Casino giant MGM Resorts International outlined a cost reduction, margin improvement plan Thursday that the gaming company said would lead to an additional $300 million in cash flow by 2021.
The plan – labeled MGM 2020, which was first discussed at an investor day last May – calls for a range of company-wide cost-cutting and efficiency measures, including $100 million in reduced labor costs. An MGM spokeswoman said the reduction in labor would amount to 3 percent of the company’s overall labor costs.
In a statement, MGM Resorts said the initiative would lead to “a more centralized organization to maximize profitability and, through key investments in technology, lay the groundwork for the company’s digital transformation to drive revenue growth.”
Wall Street’s response to the announcement was initially positive. Shares of MGM Resorts closed at $24.70 Thursday on the New York Stock Exchange, 49 cents or 1.93 percent, but the Dow was off by 660 points due the fears over the ongoing government shutdown.
Credit Suisse gaming analyst Cameron McKnight said the potential of increased cash flow – often termed as earnings before, interest, taxes, depreciation and amortization (EBITDA) – could stymie any potential activist investor activity. He said the $100 million in labor savings would off-set a $125 million increase in corporate expenses since June 2016.
“While not entirely unexpected, we view the announcement as a positive for shares,” Deutsche Bank gaming analyst Carlo Santarelli said in a research note. He added the plan, “lends credence to MGM’s ability to better manage the Strip portfolio, and we see the broadening scope of the domestic regional footprint as adding scale to support cost rationalization efforts at the regional assets.”
The plan comes as MGM Resorts continues to expand its base. In the last year, the company opened the $960 million MGM Springfield in Massachusetts, the $3.4 billion MGM Cotai in Macau, and spent more than $600 million to transform the Monte Carlo on the Las Vegas Strip into the Park MGM and NoMAD Las Vegas. MGM is adding casinos in Ohio and New York and has been focused on earning one of three possible Japan gaming licenses.
The new plan follows MGM’s Profit Growth Plan, announced in 2015, which the company termed “highly successful,” but did not provide any details.
In a research note, Jefferies gaming analyst David Katz said the company’s Profit Growth Plan originally targeted $300 million in savings and was upsized to $400 million in attained savings.
“We consider the possibility that this could occur in the current plan as well,” Katz said.
In a statement, MGM Resorts Chairman and CEO Jim Murren said the plan is intended to transform how the company operates and leverage the most effective strategies.
“Today, we are taking the next step in our evolution as an organization,” Murren said. “We are building on the strong foundation that we have solidified over the past few years, to deepen our efficiencies and achieve sustained growth and margin enhancement.”
MGM said it expects the cash flow increase will include $200 million by the end of 2020 with another $100 million by the end of 2021.
The plan has two drivers; organizational changes to improve operating efficiencies and investments in the company’s digital transformation to drive revenue growth.
Macquarie Securities gaming analyst Chad Beynon said the Profit Growth Plan had five focal points.
“While MGM has focused on their “continuous improvement” initiatives, this is the first time that it quantified a new plan,” Beynon said.
Half of the savings would come from labor reductions while 25 percent coming from sourcing and 25 percent from optimizing revenue. MGM will reallocate a portion of its annual capital expenditure budget to specific technology advancements. MGM said the changes would grow market share through innovation and elevate guest experience through data, pricing, digital and loyalty capabilities.
Katz said the MGM 2020 plan provided greater detail and context beyond what was discussed at investor day.
“It remains our view that the company has considerable opportunity to drive execution efficiencies over time, which suggests the possibility of upside to today’s confirmed targets,” Katz said.
Howard Stutz is the executive editor of CDC Gaming Reports. He can be reached at hstutz@cdcgamingreports.com. Follow @howardstutz on Twitter.
