&l;p&g;Spring is here, and the sound of jackhammers and the scent of sawdust fills the air at Churchill Downs, the iconic American horse track that has hosted the Kentucky Derby for the past 143 years. The upcoming 144th Run for the Roses is on Saturday, May 5, and time is of the essence. Post time is just 24 days, 5 hours, 44 minutes and 18.2 seconds away from this early-April Wednesday, as the Longines-branded clocks remind visitors at every turn.
An expansion to the parking lot has left a lot more space for a grand entrance, so gleaming white-brick columns are being added to the front gate. Near the paddock, a cement truck pours fresh concrete that&a;rsquo;ll soon accommodate 160,000 pairs of feet.&a;nbsp;Some parts of Churchill Downs have just gotten fresh gloss on the floors. In another, drop cloths hang protectively over food court countertops.
In all, Churchill Downs has spent some $70 million in the past year alone fixing up the 143-year-old racetrack, some bits of which have seen better days. After these renovations, the track will have 36 new private suites for 1,140 people and another 700 premium seats between the dining room and grandstand.
&a;ldquo;You sometimes hear the expression &a;lsquo;Don&a;rsquo;t build the church for Easter Sunday,&a;rsquo;&a;rdquo; says Bill Carstanjen, CEO of $3 billion (market cap) Churchill Downs Inc., the publicly traded company that owns the namesake Kentucky arena, three other racetracks and five casinos around the country. &a;ldquo;That expression is actually wrong.&a;rdquo;
&l;img class=&q;size-large wp-image-12594&q; src=&q;http://blogs-images.forbes.com/maggiemcgrath/files/2018/05/churchill-downs-construction-montage_1200x675-1200×675.jpg?width=960&q; alt=&q;&q; data-height=&q;675&q; data-width=&q;1200&q;&g; Churchill Downs construction in spring 2018.
It seems insane to spend that sort of money on a facility that sits empty for the majority of the year&a;mdash;Churchill Downs hosts live horse racing on just 70 days, and on most of those days the track struggles to attract a few thousand fans. Only Derby Week attracts the big crowds. The Kentucky Oaks, the race held the Friday before the Derby, draws in 120,000. And more than 150,000 fans are expected for this Saturday&a;rsquo;s main event to watch the favorite, Justify, battle off 19 other Thoroughbreds, including a horse called Bolt d&a;rsquo;Oro, named after the Jamaican sprinter Usain Bolt.
But given that Derby Day drives as much as 20% of Churchill Downs&a;rsquo; roughly $900 million in yearly revenue, it makes a certain amount of sense. And Carstanjen, a former General Electric exec who took over as chief executive four years ago, knows it.
&l;img class=&q;wp-image-12579 size-large&q; src=&q;http://blogs-images.forbes.com/maggiemcgrath/files/2018/05/Churchill-Downs-Carstanjen_1200x675-1200×675.jpg?width=960&q; alt=&q;&q; data-height=&q;675&q; data-width=&q;1200&q;&g; Churchill Downs Inc. CEO Bill Carstanjen. Photo credit: Chuck Hodes/CBS via Getty Images
&a;ldquo;The Kentucky Derby is our crown jewel,&a;rdquo; says Carstanjen. &a;ldquo;When you have a range of pricing from $100 up to $12,000, and you can get somewhere between 155,000 and 170,000 people to show up for your event, that&a;rsquo;s a pretty special event.&a;rdquo;
The challenge for Carstanjen is to convert those thousands of Derby fans into paying customers the other 364 days of the year. Horse racing is in a long-term decline. Industrywide revenue has declined 1.2% on an annual basis since 2012 to $3.8 billion, and betting totals peaked at $15.2 billion in 2003; today they barely crack $11 billion. Racing&a;rsquo;s core demographic is aging&a;mdash;they&a;rsquo;re 56 years old and up&a;mdash;and questions over drug use and horse treatment have tainted the sport for younger fans. Almost one fifth of America&a;rsquo;s tracks have closed in the past decade, and those that remain open are hosting far fewer races.
