It’s been a tough week for much of the market, and resort stocks, which tend to be very sensitive to macro conditions, have been particularly hard hit. After all, consumer spending on vacations is highly discretionary, and in a recessionary environment, spending in these categories tends to decline significantly.
Consequently, in a week where 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 one-step rise since 1994), it’s no surprise to see resort stocks like Vail Resorts (MTN -5.26%), Wynn Resorts (WYNN -8.17%)and Entertainment Caesars (CZR -8.99%) all by two-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 was down 12% and Caesars was down 17.3%.
What’s ironic about the fall in resort stocks like these is that the macroeconomic climate had actually favored the group. Consumer spending trends have shifted from goods to services like travel as economies reopen around the world and concerns about COVID-19 generally wane.
Yet there is no doubt that rising interest rates, high inflation and the threat of a recession pose risks for these companies. Higher interest rates make borrowing for new construction more expensive and will increase 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 retain enough staff.
Finally, although unemployment rates remain low, the prospect of a recession would surely cool demand for holiday travel, hitting these businesses just as they recover from their pandemic downturn.
Vail is coming off a strong ski season. Last week, it reported fiscal third-quarter earnings per share of $9.16, higher than pre-pandemic levels. The company also said that through June 1, advance season pass sales 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 low season, so it will be somewhat insulated from macroeconomic pressures over the next few months, and season ticket sales also act as a hedge. However, if a recession is underway during the winter, it will impact his tours and accommodation bookings without a pass.
Wynn Resorts has several properties in the United States, 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 China remained under pressure due to COVID-19 restrictions in China. Like other casinos, Wynn launched its own online gaming team, WynnBet, during the pandemic, but former CEO Matt Maddox lamented the high customer acquisition costs in the space, essentially saying gambling online had become too competitive with so many new entrants. With its Macau exposure, Wynn may be less susceptible to a U.S. recession than other casino chains, but such a downturn would still weigh on its Las Vegas and Boston properties, which generated the majority of revenue in the first trimester.
Unlike Wynn, Caesars is primarily exposed to the US market, with several properties in Las Vegas and others in regional markets across the country. This US focus only expanded with its 2020 merger with Eldorado Resorts. The company also has a significant sports betting and online gaming business, a business that was bolstered by its acquisition of William Hill last year. As a result of all this, Caesars is more exposed to a US recession than a peer like Wynn, which is why its stock fell again this week. If the risk of a domestic recession continues to grow, expect Caesars to take an outsized hit.
The good news for investors is that recent results show these companies are successfully recovering from the pandemic, and they should continue to do so as consumers seem keen on spending on travel right now.
However, the market is clearly pricing in tough times ahead, and if inflation remains elevated and the Fed continues to aggressively raise interest rates, these stocks should continue to decline as recession risk increases.