Stock Story -
Casino resort and entertainment company Red Rock Resorts (NASDAQ:RRR) announced better-than-expected results in Q2 CY2024, with revenue up 16.9% year on year to $486.4 million. It made a GAAP profit of $0.59 per share, improving from its profit of $0.38 per share in the same quarter last year.
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Red Rock Resorts (RRR) Q2 CY2024 Highlights:
- Revenue: $486.4 million vs analyst estimates of $475.8 million (2.2% beat)
- EPS: $0.59 vs analyst estimates of $0.43 (35.8% beat)
- Gross Margin (GAAP): 61.8%, down from 63.2% in the same quarter last year
- Market Capitalization: $3.49 billion
Casino OperatorCasino operators enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits. Have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casinos may face stroke-of-the-pen risk that suddenly limits what they can or can't do and where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing these players to adapt to changing consumer preferences, such as being able to wager anywhere on demand.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Red Rock Resorts struggled to generate demand over the last five years as its sales were flat. This is a tough starting point for our analysis.
Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Red Rock Resorts's annualized revenue growth of 5.5% over the last two years is above its five-year trend, but we were still disappointed by the results. Note that COVID hurt Red Rock Resorts's business in 2020 and part of 2021, and it bounced back in a big way thereafter.
Red Rock Resorts also breaks out the revenue for its three most important segments: Casino, Dining, and Hotel, which are 65.7%, 18.9%, and 10.3% of revenue. Over the last two years, Red Rock Resorts's revenues in all three segments increased. Its Casino revenue (Blackjack, Poker) averaged year-on-year growth of 3.3% while its Dining (food and beverage) and Hotel (overnight stays) revenues averaged 12% and 9.9%.
This quarter, Red Rock Resorts reported robust year-on-year revenue growth of 16.9%, and its $486.4 million of revenue exceeded Wall Street's estimates by 2.2%. Looking ahead, Wall Street expects sales to grow 6.9% over the next 12 months, a deceleration from this quarter.
Operating Margin Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Red Rock Resorts has been a well-oiled machine over the last two years. It demonstrated elite profitability for a consumer discretionary business, boasting an average operating margin of 34.5%.
In Q2, Red Rock Resorts generated an operating profit margin of 28.8%, down 1.8 percentage points year on year. This reduction is quite minuscule and shareholders shouldn't weigh the results too heavily.
Key Takeaways from Red Rock Resorts's Q2 ResultsWe were impressed by how significantly Red Rock Resorts blew past analysts' EPS expectations this quarter. We were also glad its Casino revenue outperformed Wall Street's estimates. Zooming out, we think this was a great quarter that shareholders will appreciate. The stock remained flat at $60.70 immediately following the results.