But Churchill Downs is bucking the trend. Its top line increased 7% last year to $883 million and is up 13% over the past five years. Net profits have more than doubled from $176 million in 2013 to $366 million last year&a;mdash;and even its racing business has improved its bottom line, boasting an adjusted profit margin of 33% in 2017, up from 18% four years prior. With those strong numbers, Churchill Downs has outrun the S&a;amp;P 500 over the past year (up 60% versus the index&a;rsquo;s 10% gain) and over the past five years (up 250% compared with 60%).
Carstanjen&a;rsquo;s counterintuitive plan has been to focus the company on racing&a;mdash;and even more specifically on the Derby&a;mdash;even in a time of industry decline. Last year he jettisoned a popular &a;ldquo;social gaming&a;rdquo; (think Farmville-type games) unit called Big Fish, which Churchill Downs had acquired for just shy of a billion dollars only three years ago. Social gaming was just too far from Churchill Downs&a;rsquo; Thoroughbred roots.
Those roots run deep in Kentucky. The sport of kings became popular with American settlers in the mid-1700s&a;mdash;so much so that by the 1870s, Meriwether Lewis Clark Jr., grandson of the famous explorer, was able to raise $32,000 (the equivalent of more than $600,000 today) to bankroll the initial construction of Churchill Downs on land leased by his uncles John and Henry Churchill by selling 320 membership subscriptions for $100 each. The track officially opened on May 17, 1875, and the first Kentucky Derby was held that day. (The race was won by a horse named Aristides, who is memorialized in a bronze statue by the paddock.)
&l;img class=&q;size-large wp-image-12604&q; src=&q;http://blogs-images.forbes.com/maggiemcgrath/files/2018/05/churchill-downs-celebrity-sample_1200x304-1200×304.jpg?width=960&q; alt=&q;&q; data-height=&q;304&q; data-width=&q;1200&q;&g; Over the years, Babe Ruth, Jack Nicholson, Muhammad Ali and Queen Elizabeth have attended the Kentucky Derby. Photo credit: Kinetic
The Derby hasn&a;rsquo;t missed a springtime running ever since, making it America&a;rsquo;s oldest continuously held sporting event. It wasn&a;rsquo;t waylaid by World War I (when executives&a;nbsp;planted potatoes in the infield and donated the proceeds to the Red Cross in the name of patriotic duty) or World War II (America instituted a racing ban in early 1945 but ended it after V-E Day, just in the nick of time for the 71st running).
&a;ldquo;While tradition is part of the event,&a;rdquo; Carstanjen says, &a;ldquo;we think the legacy of the Derby is also constant change. It hasn&a;rsquo;t gone 144 years as the same thing every year.&a;rdquo;
The track&a;rsquo;s facilities have gradually expanded from a grandstand beneath twin spires to a sprawling, 189-acre complex of stacked towers and balconies that includes a roughly 10,000-square-foot&a;nbsp; &a;ldquo;Mansion&a;rdquo; overlooking the finish line, premium dining areas and extensive parking lots. (The Mansion is so exclusive that it can be accessed only through a concierge with a special key, and its location is not listed on directories in the track.) New this year: 1,800 seats in a luxury &a;ldquo;Starting Gate Suites&a;rdquo; area in a tower hovering over where the horses will break from the gate. The suites, which accommodate 32 people and contain a private bar and betting machines, cost $134,000 apiece on Derby Day.
&a;ldquo;When we do things like put in the Big Board&a;mdash;at the time it was the largest 4K video screen in the world&a;mdash;for someone who comes from GE and GE Capital, the idea of spending $12 million to build a big television where there isn&a;rsquo;t a direct ROI, that&a;rsquo;s a bit of a cultural shock,&a;rdquo; Carstanjen says. &a;ldquo;It takes a few years of working at Churchill Downs to develop the confidence and understanding of how to think about investments in a facility and event like this. But it was critical to maintaining our position as an iconic American event.&a;rdquo;
Churchill Downs&a;rsquo; improvements have also been critical to maintaining sales momentum and profitability. The suites and Mansion alone&a;mdash;which costs as much $15,000 a person&a;mdash;account for a mere 3% of Derby Day attendance but drive 30% of its ticket revenue. Including members-only fine-dining areas like the Turf Club (where membership starts at $2,500 a year), there are roughly 59,000 &a;ldquo;premium&a;rdquo; seats that Churchill says is the largest contributor to Derby revenue&a;mdash;which last year came in at an estimated $174 million. Even better for Churchill Downs: More than a third of these seats are sold in noncancelable contracts with an average life of three to seven years, meaning the money is in its pockets rain or shine.
