Rick Arpin

REMAINING NIMBLE: How to Weather Bad Seasons and Extend the Good

Every industry goes through ebbs and flows and different seasons when it comes to valuations and perceptions by analysts and investors. Sometimes the big companies in an industry seem to cruise along and show outsized growth, impressing analysts and investors with steadily improving margins, well-perceived capital investments, and more. Basically, they can do no wrong. But, during those times it can often be a struggle for smaller companies to make an impact. Perception among investors may be that there is no room for these competitors, and no way they can compete against larger, well-funded companies with experienced and deep management teams.

During other periods, it seems like the smaller companies are making all the right moves, disrupting the industry or industry sector with moves that catch the bigger companies by

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Remaining Nimble Final

During other periods, it seems like the smaller companies are making all the right moves, disrupting the industry or industry sector with moves that catch the bigger companies by surprise. Maybe they create new value streams, find better ways to connect with customers, or leverage technology in ways to improve their operation. Maybe the bigger companies have some stumbles, causing investors and analysts to question their previous assessments. Maybe the battleship isn’t so bulletproof, but now it sure seems like it takes a long time to point the battleship in a different direction. And instead of admiring the captain at the helm, leadership and decision-making is questioned. What were previously seen as aggressive expansion strategies that will add value are now seen as examples of management losing their focus.

Much of 2018 for the larger public gaming companies has been spent fighting analyst and investor headwinds. This comes after several relatively strong years from a stock performance perspective, fueled first by the recovery from the recession, then steady growth and continued market growth in Macau, and finally the promise of new value streams like expansion of gaming to Japan and the prospects of legalized sports betting nationwide.

A variety of issues have led to the recent climate of skepticism by the analyst and investor communities, despite a relatively strong macro-economy. It seems somewhat like a perfect storm – which is often the case when these seasons happen. You start to look around and ask, “What’s going to happen next?” Some issues have been company-specific, like the sexual harassment allegations and ultimate resignation of Steve Wynn at Wynn Resorts. Others have been market-specific, like the lingering effects of the Oct. 1 shooting in Las Vegas. Some relate to macro-concerns, like whether resort and other fees are impacting the value proposition of Las Vegas, and the question of how to attract millennials to casinos.

surprise. Maybe they create new value streams, find better ways to connect with customers, or leverage technology in ways to improve their operation. Maybe the bigger companies have some stumbles, causing investors and analysts to question their previous assessments. Maybe the battleship isn’t so bulletproof, but now it sure seems like it takes a long time to point the battleship in a different direction. And instead of admiring the captain at the helm, leadership and decision-making is questioned. What were previously seen as aggressive expansion strategies that will add value are now seen as examples of management losing their focus.

Much of 2018 for the larger public gaming companies has been spent fighting analyst and investor headwinds. This comes after several relatively strong years from a stock performance perspective, fueled first by the recovery from the recession, then steady growth and continued market growth in Macau, and finally the promise of new value streams like expansion of gaming to Japan and the prospects of legalized sports betting nationwide.

A variety of issues have led to the recent climate of skepticism by the analyst and investor communities, despite a relatively strong macro-economy. It seems somewhat like a perfect storm – which is often the case when these seasons happen. You start to look around and ask, “What’s going to happen next?” Some issues have been company-specific, like the sexual harassment allegations and ultimate resignation of Steve Wynn at Wynn Resorts. Others have been market-specific, like the lingering effects of the Oct. 1 shooting in Las Vegas. Some relate to macro-concerns, like whether resort and other fees are impacting the value proposition of Las Vegas, and the question of how to attract millennials to casinos.

Courtesy of iStock

In these seasons, we often see consolidation – to manage market share and cost structures – and new entrants who sense an opportunity. We will likely see each of these in the coming months. In addition to those actions, here are some strategies I think are appropriate in times like this:

  • Be conservative in your forecasting. I’ve noticed that when things are in the “going well” season, forecasts get more and more aggressive, with little room for mistakes or random external unpredictable factors. And we are often slow to see the changing of the seasons. Maybe it’s human nature to want the good times to continue, and we want to hold on to the current season as long as we can, or maybe it’s just a sense of infallibility that comes with forgetting that things weren’t always this good. Whatever the case, we tend to dismiss potential red flags and keep our forecasts at the top end of our ranges and scenario analyses. That is a mistake that then leads to missing those forecasts – and nothing makes investors and analysts more upset than missing forecasts. It leads to a fundamental lack of trust, and analysts and investors then tend to add much more “haircut” to the forecast than management would have if they had just been more cautious.
  • Act like you just bought the company. As much as we try to keep our processes and people moving along at top performance, when things go well we tend to lose some focus. That often manifests itself in not making tough decisions about personnel, adding too many layers to prepare for that growth we know will continue, or make some questionable decisions in systems or other capital expenses. One way out of this is a hard reset, such as if a private-equity firm or another competitor company acquired us. In that case, they would do a full inventory of things – our portfolio of assets, our people, our organizational structure and our processes and systems. And we all know changes would be made. Not that they would always do that perfectly, but the point is they are making a detailed and unbiased assessment. We can do the same thing with our own organization.
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  • Act like a start-up. The view of large companies as “big ships that don’t turn very fast” is often pretty true. But it doesn’t have to be. It just takes dedication to nimble decision-making and assigning responsibility (with the corresponding rewards and accountability) for innovative moves. Big companies also have an advantage since the amount of funding needed for some innovative moves is so small relative to the company size that they don’t even have to acknowledge that these initiatives are taking place, and they have the resources to see them through. Many start-ups don’t have that luxury. Big companies can take many small chances trying to find a winning new approach to their business.

The seasons always change. The goal for us should be to accelerate our way through the bad seasons and extend the good seasons. I think the strategies above can help us in our companies to be in front of the pack when times are good and manage to scrap through the tough times.

Rick Arpin is a seasoned finance and operations executive with over 20 years of experience. Most recently he was Senior Vice President of Entertainment with MGM Resorts, and also held senior finance positions at MGM, after starting his career in public accounting. Contact Rick