Like individuals, corporations have personalities. At Isle of Capri, the company’s personality comes from founder Bernie Goldstein. As the first gaming operator outside of Las Vegas or Atlantic City, Goldstein’s company was as different as the jurisdiction in which it was born, Iowa. With roots set firmly in the Midwest, Isle of Capri grew by leaps and bounds in the early days of riverboat gaming. From Iowa, Isle moved to Mississippi, Illinois, Missouri and Louisiana.
The company found Middle America to be its comfort zone. Every time it reached out to expand that territory, there were problems. After the ill-advised purchase of Lady Luck in Downtown Las Vegas and ill-fated foreign ventures in the Bahamas and the United Kingdom, Isle retreated to its safety zone. But then, the economy went south.
Luckily, Goldstein had a succession plan, and had brought in an experienced team of gaming executives just before the downturn, led by Jim Perry and Virginia McDowell. Both executives had led major casinos and gaming companies, from the Tropicana in Atlantic City to Argosy Casinos and Trump Hotels.
Goldstein later stepped down as chairman, ceding the title to Perry, who recently resigned as CEO, a title inherited by McDowell. Perry remains executive chairman of the company, and McDowell now has the responsibility for implementing Goldstein’s vision.
Planning to Succeed
McDowell says that building a strategic plan upon joining the company in 2007 required them to identify the company’s strengths and weaknesses. What they discovered, she says, is that the company was good at the basics.
“We specialize in blocking and tackling, and we’ve cornered the market on having fun,” she says.
McDowell says the plan crafted at the start of their tenure remains the roadmap they are following today.
“That plan is the foundation of what we want to do as a company going forward,” she says. “Of course, we implemented that plan about six months before the economy tanked, so we had to go to plan B. In 2010, we started to see the economy and consumer confidence recover a bit, so we went back to the original plan. We’ve updated it, of course, for the ‘new normal,’ but we still believe it’s valid. We’re going to continue reinvesting in our existing portfolio, looking for organic growth opportunities, and to continue to increase free cash flow for the entire company.”
When the economy intervened, aggressive cap ex plans had to be shelved and the company began looking for ways to reduce expenditures. But Isle did it differently than other casino companies, particularly its competitors, and it started with a financial restructuring led by CFO Dale Black.
“We have worked very hard to improve our capital structure,” McDowell says. “Most recently, we pushed our various maturities out to as late as 2019. Earlier this year, we did our equity offering that went very well. During the teeth of the recession, as a result of the property enhancement programs we put in place, we were able to pull $30 million to $40 million out of the costs at the property and the corporate levels. At the same time, we were able to pay down our debt by over $300 million. We were really focused on decreasing our leverage during that time period.”
But Isle continues to focus on its customers, and how to parlay their experiences to success.
“You don’t want to cut so deep and so far that it negatively impacts your customers’ experience,” McDowell explains. “Some of our competitors did that and we benefited from their cuts. Our customers hold us to a higher standard. They tell us, ‘My leisure dollars are more precious than they’ve ever been, and I can only make one choice where I used to be able to go out three or four times a month.’ We believe that the relationships we created with our customers and the value we held for them during the great recession is going to help us on the other side.”
How that translates to a higher share price is problematic.
“The question is whether Wall Street recognizes these nuances,” she says. “It’s a bit of an intangible and hard to measure. I think our leverage has been an overhang on the company. What we’ve been able to do with paying down the debt and the equity infusion serves to reduce that overhang a little, but I think they’re still looking us as a pure play company that will thrive in the recovery. But after a few good months, it’s kind of stagnant again. So Wall Street is just waiting for a clearer sign that things are getting better.”
As the Isle financial situation began to improve, McDowell helped to direct the acquisition of two new licenses that will transform the company.
In Missouri, the company defeated at least a dozen competing bids for the state’s last gaming license, which became available when Pinnacle Entertainment shut down the Admiral casino in St. Louis. McDowell says Isle’s presence in Missouri gave the company the inside track with a proposal for a casino in Cape Girardeau.
“We thought we were in great shape right from the start,” she says. “Our headquarters is in the state, and we run three properties here. So when the license began to open up, we were solicited from just about anyone in the state who had an idea. We looked at it a little differently. We looked at where we could get the best return on our investment with the least competition. It was our belief that the Kansas City and St. Louis markets have capacity issues. You already have significant properties in both those markets. New properties would not generate much growth, and would simply cannibalize the existing properties.”
So Isle concentrated on the more rural, but underserved areas.
“We have two properties, one in Boonville and one in Caruthersville, which are in relatively remote locations, and both do very well,” she says. “So we looked out-state for a location. Few people realize that Cape Girardeau is the largest city between St. Louis and Memphis, and it’s a very underserved location. Cape Girardeau officials have been wonderful to work with; the mayor, city council, just about every civic and fraternal organization have welcomed us with open arms. Cape Girardeau has a wonderful, historic and quaint downtown. We’re building at the other end of the street to turn a two-hour visit to Cape into a six-hour visit.”
In Pennsylvania, the final Class 3 resort license was up for grabs, and despite some fierce competition from other groups, Isle was again in an enviable position, bidding for a casino license along with the owners of the Nemacolin Woodlands, a five-star resort near Pittsburgh. The proposal is a partnership with the Hardy family—Joe Hardy and his daughter, Maggie Hardy Magerko. They are known nationally as the owners of the 84 Lumber chain. McDowell says the partnership came at a fortuitous time for both organizations.
