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Churchill prospers in the face of criticism
LEXINGTON, Ky. – Over the past several months, Churchill Downs Inc., the owner of the iconic Louisville track that conducts the U.S.’s biggest race, the Kentucky Derby, has come under fire from multiple directions. Owners of Derby horses have lambasted the track publicly for its Derby Day accommodations, horseplayers have urged boycotts of the company’s racetracks, and legislators in Louisiana earlier this year pushed a punitive bill that would have forced the company to spend 10 percent of its casino proceeds on its Fair Grounds racetrack in New Orleans.
For the company that is famous for its twin spires and for hosting the most exciting two minutes in sports, not everything is coming up smelling like roses as its signature meet comes to a close and a slow business quarter looms ahead.
Dissatisfaction from horseplayers is showing up in handle on races at the company’s tracks this spring and summer. In May, not including the Derby and Oaks, handle at Churchill Downs plummeted 30 percent, according to records provided to the Kentucky Horse Racing Commission, with field sizes dropping almost a full horse per race.
Farther north, handle at Churchill-owned Arlington Park near Chicago was down 25 percent over the same time period, according to state records. Down south, Churchill-owned Calder Race Course in Miami saw its revenue plunge 44 percent in 2013 amid head-to-head competition with Gulfstream Park for the first time, and now the company plans to hand over Calder’s racing operations to Gulfstream’s parent company, the Stronach Group.
Yet Churchill Downs Inc., the company, appears to be stronger than ever. Its share price has nearly doubled over the past two years, in large part because of strong returns at its newly purchased stand-alone casino properties. The climb of its stock has richly rewarded the company’s executives with multimillion-dollar paydays through the track’s new executive-compensation program, which relies almost exclusively on stock options.
Thus, the yin and yang that is Churchill. While the company has been able to glean more and more revenue from its Derby over the past 10 years, Churchill’s other racing properties are in the doldrums: Overall racing-operations revenue at the company declined 9 percent in 2013 compared with 2012, according to the company’s financial statements. Meanwhile, casino revenue at the company was up 33 percent in 2013, to $297.5 million, a figure that surpassed the company’s live-racing revenue for the first time. (Churchill also had racing-related revenue of $184.5 million from its online account-wagering operation.)
Churchill declined to make any of its executives available for this article. The company also would not provide answers to a list of e-mailed questions regarding its Derby policies for owners, the performance of its racetracks, its executive-compensation program, or, among many other topics, its highly controversial decision to raise its takeout rates for the start of the Churchill spring meet, a move that raised the ire of horseplayers across the United States.
A statement issued by Churchill in response to inquiries by Daily Racing Form said, “Most of these questions we’ve already answered on numerous occasions in stories that have been done several times now. We have nothing new to add.” The statement added that “many of the [other questions] fall under financial information we cannot disclose at this time.”
In jurisdictions where Churchill operates, the company is viewed with a mix of perceptions by horsemen and lawmakers. That has raised questions about Churchill’s ability to make its case in front of the Kentucky legislature for slot machines at its Louisville track. With owners and the general public in Kentucky railing against the company – specifically for gouging – that case might be even harder to make in years down the road, especially when horsemen in other jurisdictions have said that the company’s greatest sin has been neglecting its racetrack properties.
Damon Thayer, the Kentucky Senate majority floor leader who has tried to shepherd bills through the legislature calling for a constitutional amendment to authorize casinos in the state, said legislators are aware of the criticisms of the company. However, he said he did not know if that would affect its lobbying efforts in the state, which are expected to begin in earnest again next year.
“I think it’s premature to make that statement,” Thayer said in response to a question about whether the adverse publicity would hamper the company’s lobbying. “Legislators in general pay a lot of attention to all of the large, high-profile companies in Kentucky, and any time they are in the news, whether it’s positive or negative, it becomes a part of the dialogue if the company is lobbying for changes in the state capital.”
