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WIKI ANALYSIS
Isle of Capri Casinos (NASDAQ: ISLE) owns casinos catering to a middle-class clientele. Its 18 casinos are located in Missouri, Mississippi, Louisiana, Florida, Colorado, Iowa, the United Kingdom, and the Bahamas.[1] Fiscal 2008 saw the addition of four new casinos to Isle's properties, either through self-development or acquisitions.[2][3]
In fiscal 2008, Isle of Capri's revenue increased by 12.4%. This was primarily due to the addition of its four new properties; excluding the new casinos, Isle's revenue decreased by 13.6% from the year before.[4] This decrease can be explained by factors such as stricter regulations on gambling (specifically in Colorado),[5] and harsh weather conditions (also in Colorado).[6]
Business Overview
Business and Financial Metrics
| Segment (Year ending Dec. 31) | 2008 | 2007 | 2006 |
|---|---|---|---|
| Casino | 1,121.9 | 1,015.6 | 1,004.1 |
| Food, Beverage, and Other | 136.5 | 130.6 | 125.9 |
| Rooms | 49.5 | 49.6 | 37.0 |
| Commissions and Fees | 19.1 | 20.0 | 20.5 |
| Gross Revenue | 1,327.0 | 1,215.9 | 1,187.5 |
| Less Promotional Allowances | -201.6 | -214.5 | -200.2 |
| Total Revenue | 1,125.4 | 1,001.4 | 987.3 |
| Operating Income[1] | -51.4 | 65.8 | 94.4 |
| Net Income[1] | -96.87 | -4.64 | 18.88 |
Isle's 12% increase in revenue in 2008 was primarily due to the addition of its four newest casinos. If revenue obtained from its new properties is subtracted from Isle's overall revenue, its total revenue comes in at approximately $864.8 million, a 13.6% decrease from the year before.[7]
Isle's 178.1% decrease in 2008 operating income can primarily be attributed to the year's 24.1% increase in operating expenses, as compared to the 12.4% increase in revenue. The increase in operating expenses were driven by a 37.1% increase in state gaming taxes, a 36.8% increase in depreciation, and a 906.2% increase in write-offs and other valuations.[4] This large increase in write-offs resulted from damages at properties in Coventry, England, and Lula, Mississippi, the termination of plans to develop a new casino in west Harrison County, Mississippi, and the write-off of construction projects in Davenport and Kansas City.[9]
Promotional allowances consist of rewards given by Isle to loyal customers (such as complimentaries) to encourage their continued business. Promotional allowances decreased 6.0%, in 2008, primarily due to declining revenues at Isle of Capri's casino properties.[4]
Isle of Capri's international segment consists of revenue from four properties in the Bahamas and the United Kingdom. In 2008, its international revenue was $33.2 million, a 29% increase from the year before, driven primarily by the addition of a new property in Coventry, England.[7]
Business Segments
Isle of Capri owns 18 casinos throughout the world, in the United States, the United Kingdom, and the Bahamas.[2] The majority of Isle's revenue (85%) comes from its casino operations, with the rest of its revenue coming from its hotel earnings (10% food and beverage, 4% rooms, 1% other).[2] In 2008, Isle of Capri added four properties, although its same-property revenue decreased by 13.6% from the year before.[7]
Casino (85% of 2008 Gross Revenue)
Casino revenues, which consist of net winnings from gaming at Isle's casinos, were approximately $1.12 billion in 2008, a 10.5% increase from the year before.[4] One key factor behind this growth was increased revenue from its casino at Bettendorf, Iowa,[10] which resulted from Isle's May 2007 opening of a new hotel in the same location.[4] This increase primarily resulted from the opening or acquisition of new casino properties in Caruthersville, MIssouri; Waterloo, Iowa; Pompano, Florida; and Coventry, England.[4] Revenues from these four new casinos were $224.9 million, 20% of this segment's total 2008 revenue, while same property casino revenues decreased by $118.7 million.[4] This decrease can be explained by factors such as lower revenues at its Biloxi, Mississippi ($62.7 million decrease),[11] and Lake Charles, Louisiana ($11.1 million decrease)[12] casinos due to devastating hurricanes (such as September 2007's Hurricane Humberto) that ravaged the south during Isle's 2008 fiscal year.[13] Furthermore, in January of 2008, the state government of Colorado enacted a smoking ban at all state casinos,[5] causing a decline in attraction of customers and thereby contributing to the $11.5 million decrease in revenue from its Colorado casino in Black Hawk.[4]
