Wynn Sweetens the Pot in Q2 but Delta Variant, Macau Remain Wild Cards 

Earnings Report

Wynn Resorts (WYNN) reported after the closing bell Wednesday better-than-feared second-quarter results.

Operating revenue of $990.1 million (+9.5% YoY) exceeded the estimate of $916 million, while an adjusted loss per share of $1.12 was narrower than estimates of a $1.55 loss. More importantly, adjusted property earnings before interest, taxes, depreciation, and amortization -- which is a better measure of the company's profitability -- was $206.9 million and a solid beat against estimates of $157 million.

"We were pleased to see the strong return of our guests at both Wynn Las Vegas and Encore Boston Harbor during the second quarter," said CEO Matt Maddox in the press release, nothing that adjusted property earnings before interest, taxes, depreciation, and amortization at U.S. operations were well above pre-pandemic levels. Maddox also said he sees as a significant pent-up demand for travel and leisure.

"While there have been some fits and starts along the road to recovery in Macau, we were encouraged by the strong demand we experienced during the May holiday period, particularly in our premium mass casino and luxury retail segments," Maddox added.

On the development front, the WynnBET online casino and sports betting app is currently available in six states with additional launches planned over the coming months, he noted, adding that Wynn is advancing its "marketing and branding strategy as we approach the upcoming NFL 2021 season."

Not a Big Win for Macau

Looking at the results by region and starting with the bad in Macau, Gross gaming revenue (GGR) per day was 31% of Q2 2019 levels.

Wynn Macau's operating revenue was $184.0 million, up from $179.73 million in the prior quarter, but below estimates of $209 million. Adjusted property EBITDA of $14.1 million was below $16.6 million in the prior quarter and missed estimates of $32 million.

Wynn Palace's operating revenues were $270.4 million, which is up from $237.3 million in the prior quarter, but missed estimates of $274 million. Adjusted property EBITDA of $53.6 million was an increase from $27.4 million in the prior quarter and slightly exceeded estimates of $49 million.

Broadly speaking, management acknowledged that the recovery in Macau has been "continuously sort of two steps forward, one step back."

For example, after riding a strong week of results from Golden Week in May, a small COVID-19 outbreak in the Guangdong region of southern China "greatly suppressed" June volumes. Then after noticing a "slight comeback" in the middle of July, almost to where the results were back close to April and May results, a new outbreak occurred, and restrictions have stepped up significantly in the past couple of days. Just yesterday Macau announced enhanced measures, including tighter border control and mandatory COVID-19 testing requirements, to combat infections in the area.

Here's what Maddox had to say about the current state of the recovery and his outlook for the future:

"So while we don't know how long this is going to last, the experience thus far with the decisive action, the ability to test millions of millions of people just within a matter of days in the region and in Macau does give us great hope that this will continue to pass. And what's really -- what we're really focused on is the accelerating vaccination rate in the region. And, so while it's impossible to predict right now, we are quite hopeful that as the vaccination rate continues to accelerate and the stated goals are hopefully achieved by the end of the year that we will begin to see a more stabilized and normalized operating environment."

Management also sounded confident in the recovery trajectory of Macau once COVID hits an all-clear moment. It cited how the business went from doing very little in April to $3 million of EBITDA a day over Golden Week in May as a sign that "the pent-up demand is very real." Macau is too great of a tourist destination for it not to come back in a major way.

How about what went great in the quarter?

In Las Vegas, operating revenues were $355.1 million, up from $178.7 million in the prior quarter, and was a strong beat against $254 million estimates. Adjusted property EBITDA came in better than expected at $133.2 million compared to estimates of $59 million and was a strong increase from $28 million in the prior quarter. The adjusted property EBITDA margin of 37.5%, a record for Wynn and was driven by cost controls.

The recovery in Vegas continued at a great pace with Wynn noting that each month in the second quarter was stronger than the last. Further highlighting the recovery in the region, the company said June's EBITDA was double what Wynn reported in April. Occupancy is growing week-over-week, with Wynn seeing levels up to the mid-90s during the weekend. It's lower during the week, but Wynn is making up for the occupancy by focusing on rates. And what's so impressive about the strong EBITDA results is that Wynn is doing this without the help of conventions and international high-end play, which historically has represented about 20% of their results.

The sustainability of the strong results in Vegas has been a question mark lately due to concerns about the delta variant sweeping across the United States. But you wouldn't know any different based on the July Wynn just had. In fact, Wynn said July represented its largest EBITDA for a single month since it opened in 2005.

Encore Boston Harbor was a positive story, too. Operating revenues were $165.2 million, up from $130.1 million in the prior quarter, and exceeded estimates of $148 million. Additionally, adjusted property EBITDA was $46.9 million, a new record that was up from $30.4 million in the prior quarter and exceeded estimates of $40 million. Similar to Vegas, Boston saw each month record stronger results than the last. What's also exciting here is how Wynn is growing its database of players, with new sign-ups for its Wynn Rewards program up 70% in the second quarter compared to the first. And also similar to the Vegas story, July was a terrific month for Boston. In fact, it was the best month on record.

Taking a look at North America as a whole, management quickly shot down the notion that EBITDA numbers would peak in the second quarter. Maddox called it "a preview of what's to come," and added that "we've all been able to streamline our expense structure, understand how to yield our properties better. And the ability to generate significant EBITDA out of these assets is quite clear."

Delta and COVID-19 is always a risk on the minds of people, but Maddox made it clear that consumer behavior has not changed.

"And what is clear is people want to have fun. They want to go to Las Vegas. And as we see conventions come back, which is going to happen and then more international play from around the world come back, I am very confident that we will continue to see growth in our results in both Las Vegas and in Boston," he said.

Updating on Wynn Interactive, which we remind you is merging with a Bill Foley-led SPAC at an enterprise value of approximately $3.2 billion, the company said the business is run-rating at a $110 million in annualized gross revenues as of July and they expect their revenue to accelerate over the reminder of the year. The upcoming football season should be a big reason why.

Overall, this was better than feared quarter for certain, driven entirely by the recovery in North America. However, it's hard to say if the stock will immediately get any credit for the result due to the ongoing uncertainty in Macau and the possibility of new COVID-19 restrictions in the United States that collectively would push out the recovery timeline further and pressure results. What this means is that the stock is hostage to the delta variant and the speed at which regions stamp out local infections.

As for our approach to the stock, Wynn has been a complete falling knife over the past few months mainly due to delta concerns and to a lesser extent, recent fears of a crackdown on Macau business operators by the China's government. The combination of these two factors has made this investment a major disappointment, one of the biggest and most painful in recent memory.

However, we are willing to remain patient here and maintain a long-term investment horizon due to the inevitability of that recovery in Macau combined with the strong performance of North America. It's taking longer than what we initially projected, but what hasn't changed is that the signs suggest the pent-up demand for gambling and entertainment remains incredibly robust.

Trading WYNN

We're trying to look for places to add to WYNN to lower our cost basis in this stock, as our cost basis is in the 120s, and the stock is trading in the low 90s. We want to apply the DeMark 9 indicator, which can be used as a trend reversal. If you look from left to right, on top of candlesticks we indicate 9-day counts. The first 9-day sequence marks a trend change in the stock, from uptrend to downtrend. The next 9 selling days mark a temporary trend change in the stock (after 9 days of straight selling there is a couple days of relief). The next 9 selling days intensified, which we also got a temporary bounce at the end of those 9 days. Now, we're 8 days into this selling sequence, and if tomorrow is another red day, we can start buying WYNN on Friday this week, hoping for a bounce next week. You can go to our Investment Guide here to read about DeMark's indicators. Watch this space.