include Speedway Motorsports Inc. (TRK), Penn National Gaming Inc. (PENN) and Monarch Casino & Resort Inc. (MCRI). All these stocks sport a Zacks Rank #2 (Buy).
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