Food, Beverage, and Other (10% of 2008 Gross Revenue)
This segment consists of food, beverage, and other miscellaneous services Isle provides to its customers that do not fall in the casino or rooms segments.[4] These include services such as room service fees, vending machine revenues, and in-room telephone services.[4] Revenue for this segment was $136.5 million in 2008, a 4.5% increase from the year before.[4] This increase was primarily a result of the opening of new casino properties in Caruthersville, Waterloo, Pompano and Coventry, which accounted for a $24.0 million increase in 2008 revenue, while same property food/beverage/other revenue decreased by $18.2 million in 2008.[4] Hurricanes in the south were primarily responsible for decreases in this segment's revenue as well,[13] as revenue at the Biloxi property decreased $9.2 million while revenue at the Lake Charles property decreased by $4.1 million in 2008.[4]
Rooms (4% of 2008 Gross Revenue)
This segment consists of revenue obtained from the renting out of guest rooms at Isle's hotel properties.[4] Isle of Capri struggled in this segment in 2008, with its revenue decreasing by 0.2% from 2007.[4] This negative growth can be explained by a $5.1 million combined decrease at its Mississippi properties at Biloxi and Lula, primarily driven by destructive hurricanes during the year.[13] The decrease of revenue at its Lula property was further impacted by the closure of 170 rooms for repair in October.[4] However, Isle was able to partially offset these losses with a $5.4 million increase in revenue from the opening of new hotels at Bettendorf and Waterloo in Iowa.[4]
Pari-Mutuel Commissions and Fees (1% of 2008 Gross Revenue)
This segment consists of commissions and fees earned at Pompano Park, Isle of Capri's only property that has pari-mutuel betting (a horse track).[14] This segment's 2008 revenue was approximately $19 million, a 4.5% decrease from 2007. This decrease was primarily driven by a decrease in wagering on simulcast races.[4]
Key Trends and Forces
Economic cycles that decrease disposable income hurt the gambling industry
People tend to participate in luxury activities such as gambling only when they feel they have enough disposable income. In 2008, domestic disposable income suffered from factors such as all-time highs in oil prices, and a struggling U.S. housing market. As of June 2008, the price of oil had reached $117.40 a barrel, a 76.8% increase from 2007.[15] These factors have contributed to shaky consumer confidence, which has sent the Applied Analysis Gaming Index, which includes casino operators and gaming machine manufacturers, down by 15.7 percent in January 2008.[16] This trend was harmful to Isle's business, as its casino revenue (excluding its new properties) decreased by $118.7 million from the year before.[4]
A declining airline industry is negatively affecting business from out-of-market tourists
Casino/resort operators such as Isle of Capri depend heavily on overall economic strength for its revenue, as people tend to travel only when they feel they have enough disposable income to afford such vacations. In the first half of 2008, however, the price of crude oil rose to $98.66/barrel, up 76.8% from the year before.[15] With this increase came the obvious increase in the price of jet fuel, as prices rose from $850/metric ton at the beginning of 2008 to $1300/ton by June.[17] As a result of these increasing prices, the International Air Transport Association expects global airlines to collectively lose $2.3 billion if oil averages $107/barrel for 2008, and up to $6.1 billion if the price averages $135/barrel for the last six months of the year.[18] The increasing fuel costs caused increasing airline prices, which in turn lowered the number of tourists who came to Isle in 2008.[19] This is evident in the 0.2% decrease in Isle's rooms revenue in 2008.[4]
Changing gambling regulations in Colorado hurt Isle's business
In January 2008, the Colorado state government enacted a new law prohibiting smoking in state casinos. This new piece of regulation had disastrous effects on the business of state casinos, contributing to a 10.7% drop in Colorado casino revenue during the beginning of 2008, the worst drop in the industry's history.[5][20] Because Isle of Capri obtains almost 13% of its revenue from its operations in the state of Colorado, it was heavily affected by this trend, losing $11.5 million in Colorado revenue in 2008.[7]
