Against Katrina, Casinos Lose Big

Whenever a natural disaster strikes, there are always going to be more immediate and more important considerations than lost revenues. For now, the staggering loss of life and property and the welfare of those caught in the path of devastation must be the primary concern -- there will be time to tally the bottom-line impact in the difficult weeks and months ahead. When the time does come to pick up the pieces, part of the healing process will involve assessing the damage -- and few businesses in Katrina's path were hit harder than the local casino industry.

While a "fortuitous" last-minute deviation pushed the track of Katrina to the east, sparing the New Orleans metro area from the worst of her wrath, it unfortunately placed the Mississippi Gulf Coast casinos directly in the crosshairs. Gaming is the lifeblood of the once-impoverished area, raking in $2.7 billion in annual revenues, filling the state's coffers with tax receipts (upwards of $500,000 per day), and employing approximately 14,000 workers on the 12 coastal casinos alone.

Bracing for impact
Over the weekend, a flood of evacuees sought refuge in my neck of the woods in North Louisiana, swelling premier resorts in the region like Harrah's (NYSE: HET  ) Horseshoe and Boyd Gaming's (NYSE: BYD  ) Sam's Town to capacity. However, at least anecdotally, there wasn't much extra activity on the casino floors. With many of those people facing the distinct possibility of losing everything, their appetite for gambling was understandably nonexistent. Most were probably glued to ongoing coverage of the approaching storm like the rest of us.

Initially, I considered Katrina vaguely reminiscent of Hurricane Ivan, which forced the closure of Gulf Coast casinos for four days. But as events unfolded to reveal the true extent of the damage, it quickly became apparent that things would much worse this time. When the damage is tallied, some resorts will undoubtedly be in better structural shape than others, but no casino operator in the area will come out of this unscathed.

Harrah's Grand Casino Biloxi, which was due for a re-branding makeover, will now need much more than that; the barge was ripped from its moorings and carried inland by the 20+ foot storm surge. The nearby $235 million Hard Rock Casino was also ravaged, just as work crews were putting on the finishing touches ahead of next week's grand opening. The jewel of the coast, MGM Mirage's (NYSE: MGM  ) Beau Rivage, was inundated with water to the second floor and will need extensive repairs.

With reports of scavengers combing through slot machines strewn along the beach for loose coins, it is obvious that this unprecedented disaster will take a much greater toll than simply the disruption of a few days' business. Not only will there be a protracted period of downtime until the companies can get temporary replacement casinos up and running, but reconstruction costs will also be heavy. Judging by disturbing pictures of submerged concrete rubble that used to be bridges, the infrastructure needed to bring tourists to the area may take years to be fully restored.

Facing stiff odds
Harrah's has issued a terse announcement stating that its downtown New Orleans resort, which miraculously sustained relatively minor damage, will be closed through Sept. 30 at the earliest. There has been no word yet on how the company's $150 million hotel tower expansion fared, and forthcoming information is likely to be scarce as the flooded city is further evacuated. Meanwhile, the firm's Biloxi and Gulfport casinos are closed indefinitely and will likely have to be scrapped.

Fortunately, Harrah's property and business interruption insurance will absorb much of the impact, with uninsured operating losses expected to reduce annual EBITDA (earnings before interest, taxes, depreciation, and amortization) by roughly only half a percent. In a candid and somewhat reassuring television interview on Tuesday, CEO Gary Loveman made some sobering comments but did have an upbeat long-term outlook. He said that employees would be paid for up to 90 days and that temporary casinos would be used until rebuilding projects have been completed.

Of course, as the largest and most geographically diversified gaming company in the world, with more than 40 properties in three countries, the company has the resources to weather this setback well. Last quarter, the firm's properties in Louisiana and Mississippi accounted for approximately 19% of total revenues and just 14% of property-level EBITDA -- and much of that was from less-impacted markets in Shreveport/Bossier and Lake Charles, La., and Tunica, Miss.

Smaller companies, however, will likely feel a much sharper impact. For example, riverboat operator Isle of Capri (Nasdaq: ISLE  ) took home roughly half of its revenues from casinos in Louisiana and Mississippi over the same period, and Pinnacle (NYSE: PNK  ) depends on the area for nearly 40% of its earnings.

It's probably premature at this point to begin trying to revise EPS estimates for the affected companies, which also include Penn National (Nasdaq: PENN  ) and Argosy (NYSE: AGY  ) . Undoubtedly, previous estimates will need to be pared back. Even if a timeframe could be established for the properties' return to full operation, local players will probably have more pressing matters to tend to in the near term, and tourists may have amended their travel plans. At the earliest, it could be a month before most of the properties are able to accommodate guests -- or guests feel ready to gamble again.

To put that lost time in perspective, Mississippi casinos generated $247.3 million in revenues during the month of May, and their counterparts in Louisiana garnered $199.6 million. Even with insurance softening the blow, it's going to be a rocky path to recovery. In the interim, expect to see companies like Harrah's working furiously to make up for lost time. Though marketing strategies that seemed promising a week ago -- like showering previous Caesar's customers with generous cross-market promotions to visit Harrah's New Orleans -- are no longer viable, the company will find a place for its loyal contingent of "Total Rewards" members to play.

Time to reshuffle
The odds went decidedly against Gulf Coast casino operators this time, but like a gambler with a large bankroll, this single losing session won't prevent them from trying their luck again. Amid the devastation, it can be difficult to see anything except the difficult road that lies ahead. But it's always best not to let short-term setbacks cloud the long-term picture, no matter how massive they seem. There may even be a silver lining, as slot machine manufacturers like International Gaming Technology and WMS Gaming will likely see an influx of orders for replacement machines.

In the meantime, those left in the wake of this devastation are facing the biggest gamble. Hopefully, Lady Luck will smile upon them.

Fool contributor Nathan Slaughter owns shares of IGT but none of the other companies mentioned. The Fool has a disclosure policy.


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