Competition Pinches Pinnacle

Shares of emerging casino operator Pinnacle Entertainment (NYSE:PNK) are down 8.5% to $31 today after the company announced plans to sell 10 million shares of common stock, potentially boosting its share count by more than 20%. The company also said in an SEC filing that fourth-quarter revenues, operating income, EBITDA, and net income would fall significantly from last year, primarily because of the reopening of competitors to its Boomtown New Orleans property, along with higher marketing expenses at the Belterra Casino Resort in Indiana.

Meanwhile, the company expects operating results at Boomtown Reno and Boomtown Bossier City to be down as well. "Significantly improved performance" at the high-end L'Auberge du Lac property in Lake Charles, La., should partially offset declines at the other four properties, according to Pinnacle.

Boomtown New Orleans
The Boomtown New Orleans has seen significantly higher-than-normal levels of business since October 2005, because the property, located on the western bank of the Mississippi, was the first to return to the New Orleans market. Boyd Gaming's (NYSE:BYD) Treasure Chest casino is a weak rival in a relatively remote location, while the third riverboat (Bally's) was wiped out.

But the biggest competitor by far in the market -- the land-based Harrah's (NYSE:HET) New Orleans, located downtown -- returned to the market in February 2006; ever since, Boomtown's performance has reverted toward normalized levels. It probably hasn't helped that a number of casinos have returned to the Mississippi Gulf Coast, each roughly an hour to two-hour drive away, including MGM Mirage's (NYSE:MGM) Beau Rivage and Harrah's Grand Casino. Then again, it probably hasn't hurt much, either, given Boomtown New Orleans' own remote location and locals-oriented business.

I actually stopped at Boomtown New Orleans a few weeks ago, and there were obvious signs of a struggle to retain business. I signed up for a players card and was given a lucrative coupon book on the spot -- something casinos typically give you after you've given them some business. The book was literally free money; I got a $5 slot match play coupon, for which I was handed a $5 bill by the cashier. I got $60 worth of blackjack and craps match-play coupons, which costs the casino probably about $59 in cash. I also got a $3 coupon for the arcade.

This, by the way, is extremely bad practice. I probably spent a little more than an hour on the property -- half of it in the arcade -- but the casino basically gave me $64 in free money, even though I'll probably never return.

Boomtown New Orleans Revenues

When the company says that its marketing expenses are up at the Belterra Casino Resort in the face of new competition, this is the type of promotional activity it means. It doesn't help that Pinnacle's portfolio consists largely of second-best properties -- or worse, as is the case in Bossier City -- which means that the return on investment for these promotions will be lower than for a superior competitor. The Belterra is a very nice property, but it suffers from a weak location. These properties stand in stark contrast to the new L'Auberge du Lac, easily the most exotic hotel in the riverboat gaming industry, situated in a market where the only competition is Isle of Capri (NASDAQ:ISLE).

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Fool contributor Jeff Hwang does not own shares in any of the companies mentioned above. The Fool has a disclosure policy.