One of Isle of Capri's largest casinos, the Houston-area Lake Charles, has lived up to its name in recent periods as weather-related events including flooding have impacted results. Image source: Isle of Capri Casinos.
Even though Isle of Capri Casinos (NASDAQ: ISLE) came up short of Wall Street expectations on revenues in its fiscal 2016 fourth-quarter earnings report last week, it still managed to beat profit forecasts, generating $25 million in net income for the period compared to just $3.1 million a year ago.
Considering revenues fell to just under $265 million, a drop of 1.6% from 2015, missing expectations that revenues would be flat, how was the company able to generate such a better profit picture? Here are six reasons Isle of Capri Casino's quarter was such a mixed bag.
1. The weather is finally letting it dry out.
Texas has been inundated with rain, and though weather-related issues have dogged the casino operator for several quarters now, it looks like its Houston-area Lake Charles casino is finally drying out. It pointed out that Interstate 10 was closed for nearly one week during the quarter due to flooding, severely affecting its big spring-break performance. Even so, Isle of Capri said it was able to mitigate 85% of the decline in net revenue by improving in cost structure, though flooding still cost it about $1 million.
2. The calendar worked against it.
There was one fewer Friday and Saturday and an additional Monday and Tuesday in the month of May, which is, as CEO Eric Hausler noted, "probably about as bad as it can get" for a casino operator.
3. It's investing in its properties.
Isle of Capri spent $17.6 million in capital during the quarter, including some $6.6 million in maintenance and equipment purchases. A lot of its spending has been on the Bettendorf property in Iowa, which accounted for more than 62% of total capex in the quarter. Ultimately, Isle of Capri is looking for total capex of $100 million in 2017, half of which will be for slot and other maintenance capital to continue improving the customer experience.
Isle of Capri Casinos has invested tens of millions of dollars in upgrading and renovating the Hotel Bettendorf with new amenities and gaming machines. Image source: Isle of Capri Casinos.
4. New competitors make the environment more challenging.
The Lake Charles property did better than expected considered the soaking it got from the floods, and though it's up against Landry's Golden Nugget in the market, that casino has lapped its opening, so Isle of Capri is looking for the market to stabilize.
That's not the case elsewhere, such as at Lula in Mississippi, where racino competitors have expanded, causing the casino to lose share. And its Pompano, Florida, racino had the dual problem of "snowbirds" leaving later than usual and the Dania Jai-Alai casino reopening after a year's absence. Add in competition from Seminole Casino in nearby Coconut Creek, and a handful of its properties had a rough go of it this quarter.
5. These were its biggest losers.
Lake Charles, Pompano, and Black Hawk in Colorado were its three big losers this quarter. Although it was quick to note eight of its 13 properties reported higher adjusted earnings before interest, taxes, depreciation, and amortization, it neglected to mention those three casinos are its biggest revenue producers, accounting for 44% of total revenues.
6. A REIT won't happen.
While Isle of Capri has sought out M&A transactions, nothing has come of it. But one that won't be happening is its converting into a real estate investment trust like Gaming & Leisure Properties (GLPI -0.21%) did, or handing properties off to a REIT like MGM Resorts International (MGM -0.33%) did with MGM Growth Properties (MGP). IRS changes to the tax laws that made such maneuvers less favorable, execs noted.
Still, while a REIT is not likely to happen, a stock buyback might, as it's one of the things Isle of Capri is considering. As CEO Hausler noted during the company's earnings conference call with analysts, Isle of Capri needs to "find the appropriate balance there because if we do pull the trigger on refinancing some parts of a debt," it's going to need the money to pay for the cost associated with that.
Foolish takeaway
Hausler says the casino operator will be focusing on "operations and culture, internal allocation of capital, external allocation of capital, and technology." Those are all important aspects of the business, but they aren't enough for the regional casino operator to overcome what appears to be a slowdown in the regional gaming market.
It's certainly not a game-changing vision, and because Isle of Capri has improved markedly over the past two years, the operational focus is really just nibbling-around-the-edges kind of improvements. The casino operator's stock is up 27% year to date and has gained 66% from its February lows, but the market is likely attuned to the fine tuning it's doing operationally, making its current stock price a high water mark.
Isle of Capri Casinos is a conservatively managed company, and its efforts to continuously improve marketing and operations have allowed it to contain costs, but without any big levers to pull, investors may not want to gamble by placing a bet here.