In other states, the feelings are not so ambiguous. In Louisiana, the local chapter of the Horsemen’s Benevolent and Protective Association, which would not comment for this article, began a public campaign in early 2014 to draw attention to what it called deficiencies in Churchill’s management of Fair Grounds, citing, most specifically, improper maintenance of the track’s turf course. The campaign resulted in the Louisiana legislature holding several hearings where lawmakers were highly critical of the company, along with a delay in approving the company’s racing license until the state racing commission could extract concessions from Churchill on devoting money to the turf course and other renovations and marketing programs.
Sen. Ronnie Johns was one of several Louisiana state lawmakers who said Churchill must live up to its promises to improve Fair Grounds or face the prospect of a bill that would require the company to spend 10 percent of its slot-machine revenue in the state on the track. The bill overwhelmingly passed the House but was tabled in the Senate after the hearings, which included testimony from Tim Bryant, the track’s general manager.
“I think Mr. Bryant gave my comments for me when he said if you all don’t live up to this, you all are going to be back [before the Senate], and it may not be pretty,” said Johns. “And that’s surely not a threat. Well, it kind of is. But it’s reality ... I like what you’ve agreed to do. I would hope that is just a beginning, not something that two years from now we have to come back and revisit again.”
Horsemen in Florida have similar complaints about Churchill’s management of Calder – that Churchill has neglected the track’s grandstand and the promotion of the racing product while focusing all of its marketing efforts and capital expenditures on the adjacent casino.
“If you find an advertisement for racing at Calder, you let me know because I certainly haven’t seen one,” said Kent Stirling, the longtime executive director of the Florida HBPA. “But they’ve got buses running all over to bring people to the casino, and they promote that plenty. It even says Calder Casino on the grandstand now.”
Earlier this year, Churchill reached an agreement with the Stronach Group, the owner of Gulfstream Park, that will put Gulfstream in charge of all of Calder’s racing operations – while retaining Churchill’s right to own and operate the casino. The agreement still needs to be approved by state regulators, and if it is, Calder will race no more than 40 dates a year, and its grandstand likely will be torn down. The Calder casino had net revenue of $79 million in 2013, compared with net revenue from the track’s racing operations of $44 million.
Florida horsemen will not be sorry to see Churchill out of the racing business in the state, if it comes to that.
“I think everyone’s happy that Gulfstream is going to be running things now rather than Churchill,” Stirling said. “And that’s because Gulfstream does things first-class, and that’s not always the case with Churchill.”
Yet at Churchill Downs, horsemen in the state are satisfied with their relationship with the company, according to Marty Maline, the longtime executive director of the Kentucky HBPA. Maline said the company’s investment in its Louisville racing facility – including several huge renovations and the installation of a massive infield video board – demonstrate that it is committed to racing at the track, and he also said that company executives regularly respond to requests from horsemen to address backstretch needs.
“It’s factual. It’s not just someone blowing smoke,” Maline said. “If we have a problem, it’s addressed. It’s hard for me to fathom some of these other issues at other tracks. People call me, and they ask, ‘Don’t you guys have the same problems with them?’ And the answer is no.”
Churchill Downs, the track, is certainly the company’s bread and butter among its racing properties. Racing revenue for the track in 2013 was $132.8 million, up 7 percent from 2012, a number that is nearly half of the company’s total racing revenue from its four tracks. Company officials have attributed the jump in revenue to continued growth in revenue from the Derby and the Oaks, where Churchill has focused much of its efforts since chief executive Robert Evans took the helm of the company in 2006.
But those efforts to leverage the Derby also have had a cost. Several owners of Derby horses criticized the company this year for failing to provide proper accommodations for the event, contending that Churchill was only interested in making money instead of making the owners feel welcome and comfortable. Perhaps most damaging to the company, Ron Turcotte, the paralyzed former jockey, released a letter just prior to the 2014 Derby that was highly critical of how Churchill treated him during previous runnings of the race. Turcotte, one of the most beloved former jockeys in the sport, rode the 1973 Triple Crown winner Secretariat and won the 1972 Derby on Riva Ridge.
“My most recent experiences at the track have tarnished my fond memories of Churchill Downs through the actions, or should I say inaction, of track management,” Turcotte wrote.