Isle is affected by the harsh weather conditions in the markets in which it operates
Several of Isle of Capri's properties are located in regions that are prone to inclement weather, including dockside and houseboat properties.[6] Its Biloxi and Lake Charles properties were both shut down September and October of 2005 as a result of Hurricanes Katrina and Rita.[6] In 2008, revenues from Isle's properties in Mississippi and Louisiana were heavily affected in all three of its segments. Isle lost a combined $73.8 million from its properties in Biloxi, Mississippi and Lake Charles, Louisiana in fiscal 2008 as compared with 2007.[4]
Competition
Isle of Capri caters primarily to middle-class customers, as opposed to companies like MGM MIRAGE (MGM) that aim to attract high-end tourists in popular vacation hotspots like Las Vegas. As such, Isle primarily competes with casino/resort companies that operate in the same markets as it does. These companies include:
- Ameristar Casinos (ASCA) runs eight casino resorts in the Midwestern United States. Ameristar depends on local residents for the majority of its revenue, differentiating it from most other casino operators.[21] Ameristar, whose 2007 revenue was just over $1 billion, competes with Isle's properties in Colorado, Missouri, Iowa, and Mississippi.[21]
- Penn National Gaming (PENN) owns casinos, racetracks, and other betting facilities in 14 states and Canada.[22] A company with a 2007 revenue of nearly $2.5 billion, Penn Gaming competes with Isle of Capri Casinos in five of the six states in which it operates: Colorado, Florida, Iowa, Missouri, and Mississippi.[22]
- Pinnacle Entertainment (PNK) develops, owns, and operates casino gaming resorts around the world. In addition to its six main casinos in Nevada, Louisiana, Indiana, and Missouri, Pinnacle operates several small casinos in Argentina.[23] Pinnacle thus directly competes with Isle in the Louisiana and Missouri markets.[23]
- Boyd Gaming (BYD) owns and operates 16 casinos in the United States. Boyd, which targets middle-income customers, competes with Isle of Capri in Mississippi, Louisiana, and Florida.[24] Boyd's revenue for fiscal 2007 was approximately $2 billion.[24]
| Company | 2007 Revenue ($ in millions) | 2007 Operating Income ($ in millions) | 2007 Operating Margin |
|---|---|---|---|
| Isle of Capri Casinos[1] | 1,125 | -51 | -4.56% |
| Ameristar Casinos[25] | 1,081 | 174 | 16.08% |
| Penn National Gaming[26] | 2,437 | 498 | 20.43% |
| Pinnacle Entertainment[27] | 924 | 8 | 0.90% |
| Boyd Gaming[28] | 1,997 | 337 | 16.89% |
Isle of Capri's numbers come from its 2008 fiscal year, which ended April 27, 2008. The numbers from the other four companies come from their 2007 fiscal years, which ended on December 31 of 2007.
References
- ↑ 1.0 1.1 1.2 1.3 Google Finance: ISLE
- ↑ 2.0 2.1 2.2 ISLE 2008 10-K, Item 1: Business, page 2
- ↑ ISLE 20080 10-K, Item 1A: Risk Factors, page 9
- ↑ 4.00 4.01 4.02 4.03 4.04 4.05 4.06 4.07 4.08 4.09 4.10 4.11 4.12 4.13 4.14 4.15 4.16 4.17 4.18 4.19 4.20 ISLE 2008 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 26
- ↑ 5.0 5.1 5.2 The Denver Channel: Colorado Casino Revenue Down 10.7 Percent
- ↑ 6.0 6.1 6.2 ISLE 2008 10-K, Item 1A: Risk Factors, page 13
- ↑ 7.0 7.1 7.2 7.3 7.4 ISLE 2008 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 25
- ↑ 8.0 8.1 ISLE 2008 10-K, Item 6: Selected Financial Data, page 22
- ↑ ISLE 2008 10-K, Item 7: Management's Discussion and Analysis of Financial Condition, page 27
- ↑ ISLE 2008 10-K, Item 2: Properties, page 17
- ↑ ISLE 2008 10-K, Item 2: Properties, page 16
- ↑ ISLE 2008 10-K, Item 2: Properties: page 15
- ↑ 13.0 13.1 13.2 MSNBC Weather: Humberto Breaks Records
- ↑ Wikipedia: Parimutuel Betting
- ↑ 15.0 15.1 15.2 Inflation Data: Historical Oil Prices
- ↑ ReviewJournal.com: Casino-stock index declines during January
- ↑ Wall Street Journal: More Fuel Surcharges Could Curb Air Travel
- ↑ New York Times: Airlines Face ‘Desperate’ Situation, Official Says
- ↑ Hotel Marketing: TripAdvisor’s US travel outlook for 2008
- ↑ ISLE 2008 10-K, Item 1A: Risk Factors, page 11
- ↑ 21.0 21.1 Wikinvest: ASCA
- ↑ 22.0 22.1 Wikinvest: PENN
- ↑ 23.0 23.1 Pinnacle Entertainment: About Us
- ↑ 24.0 24.1 Wikinvest: BYD
- ↑ Google Finance: ASCA
- ↑ Google Finance: PENN
- ↑ Google Finance: PNK
- ↑ Google Finance: BYD
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