Friday, June 18, 2010

Churchill's Ongoing Makeover

Now that Churchill Downs Inc.'s annual meeting is over, it's an opportune time to take a close look at the leading US race track operator's financials. As we've pointed out here in prior years, Churchill has a long-term strategy of increasing the profits from its online betting operations (Twin Spires and the newly merged YouBet) and casino gambling (in Louisiana, and now at Calder in Florida), while managing the ongoing decline of revenue from live racing. That trend continues to be evident in Churchill's numbers the calendar year 2009 and for the first quarter of 2010.

In fact, it appears that the trend is accelerating. In comments at yesterday's annual meeting, and in an interview with the Lexington KY Courier-Journal, Churchill CEO Bob Evans (definitely not a racing guy) said that the future of live racing at Arlington Park in Chicago -- without slot machines and without access to loans from the Illinois state government -- was in serious doubt, ands, even more surprising, said that there was a good chance that the number of live racing days would be reduced at Churchill Downs itself. Churchill, according to Evans, is starting a review of all its live racing sites -- Churchill Downs, Arlington, the Fair Grounds and Calder -- with a view to determining how much, and , to cut racing days. And, even before that review gets underway, Churchill has already reduced its racing dates for 2010 as compared to last year -- 4 fewer at Churchill Downs, 2 fewer at Calder, 7 fewer at Arlington and 6 fewer at the Fair Grounds, for a total reduction of 19 days, or about 5%.

That may be bad news for owners and trainers, but it's apparently good news for the shareholders. Churchill's stock price is currently well over $34 a share, significantly up from the $20 low point it reached in 2009.

Churchill's shift of emphasis from live racing to online wagering and slot machines has been underway for some time. In 2006, live racing accounted for 88% of the company's revenue; in 2009, that percentage was only 53%, and in the first quarter of 2010, for the first time, non-racing sources for more than half of all revenue.

Even with the recent reductions, Churchill still runs some 4,100 races a year at its four tracks, or about 8% of the US total. That makes it the largest single track operator in the country, even as it looks to steadily reduce its dependence on live racing.

In its place, and, to a considerable extent, in competition with its own live product, Churchill is expanding its online and off-track wagering operations. The company runs a network of OTBs in Kentucky, Illinois and Louisiana (New Yorkers take note: some places have figured out that having the tracks own the OTBs might actually work). It also owns the expanding Twin Spires online wagering platform, now merging with, as well as the Bloodstock Research online date supplier. In the first quarter of 2010, the online operations accounted for $18 million in net revenue, about a quarter of the company's total. And, as a corporation, Churchill actually prefers to have bets placed through its online network rather than at the track, since the share of the takeout that goes to purses is much less for online bets than it is for on-track betting. Not a good thing for horsemen when your track operator doesn't have any incentive to charge online bet-takers the maximum it can get.

Even though Churchill is still a small player in the non-racing gambling business, with just 1,200 slots at Calder and 1,400 machines in Louisiana, that sector accounted for $26 million in net revenue in the most recent quarter, or more than one-third of the company's total. As, inevitably, Churchill adds more slot machines and other casino-style revenue sources,the gaming side of its revenue will continue to increase, at least vis-a-vis revenue from live racing.

While Churchill still has a comfortable balance sheet, with $17 million in cash and some $187 million in a credit line available as of the end of the first quarter of this year, it does face some hurdles down the road, with some $70 million in debt repayment due in 2013-14. By then, though, if things keep going as they are, Churchill will be even less of a horse racing company and more of an online wagering and slot-machine operator. They're doing what it takes to stay alive, but is it good for the racing game?

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