Churchill officials have previously said that they reached out to Turcotte and the owners who had complaints about their Derby experience.
“We’ve clearly had some problems, and we’re working on fixing them,” said John Asher, the track’s vice president of racing communications, shortly after Turcotte released his letter.
Beyond the Derby, the racing product at Churchill has cratered. While Maline and horsemen say the problem is field size – cards at Churchill’s current meet have been littered with five- and six-horse fields – the product is also clearly suffering from the blowback caused by Churchill’s decision to raise takeout rates to the statutory maximum this year. The takeout on win, place, and show wagers went from 16 cents on every dollar to 17.5 cents, an increase of 9.4 percent, while exotic wagers such as exactas and trifectas went from 19 cents on every dollar to 22 cents, an increase of 15.8 percent.
While the new takeout rates are not exorbitant by racing standards and are, in fact, competitive with most major racing circuits, the decision rubbed horseplayers wrong at a time when the game is already suffering from short fields and integrity questions. In response, the Horseplayers Association of North America, a grass-roots organization, immediately began a social-media campaign calling on bettors to boycott Churchill and its other tracks. The group also has maintained its own database tracking the handle at Churchill and Arlington, and members frequently celebrate the declines with provocative tweets and posts.
Horsemen, though, defend the takeout increase. Under the horsemen’s contract with Churchill, purses get half of the track’s racing revenue. So, half of the takeout increase is going to prop up purses, even though the track’s races are obviously less attractive to bettors, no matter what the purses are.
“Thankfully for the increase in the pari-mutuel takeout, that’s helped a lot in keeping purses up and maintaining a solid purse structure,” Maline said. “Without it, the problems would be much worse.”
Frank Jones, a racing commission member and horse owner who has supported the efforts to get casinos at Kentucky tracks, said Churchill was right to focus on its purses at a time when the track is competing with racinos in Indiana, Ohio, Pennsylvania, and West Virginia.
“If you’re not able to produce larger purses, you have no ability to draw more horses,” Jones said. “The thing they have to focus on is getting more people to race their horses at their track.”
That task has become more difficult for Churchill this year due to the recent reopening of River Downs in Cincinnati, just a 90-minute drive from Louisville and the training centers of Lexington. Now known as Belterra Park, the track’s purses are nowhere near Churchill’s, but at $80,000 a day, compared with $40,000 a day when the track last ran in 2012, the cheaper horses are running at Belterra instead of Churchill, Maline said.
“The horses entering [at Churchill] are so tough, and so a lot of guys see that they can go to Indiana or River,” Maline said. “Maybe the purses aren’t as good at those places, but you can justify it because it’s not such great competition.”
While overall handle on Churchill’s races since the opening of the spring meet is down 7.2 percent, according to racing commission records, it’s unclear if the track’s revenue has declined enough to hurt the bottom line. The takeout hike is extracting more money from each bet, and Churchill also began negotiating higher simulcast rates for its signal this year, meaning it is receiving more simulcast revenue from each out-of-state bet. So, while horseplayers may feel played by the company, the decision to raise the takeout may mean more revenue for Churchill, providing no incentive whatsoever to use takeout rates to market a cheaper product.
Evans, Churchill’s chief executive, is obviously aware of that dynamic. He studied quantitative economics in college, and in a 2006 interview with DRF just after taking the top job, he was asked whether he believed that lower takeout rates would lead to higher handle.
“I don’t know,” he answered. “I’m an economist by education, so I’m willing to test that. That would be some good information to have. It wouldn’t surprise me if you could drive higher handle levels off lower takeouts ... This is the problem: In an industry that is struggling economically, people don’t take a lot of chances.”
Certainly, Evans and other Churchill executives have incentives to boost Churchill’s stock price, regardless of its ontrack policies. And they’ve succeeded wildly at that, at a time when stocks have been rising across the board anyway. In the past two years, Churchill’s stock has climbed from a low of $54.85 to as high as $96.74. It currently trades at around $90 a share, so the vast majority of its shareholders can’t possibly be unhappy.
