Once viewed as a crucial attraction to draw visitors to a redeveloped Palms resort-casino, the KAOS Dayclub and Nightclub ended up being a drain on the casino’s profits, forcing Red Rock Resorts to close the club some seven months after celebrating its grand opening.
The highly-anticipated KAOS had been part of the $690 million renovation of the Palms, which began about a year after Red Rock Resorts acquired the property in 2016 for $312.5 million.
The decision to close KAOS was confirmed when the company reported a net loss of $26.8 million in the third quarter, down from $51.9 million from the same period last year.
“In short, while the property is experiencing exceptional top line growth across both gaming and non-gaming segments with gaming revenues up nearly 30 percent for the quarter, the expense side of the business has been challenging to date due in large part to the entertainment and fixed-cost structures associated with the KAOS dayclub/nightclub,” said Stephen Cootey, Red Rock Resorts’ executive vice president, CFO and treasurer.
Therefore, Cootey said, the company decided to close the club effective immediately and reassess the use of those venues going forward.
“In the interim, we intend to use the venues for private meeting space and special events in addition to everyday resort full operations,” Cootey told analysts during a conference call to discuss third quarter earnings.
Cootey added that Red Rock Resorts has taken a onetime charge of $28.2 million during the quarter associated with the termination of “certain artist performance agreement and employment agreements.
“We anticipate taking similar onetime charges over the next couple of quarters in the range of $16 million to $22 million,” he said.
The Palms transformation began back in February 2017 and took more than 32 months to complete.
“While closing the nightclub should improve near-term profitability, we could continue to see other elevated costs as the property continues to ramp,” Barry Jonas, an analyst with SunTrust Robinson Humphrey,
Jones noted that with the unprofitable nightclub closed, executives expected the Palms’ earnings to “improve sequentially” and move above the break-even early next year.
As such, Jones said, he was lowering his 2020 earnings estimate for the property from $39 million to $20 million.
When asked about the thought process behind making the decision at this stage to close the club, Frank Fertitta, the chairman and CEO of Red Rock Resorts, said it was obvious that the nightclub environment in Las Vegas is extremely competitive.
“It doesn’t appear that the market has grown enough for the amount of supply in the market,” Fertitta said. “The cost of entertainment is excessively high, and we just made the decision to focus where the fish are and acknowledge that (the) nightclub business, at least at the Palms, was not working for us.”
The rumors of problems at KAOS began in September with reports that DJ Marshmello, who had signed a $60 million two-year residency was dropped from his deal with the club. Last month, Jon Gray left his position as the Palms’ vice president and general manager.
Fertitta didn’t specifically address Marshmello’s or Gray’s departures. He told analysts that there is a new leadership team in place at the Palms that are intently focused in hotel, casino, and all things that are working.
“There are a lot of good things happening over there,” he said. “And it’s just … we don’t want to be distracted by the things that weren’t working for us.”
Sphere London update
Meanwhile, the Madison Square Garden Company will spin off its entertainment business from its sports business to set aside cash for a second MSG Sphere project in London, company officials said.
The restructuring will have no effect on the MSG Sphere at The Venetian project, Gregg Seibert, MSG vice president, told analysts in the company’s earning conference call.
The company had previously said that they planned to open London a year after Las Vegas.
“It’s not going to be a year after Vegas,” Seibert said. “I don’t know if it’s going to be two years … or three years after Vegas. I think you could see us very easily look at the Sphere in Vegas as a financing source as we go forward.”
The MSG Sphere at The Venetian, an 17,500-seat arena with a wraparound LED screen, has a price tag between $1.2 billion and $1.7 billion.
The project, which will have nine levels and 875,000 square feet of interior space, is on track to open in 2021, according to a company official.
The venue will be 360 feet tall and 516 feet wide and will connect to The Venetian and the Sands Expo and Convention Center via a pedestrian bridge. Both properties are owned by Las Vegas Sands Corp.
Las Vegas Sands contributed the site as part of its partnership with MSG.