What happened
It's been a tough week for much of the market, and resort stocks, which tend to be highly sensitive to macroeconomic conditions, were particularly hard hit. After all, consumer spending on vacations is highly discretionary, and in a recessionary environment, spending in those categories tends to pull back significantly.
Therefore, in a week when investors reacted to the highest inflation reading in 40 years and the Federal Reserve's decision to raise its benchmark interest rate by 75 basis points (its biggest single-step hike since 1994), it's not surprising to see resort stocks like Vail Resorts (MTN -2.68%), Wynn Resorts (WYNN -1.42%), and Caesars Entertainment (CZR -1.40%) all by down double-digit percentages.
According to data from S&P Global Market Intelligence, as of 1:23 p.m. ET Thursday, Vail Resorts was down 11.2% for the week; Wynn had lost 12%, and Caesars had dropped 17.3%.
So what
What's ironic about the slide in resort stocks like these is that the macroeconomic climate had actually been favoring the group. Consumer spending trends have been shifting from goods back to services like travel as economies reopen around the world and concerns about COVID-19 are generally fading.
Still, there's no question that rising interest rates, high inflation, and the threat of a recession pose risks to these companies. Higher interest rates make things like borrowing for new construction more expensive and will raise the cost of adjustable-rate debt. Inflation, especially fuel prices, is making travel more expensive, and labor costs are rising as they try to hire and hold sufficient staff.
Finally, though unemployment rates remain low, the prospect of a recession would surely cool off demand for vacation travel, hitting these companies just as they're recovering from their pandemic slowdowns.
Vail is coming off a strong ski season. Last week, it reported fiscal third-quarter earnings per share of $9.16, a figure that was above pre-pandemic levels. The company also said that through June 1, advance sales of season passes for the 2022-23 ski season (a key metric for its business) were up 9% in volume and 11% in dollar value. Summer is Vail's slow season, so it will be somewhat insulated from macroeconomic pressures for the next few months, and season pass sales also act as a hedge. However, if a recession is underway during the winter, that will take a toll on its non-passholder visits and lodging bookings.
Wynn Resorts has several properties in the U.S., including locations in Las Vegas and its recently opened Encore Boston Harbor, but the majority of the company's revenue has historically come from the global gambling hub of Macau. Business in the Chinese territory has remained under pressure due to COVID-19 restrictions in China. Like other casinos, Wynn launched its own online gambling outfit, WynnBet, during the pandemic, but former CEO Matt Maddox lamented the high customer-acquisition costs in the space, essentially saying that online gaming had gotten too competitive with so many new entrants. With its exposure to Macau, Wynn may be less sensitive to a U.S. recession than other casino chains, but such a downturn would still weigh on its Las Vegas and Boston properties, which brought in the majority of revenue in the first quarter.
Unlike Wynn, Caesars is primarily exposed to the U.S. market, with several properties in Las Vegas and others in regional markets around the country. That U.S. focus only expanded with its 2020 merger with Eldorado Resorts. The company also has a leading online sportsbook and gambling operation, a business that was bolstered by its acquisition of William Hill last year. As a result of all that, Caesars is more exposed to a U.S. recession than a peer like Wynn, which explains why its stock has fallen further this week. If domestic recession risk continues to grow, expect Caesars to take an outsized hit.
Now what
The good news for investors is that recent results show these businesses are successfully rebounding from the pandemic, and they should continue to do so as consumers seem eager to spend on travel at the moment.
However, the market is clearly anticipating tough times ahead, and if inflation remains high and the Fed continues to aggressively ramp up interest rates, these stocks should continue to fall as the risk of a recession rises.