Neither are its executives. In 2013, the company created a new executive-compensation plan tied to the company’s stock, and since it was launched, Bill Carstanjen, the track’s chief operating officer, has received $9.9 million in compensation, according to company proxy statements. Its chief financial officer, Bill Mudd, has taken home $8.3 million. Evans has sold $12.5 million worth of Churchill stock over the past three years, according to records, and took home $1.5 million in salary and bonuses in 2013.
In recent conference calls, investors and analysts have praised the company’s acquisitions of stand-alone casinos and its leveraging of the Derby and Oaks. While Churchill’s long-term commitment to its racing properties may be unclear, an investor can bet that Churchill will go where the money is, and that increasingly looks like casinos and the Derby. Horseplayers and horsemen may just have to accept that.
As my own protest over the Churchill Downs takeout increases I no longer wager through Twinspires. If I just have to bet a Churchill Downs-owned track -- and I rarely do -- I do so through Xpressbet. I also don't pony up the $180 a year for DRF Plus. That said, nice article here by Matt Hegarty; thanks for making it free, just like all the DRF.com articles used to be.
The operation was a success, only problem is the patient died. That's what this article is saying. Churchill is prospering but the horseracing portion is slowly twisting in the wind, dying a slow but sure death while the corporate executives fatten their wallets. Just a matter of time until everything but the Derby and Oaks are history.
Maybe the stockholders and employees are prospering but the quality of the races and the handle are suffering. I can't bet Churchill unless I open an account with them (I currently wager through D.R.F.BETS)! C.D.I. Management evidently believes wagering (at C.D.I. tracks) is a special privilege!
Bottom line, racetracks want to increasingly become casino companies, and when they accomplish that mission, they will seek to abandon the poor economic model racing business. It's all about the money, and Churchill Downs, along with Parx et al. Have demonstrated an unwillingness to subsidize racing any longer. It's a shame, but a hard cold fact.
(Churchill also had racing-related revenue of $184.5 million from its online account-wagering operation.) That is an eye opener! The fact is this time of the year Belmont offers better racing, Monmouth about the same quality as Churchill offers 10 pick6. And I can only play 1 track at a time.
Churchill has been trying to get slots on site for years, and the Ky. legislation has repeatedly turned it down from pressure of religious groups. In a state know for horse racing, Ky. politicians have ruled against CD empire. Its a thorn in Churchill's side with a casino just a few miles from the track, across the river in Indiana, and most of the cars at the casino have Ky. license plates. Then there are several other casinos up river in Indiana, and a big new one in Cincinnati, which is only about 100 miles. This is a hot, touchy topic with CD. The Ky. Governor has been supportive of the slots at the track, and other casinos in the state, but it keeps getting voted down, mainly from supporters from religious groups.
Stock price does not indicate success. Thousands of companies have seen their stocks rise higher and faster than CHDN and fallen to near zero quickly. In fact, CHDN stock peaked at 96.74 on 2/26 and trades around 89 today. It will almost certainly fall further as historically weak handle is reported from CD's primary meeting. This is not just an indication of weak future performance it's a sign of management ineptitude. Current management has analysts snowed by short-term improved financial metrics and their promises of a lucrative online gaming future, but it is only a matter of time before their incompetence is discovered. Simply put they are poor executives. They are permanently ruining valuable assets for short-term results and harming what goodwill exists in the Churchill Downs name. Smart money is selling CHDN.
Not only was this article free, but it is one of the rare bits of investigative journalism we've seen from DRF. Good job, Mr. Hegarty.
If NYRA went public tomorrow, what do you think would happen? Do you think that the IPO would lead to an immediate announcement that a "new, bigger, brighter facility" where Belmont Park stands? Of course not. Belmont is a nod to better days. When it goes, you'll never see anything like it. Churchill Downs, on the other hand, is bigger, cleaner and a more desirable destination, even as it's surrounded by more and more boats. Will horse racing be CDI's focus in 30 years? I don't know. If you're an investor, you're pleased with their direction and their overall results. That I do know. As an investment, CDI has always stood head and shoulders above those Stronach tracks that wasted a billion dollars, quickly.