Casino, tavern, and slot machine operator Golden Entertainment (NASDAQ:GDEN) fell short of the market’s revenue expectations in Q3 CY2024, with sales falling 37.4% year on year to $161.2 million. Its GAAP profit of $0.18 per share was 101% above analysts’ consensus estimates.

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Blake Sartini, Chairman and Chief Executive Officer of Golden, commented, “In the third quarter, we have maintained our commitment to returning capital to shareholders through our regular dividend and share buyback program despite a challenging operating environment for our properties. We anticipate that business conditions will improve in the fourth quarter and, with our increased share buyback authorization currently at over $130 million, we expect to continue to use our liquidity to acquire our own shares throughout the year.”

Company Overview

Founded in 2001, Golden Entertainment (NASDAQ:GDEN) is a gaming company operating casinos, taverns, and distributed gaming platforms.

Casino Operator

Casino operators enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits. Have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casinos may face stroke-of-the-pen risk that suddenly limits what they can or can't do and where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing these players to adapt to changing consumer preferences, such as being able to wager anywhere on demand.

Sales Growth

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Golden Entertainment struggled to generate demand over the last five years as its sales dropped by 4.9% annually, a rough starting point for our analysis.

Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Golden Entertainment’s recent history shows its demand has stayed suppressed as its revenue has declined by 19.2% annually over the last two years. Note that COVID hurt Golden Entertainment’s business in 2020 and part of 2021, and it bounced back in a big way thereafter.

Golden Entertainment also breaks out the revenue for its most important segment, Gaming. Over the last two years, Golden Entertainment’s Gaming revenue (Poker, Blackjack) averaged 25% year-on-year declines. This segment has lagged the company’s overall sales.

This quarter, Golden Entertainment missed Wall Street’s estimates and reported a rather uninspiring 37.4% year-on-year revenue decline, generating $161.2 million of revenue.

Looking ahead, sell-side analysts expect revenue to decline 5.9% over the next 12 months. While this projection is better than its two-year trend it's tough to feel optimistic about a company facing demand difficulties.

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Cash Is King

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Golden Entertainment has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.1%, lousy for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Golden Entertainment to make large cash investments in working capital and capital expenditures.

Key Takeaways from Golden Entertainment’s Q3 Results

We were impressed by how significantly Golden Entertainment blew past analysts’ EPS expectations this quarter. We were also glad its Gaming revenue outperformed Wall Street’s estimates. On the other hand, its revenue missed. Overall, this quarter was mixed. The stock remained flat at $30.78 immediately after reporting.

So do we think Golden Entertainment is an attractive buy at the current price? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.