Churchill Used to be a Racing Company

Wow. More than a year since my last entry on this blog, and more than two years since I've been posting regularly. To some extent, Twitter can substitute, but when it comes to doing deeper analysis, that 140-character limit can get in the way. In any event, changes in the rest of my life mean I can get back to the blog on a regular basis, so here I am.

When last I looked, way back in 2010, Churchill Downs Inc. was in the process of transforming itself from a thoroughbred racing entity -- one that ran 8% of all live races in the US and 88% of whose revenue as recently as 2006 had come from the live racing product -- into, well, we weren't quite sure what.

Now we know. In its third quarter 2016 report, just released this past Thursday, Churchill shows that only $41.3 million of its total corporate revenue of $303.4 million (that is, just 13.6%) comes from live racing. Looking at the nine months ending September 30, the picture is slightly less extreme; live racing accounted for $220.8 million of Churchill's total revenue of $1.03 billion, or 21.4%. That's probably a fairer measure, since by far the largest part of live-racing revenue comes in the second quarter, from Derby Week in Louisville. For the year as a whole, I estimate that racing will account for well under 20% of Churchill's total revenue, since income from Gulfstream-at-Calder and Fair Grounds will pale in comparison to the ongoing streams from the Twin Spires ADW, the casinos and the Big Fish computer games.

As for profits, live racing now accounts for less than 1% of Churchill's bottom line. For this year's third quarter, net income from racing operations was all of $400,000, compared to $30.4 million from casinos, $14.3 million from the Twin Spires ADW, and $23.4 million from Big Fish Games. Looking at the nine-month figures, which Include Derby and Oaks Days, the racing segment of the company showed a "profit" -- i.e. earnings before interest, taxes, depreciation and amortization -- of $84.3 million for racing, $98 million for casinos, $44.8 million for Twin Spires and $58.9 million for Big Fish. That's 29.5% of total corporate profit, sizable but by no means the corporation's main profit engine. I suspect the Churchill Downs Inc. suits would gladly part with it, as long as they held on to the two-day profit bonanza of Oaks and Derby Days. Col. Matt Winn and other personalities from Churchill's formative years would not be amused.

Churchill's third-quarter financial report, which also has results for the first nine months of 2016, is available here. For those with a wonkish inclination, it has lots of detail. Among the principal facts that leapt out at this racing aficionado are the following:

Churchill's number of race days continues to decline year top year. For the nine months ending September 30, Arlington, Fair Grounds, Calder and Churchill had only 175 days of live racing, compared to 183 days in 2015. Under the new agreement between Churchill and the Stronach group, which authorizes the latter to run enough days at Calder to maintain that track's right to have slot machines and poker, Calder has effectively disappeared from live racing, following in the wake of Churchill's earlier selloffs of Ellis Park and Hollywood park. The Churchill folks have torn down the grandstand at Calder and most of the barns, and racing is essentially conducted in a television studio.

Churchill continues to expand its casino operations, with 8,560 "gaming positions" (aka slot machines) at five casinos and two hotels, in addition to joint-venture interests in the new harness tracks and slot parlors in Lebanon, Ohio and Ocean City Maryland.

As for Big Fish Games, which Churchill acquired at the end of 2014, for $885 million, I confess to having no expertise in evaluating its prospects, or in playing its games. Those who want to check on the games can go here. I suppose we'll know in a few years whether the acquisition paid off, but the acquisition was a powerful signal that Churchill is moving steadily away from  racing.

Churchill's hostility to horsemen and mistreatment of racing fans have been well-documented elsewhere, and its tracks rate poorly compared to others supposedly in the big leagues. The Horseplayers' Association of North America (HANA) rates Churchill Downs 22nd, Fair Grounds 26th and Arlington 35th among all US tracks. The other multi-track players do much better. For example, NYRA, for all its faults, has Saratoga, ranked 3rd, Belmont 12th and even Aqueduct 21st, all three ahead of all of Churchill's tracks. And the Stronach group has Gulfstream at 8th in the HANA rankings, Santa Anita at 15th, and Pimlico and Laurel and 23rd and 24th.  Yes, the latter two companies depend on slot revenue to some extent, but they're basically about horse racing. Churchill isn't anymore, and it shows. (The complete HANA ratings are here.)

It's too late for Calder and Hollywood Park, and Ellis, under post-Churchill ownership, is hanging by a thread. The writing on the wall is clear: unless someone or some entity takes over Churchill's remaining tracks, the company's racing program will eventually diminish to a two-day carnival in May.