&a;ldquo;It&a;rsquo;s great to have a business you can keep putting money into and it keeps the returns sustained,&a;rdquo; says Adam Trivison, an analyst at Gabelli. He projects the 2018 Kentucky Derby will drive $100 million in profits for the company, up from $53 million in 2011. &a;ldquo;At a certain point, you exhaust your options and you build enough seats, but they&a;rsquo;re nowhere near that point,&a;rdquo; he says.
As much as Churchill Downs is focused on squeezing as much money as it can out of the Derby, the event has also been integral in driving business to TwinSpires.com, its online wagering platform that saw $1.3 billion in bets flow through in 2017 and provided $257 million in revenue to the parent company. &a;ldquo;You have so many casual people who don&a;rsquo;t bet come into play during the Derby,&a;rdquo; Trivison says. &a;ldquo;They use that, essentially, as an onboarding opportunity.&a;rdquo;
&l;img class=&q;wp-image-12582 size-full&q; src=&q;http://blogs-images.forbes.com/maggiemcgrath/files/2018/05/Churchill-Downs-Statue_1080x1080.jpg?width=960&q; alt=&q;&q; data-height=&q;1080&q; data-width=&q;1080&q;&g; The statue of the Kentucky Derby&s;s first winner, &l;span&g;Aristides.&l;/span&g; Photo credit: Adam Jones Danita Dellmont Photography/Newscom
In the second quarter of 2017&a;mdash;the period when the Derby occurred&a;mdash;Churchill Downs spent nearly $5 million on marketing for &l;a href=&q;http://twinspires.com&q; target=&q;_blank&q;&g;TwinSpires.com&l;/a&g; (it spent $3 million the rest of the year). The blitz-em-at-the-Derby strategy arguably worked: Between the 16 million people watching at home and the 160,000 people at the track, TwinSpires saw a 34% spike in active users that quarter, and the amount of money it recorded in bets outpaced the broader Thoroughbred industry by nearly 20%.
Carstanjen has remained disciplined about staying focused on horse racing and gambling. Consider the Big Fish Games divestiture. Churchill Downs acquired the social gaming company in late 2014 for $885 million. It had been an attempt to diversify Churchill Downs&a;rsquo; operations away from horse racing. By late 2017, however, competition in the social gaming space had skyrocketed, and the segment was not growing at the same rate as TwinSpires (indeed, in the last full quarter Big Fish appeared on the company&a;rsquo;s balance sheet, the division&a;rsquo;s revenues actually fell). And so, three years after announcing the Big Fish purchase, Carstanjen and his team were announcing its sale. They were able to sell at a profit, netting more than $95 million, and the company used some of the money to buy back $500 million worth of its shares.
For all these dispassionate investment decisions, Carstanjen takes a poetic view of what makes the Derby a billion-dollar asset. To him it&a;rsquo;s about the hope people chase when they wager on, buy, train or race Thoroughbreds. Because despite the millions his company has spent on the Mansion, Millionaire&a;rsquo;s Row and the new Starting Gate Suites, come 6:34 p.m. on May 5&a;mdash;post time&a;mdash;you won&a;rsquo;t find him in any of these shiny new spots.
&a;ldquo;I&a;rsquo;m facing the crowd in the grandstand,&a;rdquo; he says, beaming. &a;ldquo;When the starting gate goes up, and the horses go out, there&a;rsquo;s this roar that I get to experience&a;mdash;not as part of the crowd, but facing the crowd, so I get to see it and hear it as the horses come down the stretch for the first time. That&a;rsquo;s my favorite part of the Derby.&a;rdquo;&l;/p&g;