High unemployment, weak consumer confidence and fears of a double-dip recession aren’t conducive to a business recovery in Las Vegas, the nation’s playground.
So what explains the better-than-expected earnings gain reported Monday by MGM Resorts International?
The acquisition of a lucrative Chinese subsidiary in Macau primarily fueled the company’s significant increase in second-quarter profit. But improved business in Las Vegas also factored into the positive results, with tourists spending more on shows, meals, slots and table games, executives said. The trend is expected to continue into 2012.
While the nation’s economy struggles, several factors are working in MGM’s favor and that of Las Vegas as a whole, MGM Resorts CEO Jim Murren said.
Las Vegas offers good value for the money — a consideration that has become more critical for consumers, Murren said.
“This didn’t mean as much to people back in ’07 when they felt they could afford other experiences,” he said. “That value proposition is far more important today.”
Although consumers are understandably concerned about the debt-ceiling debate in Washington and the fallout on Wall Street, many are still in better shape than they were two years ago and are able to put the latest turmoil in perspective, Murren said.
“They’re getting on with their lives — and going on vacation,” he said.
Such theories help explain the company’s increased room revenue in Las Vegas, even as it entered the hot summer season when business typically slows down. Other business segments, including gambling, entertainment and food and beverage, also rose on the strength of increased spending by tourists.
MGM’s convention business is also trending upward, though conventiongoers only represent about 15 percent of the company’s room bookings next to the fun-seeking tourists who account for 60 percent.
Even as stocks tumble, many corporate balance sheets have improved, with companies stockpiling cash and beefing up their meeting schedules, Murren said.
“Businesses that deferred a lot of meetings are getting back to work,” he said. “They need to take trips to do what they do.”
MGM earned $3.45 billion or $6.22 per share in the second quarter versus a loss in the year-ago quarter of $883 million or $2 per share.
MGM executives say they are also getting a boost by marketing their Las Vegas properties in more appealing ways.
“We own most of the dominant properties where people want to stay, they’re in great shape and we’ve been more effective in marketing them as a portfolio,” Murren said.
The company’s M Life loyalty program, which launched in January, packages deals on shows, meals and other attractions at multiple properties. The program now offers those benefits to gamblers based on what they spend on the casino floor. In October, MGM will expand the program’s benefits to nongamblers based on what they spend on rooms, meals, entertainment and other nongambling amenities in Las Vegas.
Among those booking rooms and spending money on resort amenities are friends and family of many of the company’s 50,000 employees in Las Vegas. Under a program called M Life Insider, employees can access discounted offers for rooms, show tickets and meals and pass them on to designated recipients.
“They’ve become a big army of marketers who have a bigger understanding of the company they work for. By linking these properties together in a seamless way, M Life is going to be the most powerful economic engine we have as a company.”
The company’s CityCenter resort complex also showed improvement in the second quarter. CityCenter’s operating loss narrowed to $89.8 million from $128 million a year ago. Revenue from resort operations rose 50 percent to $274.9 million and revenue at Aria increased 48 percent to $233 million.
Since its December 2009 opening, the $8.5 billion complex has been plagued with problems ranging from sluggish condo sales and retail activity to the empty, construction-flawed Harmon hotel. Some customers also reported initial problems with CityCenter’s in-room hotel technology and did not take to its modern design.
“I think people still want to know where Aria and CityCenter fit into the Las Vegas landscape and will it justify its investment over time,” Murren said. “From our perspective, it’s clearly on that path. Brand awareness is improving and our (customer service) scores have gotten much better.”
MGM is working with Cirque du Soleil to modify Aria’s money-losing “Viva Elvis” show, which has drawn sparse crowds, executives said.
Though business is looking up for MGM, Murren said the company is still in recovery mode and is taking steps to prevent another potential catastrophe like the company’s near bankruptcy in 2009.
Excess cash will first go to pay down the more than $12 billion in debt on the company’s books. Secondly, the company has begun diverting some money to strategic improvements designed to boost revenue, such as the room remodeling effort under way at Bellagio and the upcoming room remodel at MGM Grand that will wrap up next year, he said. That’s a big chunk of the $275 million MGM expects to spend this year on such improvements.
MGM has hired back some employees who were let go in the recession, including from such assignments as banquets, catering and convention services, Murren said.
The company’s ability to hire and expand will depend on how well it can improve profit margins, which are still far below pre-recession levels, he said.
The latest stock market decline, for all of the dire headlines emanating from Wall Street, he said, isn’t expected to derail the company’s action plan for recovery. Customers, he said, don’t appear to be canceling reservations or running for the exits.
“I know tourists are not happy with Washington. They’re not happy when they watch the financial markets slide ... we just have to look at where we are and how far we’ve come.”
Murren said all of the TVs at the Bellagio gym Monday morning were tuned to broadcasts of the declining Dow Jones industrial average.
“I’ve never seen that in the 11 years I’ve worked at Bellagio. But the gym was packed — two years ago it wasn’t.”