Like the whiny bitches that they are, DraftKings is taking out its ire at a recent tax increase in Illinois … on the customers. Yup, CEO Jason Robins has found a new way to chisel honest players: surcharges for the privilege of placing a bet with his company. This is vile on the face of it. It’s also DraftKings’ characteristic response to a tax hike that initially had them threatening to leave the Land of Lincoln altogether. We never believed they would. We even double-dared them to do it. No, Robins has found a way to have his cake and eat it too, at bettors’ expense.
The proposed surcharge is intended to punish players in four states where DraftKings has elected to do business in spite of hefty state levies: New York State, Illinois, Pennsylvania and Vermont. In the gaming industry, which is driven by a herd mentality, competitors will be sorely tempted to follow suit. But this is a great competitive opportunity for FanDuel, BetMGM and the also-rans. They can potentially steal market share from sulking DraftKings by hawking their lower-cost betting offerings. Will they do it? It might make too much sense.
DraftKings may be motivated by a drastic sag in its 2024 ROI, from $500 million to $380 million, even as revenue nudged upward. The company is hurting not just from a higher tax in one state but from the costs of buying lottery provider Jackpocket, spending more on customer acquisition (read: marketing) and from players doing well in April. Hey, that’s called free enterprise, Robins, and you ought to suck it up like a man. His excuse is, hey, they do this in Germany. Why not here? Sounds like feeble logic to us. What’s really sucktastic is DraftKings’ sleazy plan not to impose the surcharge upfront but to subtract it from your winnings. The reasoning, transparently, is to pressure states into lowering their OSB taxes below 20%. Will unhappy punters translate into political action? At this point, we’re highly skeptical.
Robins can’t be hurting too badly, as DraftKings has $1 billion lying around to juice the stock price by repurchasing shares of DKNG, much to Wall Street‘s pleasure. Still, longtime skeptic Carlo Santarelli of Deutsche Bank kept his price target (“Hold”) at $35/share, even though the stock was trading higher at the time. Perhaps he was bemused by DraftKings’ decision to blame muted 2Q24 results on a tax that hadn’t even gone into effect until the onset of the third quarter. “Simply, we believe there is more to the guide down than the aforementioned drivers, as in, there is something more operational that is driving at least some of the revisions,” he wrote. Santarelli opined thusly of the (exaggerated?) Illinois impact, “Assuming a $50 mm hit to adjusted EBITDA for half of the calendar year implies there is next to nothing that can be done to offset the impact, though, one would imagine, promotions can be curbed very quickly, thereby reducing the taxable GGR base.“
Santarelli found the surcharge a largely rhetorical move, a “shot across the bow of other states contemplating tax increases, versus an actual cure to the issue of higher tax rate competitive markets.” He opined that DKNG might shift (even) more to recreational bettors, away from serious ones who might balk at the markup. “From a competitive standpoint, if competitors aren’t following suit, this feels like a potentially expensive gamble, especially considering the GGR at stake across these 4 states, given their size.” It’s a gamble we hope loses Robins his shirt.
Even J.P. Morgan analyst Joseph Greff, a DKNG fan, was not totally persuaded. His remarks are work quoting at length: “In general, we think of this surcharge as akin to a resort fee on top of the rate a hotel charges for a room and fee surcharges rideshare companies levy on consumers in certain states. The only difference with those businesses is that it is universally adopted by those industries. Our initial reaction is that this is an interesting way to mitigate higher gaming taxes, assuming its peers match (and why wouldn’t they? It is in their financial interest and in the spirit of shareholder value to do so) but we are unsure if this will give a boost to offshore, black market sportsbooks.” Do we really want to drive customers back to the black market? Robins evidently does.
Despite good results in 2Q24, Caesars Entertainment CEO Tom Reeg may find himself regretting his fan dance about disposing of non-core assets. Yesterday, Vici Properties CEO Edward Pitoniak stole Reeg’s thunder by announcing that Vici wasn’t interested in Horseshoe Indianapolis or Harrah’s Hoosier Park … and wasn’t going to wait for the expiry of its purchase option to say so. Vici execs explained that the investment wouldn’t be “sustainable,” which is an interesting (if troubling) spin on the state of gaming affairs in Indiana. Et tu, Vici?
