For the 140th time, the 2014 Kentucky Derby will captivate the sports world. From sports bettors to mint juleps -- the race's official drink -- millions of dollars will be spent at Churchill Downs' (NASDAQ:CHDN)racetrack this weekend. How much money will the company take in?
The multi-million dollar question
It keeps exact Kentucky Derby Week revenues secret, but Churchill Downs does provide a way to estimate them. According to the company's quarterly reports from the past three years, an average of $268.1 million in net revenues from continuing operations has been booked in the second quarter since 2011. This period coincides with the Derby and its sister race, the Oaks, which are typically held on the first weekend of May.
As the graph shows, Churchill Downs' Q2 revenues are, on average, $112 million greater than they are during non-Derby quarters.
So can this entire difference be attributed to the money that's made during race week? That's the obvious question, and one that ultimately is impossible to know the answer to unless you have access to the company's books. The track also hosts one other Grade I race -- the Stephen Foster Handicap -- in June, and an array of Grade II and Grade III events during the quarter.
If pressed to make an estimate, it's sensible to think Kentucky Derby Week revenues will hit close to $100 million this year. That's the majority of the $112 million difference described above. And in full, $100 million would represent about 40% of all Q2 revenues (remember this ratio).
Consider the evidence: Not including interest, taxes, and write-offs, Churchill Downs says Derby Week earnings, or EBITDA, grew by about $6 million per year between 2011 and 2013. Over this same time, total Q2 EBITDA expanded by an annual average of $14 million. The relationship between these two figures -- $6 million is about 40% of $14 million -- implies that Derby Week annual revenues should be around the nine-figure mark.
This, of course, assumes Derby Week is growing at a similar pace as the rest of Churchill Downs' businesses -- a reasonable assertion for our purposes.
Breaking it all down
Now comes the fun part. Thanks to a handy bit of analysis from Louisville's Courier-Journal last year, it's also possible to estimate how the Kentucky Derby Week money breaks down.
According to the paper and USA Today, more than half of all Derby-related profits are attained from tickets sold to racegoers. Astoundingly, profits from premium tickets outweigh general admission income by nearly sevenfold. In 2014's race, for example, TiqIQ reports the most expensive seats were over $9,000. General admission tickets, by comparison, cost under $100.
To capitalize on this affluent fan base, Churchill Downs recently built a $9 million southern-style, hospitality suite known as "The Mansion." Completed last year, the area is 10,000 square feet of fine dining, drinks, and personal concierge services. A premium area known as the Plaza Balcony is also relatively new, and the famed Millionaires Row continues to be a fan favorite.
As you might expect, sports betting is also a significant driver of Derby Week profits. Churchill Downs' latest annual report pegged the value of all wagering activity at $184 million in 2013, which includes both on-track and off-track bets. If the revenue estimate from above is close, the company's cut of all wagering activity could be more than $15 million.
Endorsements and media licensing, lastly, account for most of the remaining Derby Week money. The race's first major sponsorship, a multi-year deal with Yum! Brands (NYSE:YUM), was announced in 2006. Eight years later, Churchill Downs has added Anheuser Busch Inbev's (NYSE:BUD) Stella Artois, PepsiCo (NYSE:PEP), and Brown-Forman's (NYSE:BF-B) Early Times Mint Julep brand to its stable of sponsors.
The bottom line
Unless Churchill Downs releases the numbers, there's no way to know how much revenue Kentucky Derby Week brings in. But if my estimates are close, the annual number could be near $100 million.
And because a significant portion of Derby dollars are made from premium tickets, I expect more areas like the "The Mansion" to be built in the future. That revenue stream -- and sales of many, many mint juleps -- should continue to make the race millions for years to come.
Jake Mann has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.