Monarch Casino & Resort (NASDAQ: MCRI) owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno. The facility includes 50,000 square feet of casino space, a hotel, and adjoining food and retail outlets.
Monarch's revenue increased by 5.2% in 2007, compared to an 8.7% growth in 2006. This falloff can be attributed to factors such as rising oil prices, which hurts the business of the tourist-dependent casino industry. Another factor that contributed to this falloff was stricter government regulations, which increased the casino business in California, thereby taking away some of Monarch's out-of-state clientele. However, an increase in business from the rapidly growing local population of Reno enabled Monarch to partially offset this decline.
|Segment (Year ending Dec. 31)||2007||2006||2005|
|Food and Beverage||42.36||41.04||38.57|
Monarch's net revenue increased by 5.2% in 2007, while operating income and net income increased by 6.6% and 10.9%, respectively. However, while MCRI's revenue growth decreased from the year before, both operating income and net income grew at higher rates than in 2006.
The company's promotional allowances, which are deducted from the gross revenue to obtain the total net revenue, are defined as the retail value of hotel, food and beverage services Monarch provides to its customers. Promotional allowances went up by 7.7% in 2007, compared to the 5.2% increase in net revenue in the same year.
Monarch's entire revenue comes from the services provided at its one and only property: The Atlantis. The revenue is divided into its four segments of operations: casino, food and beverage, hotel, and other.
Revenue from this segment represents Monarch's aggregate net win from gaming activities at its properties. Casino revenues were $110.3 million in 2007, a 6.8% increase from the year before. The key drivers behind this increase were increases in revenue from table games, poker, Keno, and especially slots. Revenue from slot and video poker machines increased by 7.3% in 2007, driven by a shift in customer preferences towards electronic casino games. This increase in slot revenue can also be attributed to Monarch's technological innovations to its existing facilities and equipment. Furthermore, Keno and poker revenues grew by 11.0% in 2007, an increase that Monarch attributes to effective marketing and the quality of its product and service offerings at its property. Lastly, a decrease in this segment's operating expenses contributed to the increase in this segment's overall revenue.
This segment consists of revenue obtained from Monarch's aggregate food and beverage sales at its properties. This includes sales from in-hotel restaurants and bars, room service charges, and vending machine sales. Food and beverage revenues increased 3.4% to $42.4 million in 2007, primarily due to a 3.5% increase in average revenue per cover. Lastly, there was a slight increase in operating expenses, up to 47.9% of food and beverage revenue in 2007.
This segment consists of revenues from room rentals in Monarch's hotel. Hotel revenues totaled $27.9 million in 2007, a 5.7% increase from 2006 numbers. The increase reflects an increase in both the average daily room rate (ADR) and occupancy rate in fiscal 2007. The Atlantis ADR increased 5.97% in 2007 (up to $74.04), while its average occupancy rate rose from 93.3% in 2006 to 93.8% in 2007. Furthermore, hotel operating expenses decreased to 30.0% of hotel revenues in 2007, compared to 31.7% in 2006. This decrease resulted from the impact of the increased ADR on revenue.
This segment consists of miscellaneous services that do not fall into any of the other categories, such as long-distance phone services, parking services, and in-room movie services. This segment had no growth in 2007, remaining flat at approximately $4.9 million.
Casino/resort operators such as Monarch depend heavily on overall economic strength for its revenue, as people tend to travel only when they feel they have enough disposable income to afford such vacations. In the first half of 2008, however, the price of crude oil rose to $98.66/barrel, up 76.8% from the year before, causing an increase in the price of jet fuel from $850/metric ton at the beginning of 2008 to $1300/ton by June. The increasing fuel costs lead to spikes in airline prices, which in turn drastically lower the numbers of people who can afford travel costs. This in turn takes business from tourists away from hotels and casinos, as evidenced by Monarch's slower growth in 2007.
Over the past 10 years, the population of Washoe County (where Reno is located) has grown at an average of 2.7% a year compared to the national average of a 1.1% average 10 year population growth. In addition, Nevada's history of favorable regulations on gaming enable MCRI to operate its casino without fear of losing its business due to a change in regulation. These factors help Monarch because it provides the casino/resort with a growing number of potential customers right in its own market of operation.
However, although Monarch benefits from the ever-increasing population of Reno, its inability to enter other markets makes it vulnerable to any changes in Nevada's economic conditions. For example, if there is an economic recession in Nevada that causes a steep decline in revenue from Monarch's Nevada casinos, it will be unable to offset these losses through revenues obtained in other markets. In the first four months of 2008, gaming win for the entire Reno market was $224 million, a 6.5% decrease from 2007. MCRI was hit particularly hard by this trend, with its 2008 Q2 revenue decreasing by 15% from the previous year's Q2 results.
Nevada casinos have historically been able to count on business from Californians due to California's stricter gambling regulations. However, since 2000, these regulations have become less strict, leading to a growth in Californian Native American casino revenue every year since. 2007 saw a serious decline in Native American casino revenue growth, with Native American gambling increasing only 1.6% in Southern California, compared to 5% nationally. In February 2008, California voters approved an increase in the number of Native American operated slot machines in the state that analysts expect to increase this growth rate. This affects Monarch because it gives Californians more in-state options for gambling, decreasing out-of-state clients and increasing the importance of Monarch's ability to attract people from its own state, specifically Reno.
The changing regulations contributed to the slowing of Reno's casino revenue growth, from 8.7% in 2006 to 5.2% in 2007. Further, as a result of the higher concentration of local customers, casino revenue grew by 6.7% in 2007 while food and beverage and hotel revenues increased by 3.2% and 5.6%, respectively. This can be explained by the fact that Monarch obtains the majority of its food and beverage and hotel revenue from out-of-state customers, while both local and non-local customers contribute to casino revenue.
The majority of Monarch's business comes from tourists and, as a result, it competes with other casinos/hotels for the gambling and lodging preferences of these tourists. Further, because Monarch operates wholly in Nevada, it primarily competes with other Nevada-based casino/hotel operators. These companies include:
|Company||2007 Revenue ($ in millions)||2007 Operating Income ($ in millions)||2007 Operating Margin||2007 Nevada Casino Revenue ($ in millions)||2007 Nevada Casino Revenue Market Share|
|MGM MIRAGE||7,962||2,864||37.23%||~2,000||~ 15% < X < 20%|
|Las Vegas Sands||2,951||319||10.82%||405||3.43%|
Nevada is the state with the highest revenue from casino operations, with an estimated aggregate $11.8 billion in revenue for fiscal 2007, a 5.72% increase from 2006. Monarch was responsible for just under 1% of this revenue, while industry giants MGM MIRAGE and Harrah's Entertainment combined for nearly 40% of the market's revenue. MGM does not separate its casino revenue by geographic location, so its $2 billion in Nevada casino revenue is an estimate based on the fact that 68% of its available casino floorspace is in Nevada and its overall casino revenue for 2007 was $3.24 billion. This would place its approximate market share at 15-20% of the overall Nevada gaming market. Wynn's market share is an estimate based on taking the percentage of casino revenue on its total revenue (73%) and multiplying it by Wynn's net revenue from its Nevada operations.