While the Federal Reserve continues to tap dance about interest rate cuts, Truist Securities analyst Barry Jonas thinks they could come later this year and that CZR will be a beneficiary. The company’s $2.8 billion in quarterly revenue came in just a hair under Wall Street estimates but cash flow beat them, right at $1 billion. Weakness in regional casinos (formerly Caesars’ bread and butter) was more than offset by the Las Vegas Strip, which reaped the benefits of higher room rates, same-store revenues and hotel occupancies. True, the company had to absorb $20 million in greater Las Vegas labor costs but also was sparked by newly unveiled renovations at Caesars Palace and Paris-Las Vegas, which were said to be driving higher-than-anticipated ROI. Unlike the infamous Gary Loveman, Reeg (below) clearly believes in reinvesting in his products.
“Forward expectations for the Strip are positive, given favorable occupancy and pricing trends, combined with a decrease in supply on the Strip (though mgmt did note the Mirage closure would also reduce some normal CZR visitation by Mirage guests),” Jonas observed. Regionally, the company had to weather the negative impact of Terre Haute Casino, as well as the height of construction disruption at Harrah’s New Orleans, slowly morphing into Caesars New Orleans. Group business in Reno was weak, too (i.e., fewer bowlers), but revenues from Nebraska and Virginia were bright spots.
Caesars Sportsbook‘s growth (13%) lagged the OSB sector badly (28% overall) but Caesars Palace Online was performing well, showing 46% enlargement in revenue. Greff thought the digital Caesars sphere on pace to achieve $200 million in ROI this year and $300 million in 2025. There was some loose talk of ‘monetizing non-core assets,’ but—as we saw—Vici kinda quashed that. The company still has a staggering $12.4 billion debt burden, although that may be partially relieved by …
… unloading the World Series of Poker. Although Caesars will continue to host the prestigious tourney (no small thing) and offer i-poker in 20 states, it’s selling the intellectual property to NSUS Group and for a pretty penny: $500 million. Some of the proceeds will go (perhaps reluctantly) into debt reduction and the remainder into share repurchases. The news broke late yesterday, giving analysts little time to react, but both Greff and Santarelli applauded the move.
Jottings: Pennsylvania casinos are hopping mad (and rightly so) about preferential tax treatment for black-market slots in the Keystone State. While the court system has blessed the so-called “skill games,” they pay no taxes, while casinos are levied 54% of their slot proceeds. It’s highly unfair and cries out for legislative redress … The ongoing clusterfuck that is New York City‘s casino-selection process has been ripped as “an embarrassing picture of ineptness.” Part of the problem is that the New York State Gaming Commission has largely been cut out of the procedure, save to vet applicants … OSB providers continue to behave as though they’re above regulation in Massachusetts. Although they’ve agreed to meet with the Massachusetts Gaming Commission it’s quite unclear whether they’ll be any more cooperative than that … On a related note, MGM Springfield (above) has screwed the pooch yet again, offering bets on a pair of in-state athletic contests. (A Bay State no-no.) For its indiscretion, it is being fined 47 dimes. Will they ever learn? Or is it ‘the cost of doing business’? … Ippei Mizuhara‘s notorious, illegal bookie, Mathew Bowyer, has copped a plea over his unlawful activities. Both Resorts World Las Vegas and The Venetian are strong candidates to be “Casino A,” cited in Bowyer’s deal with the feds. Resorts World is believed to be cooperating. If Apollo Management is smart, The Venetian will come clean too.
Quote of the Day: “If you are the only seller of heroin in a community and have managed to get a portion of the population addicted, you have a very inelastic demand function for your product. In short, you can raise the price and sell pretty much the same quantity.“—Richard Schuetz, on Jason Robins‘ latest stick-it-to-the-customers ploy.