“The Hardys didn’t apply for the first round of applications because the requirements were a bit confusing,” she says. The confusion was felt by others, and few applicants presented bids. In the rebidding process, after some clarity was added to the process, the Hardys decided to bid, but there was an obvious need.
“The Hardy family traditionally goes it alone,” says McDowell. “So they never took in an outside partner on any of their various business ventures. They recognized that gaming is very different, and they needed a subject-matter expert as their partner. They looked at many companies, but felt comfortable with Isle. We had the same entrepreneurial spirit that they did, and in many ways we have the same values, ethics and integrity that they value.”
Another plus was the casino site itself, which is set apart from the resort.
“About five years ago, they added a building that was perfect for a casino,” explains McDowell. “At first, it was going to be a Cabelas or a Bass Pro Shop operation, then they made it into a kind of ‘Dave and Buster’s’ arcade restaurant, with a lot of the lighting and wiring you would need for a casino. So for us, it’s almost plug-and-play. We have to bump it out for a few amenities and office space, but once we get the nod, we can be up and running in about nine months.”
Isle will invest about $50 million in Nemacolin, and will draw from some local flavor as a theme.
“Frank Lloyd Wright’s Fallingwater is not far from Nemacolin, so we’ve drawn our inspiration from that famous residence,” she says. “Our creative people are going to make it like his workshop, things that Wright would have considered while designing Fallingwater.”
Although Nemacolin is the state’s last resort license, it will be the first to open. And the regulations controlling the operation are a work in progress, says McDowell.
“We are working with the regulators right now to determine exactly what the regs will be,” she says. “Right now, you don’t have to be a guest of the resort, but you do have to be a patron of the resort. For example, if you’re attending a wedding, going to a meeting, using the golf courses, having dinner, you should be able to gain access to the casino. But the actual mechanics of that are what we are discussing right now.”
She says she’s been impressed with the cooperation the regulators are offering.
“It’s our belief that the regulators want to make it easier, not more difficult, to participate,” she says. “The last thing they want or we want is to place hurdles or barriers to entry that would frustrate people. We have firsthand knowledge of this in Missouri, where loss limits were a problem for so long. The more difficult it is to get them into the casino, the greater likelihood they’re going to change their minds and walk away.”
Although another five-star resort in West Virginia, the Greenbrier, is having problems getting the level of expected play at its recently opened casino, McDowell says the comparison is not valid.
“Part of the issue with the Greenbrier is that it is so remote,” she explains. “It’s not like there’s a market close by. If you’re there, you are probably staying there. At Nemacolin, we have a surrounding market of hundreds of thousands of people who would be able to drive to the casino.”
For McDowell, the best part of getting the two licenses is that her team will be able to build the up-to-date versions of the company’s two casino brands, Isle of Capri and Lady Luck.
“Now that we’re going to build the flagship properties for both of our brands over the next two years, that will really help us define the personalities of those brands, the brand DNA,” she says.
Although there are significant differences in the two brands, McDowell has an explanation:
“In broad strokes, if it floats, it’s a Lady Luck; if it’s more amenity-driven, it’s an Isle,” she laughs. But that’s in very broad strokes.
“Nemacolin doesn’t float, but because the resort has all the amenities and more that we offer at Isle, there is no need to offer them in the casino, so therefore, it’s a Lady Luck. It’s a great way to add a fun brand in addition to what they offer at Nemacolin.”
So Lady Lucks are the first-generation riverboat facilities, while Isles are hotel, restaurants, convention space, spa.
“This is not to denigrate the first-generation riverboats,” McDowell says. “When you look at some of them, the return on investment makes them tremendous assets. We have to build the experience to the physical plant. Our research shows us that our customers are looking for a clean, safe, friendly, fun gaming experience. They want great service, good value on the casino floor, great entertainment and a cold beer or their beverage of choice. As long as we can deliver on those things, we’ll be doing OK.”
In addition to the two casino brands, Isle is developing several other non-gaming brands: Otis and Henry’s Restaurant, Lone Wolf Bar & Grill, the Jesters Jam concert series. These will be common to most Isle casinos and some Lady Luck properties. The entertainment series has been a particular success, says McDowell.
“You can buy acts and route them to our properties,” she says. “We were approaching entertainment on a very decentralized basis. We weren’t taking advantage of the economies of scale. So as part of our house of brands, the Jesters Jam concert series has been very successful. We’ve gotten very creative with the T-shirts and posters. It also gave us the ability to really use our aggressive social media platform and take that to the next level.”
Expansion and Contraction
In addition to the two licenses in Missouri and Pennsylvania, Isle has recently entered into agreements to shed two other licenses.
In Louisiana, the company will sell one of its two licenses in Lake Charles, and the boat holding the casino will be transferred to Bossier City if the deal goes through. Paradise Casinos, LLC has plans to buy the Crown riverboat, leaving the Grand Palais boat in place at Isle’s Lake Charles property.
“We’ve been wanting to monetize the second license at Lake Charles for some time now,” says McDowell. “We’ve looked at a variety of different options. We considered relocating it ourselves, based on the approved bodies of water you can use in Louisiana. We never found the right opportunity. But we feel that this is a good one. You have to have parish approval, so there’s a referendum that is scheduled this fall. They have exclusive right until the vote is over.”
In Davenport, Iowa, the city council asked the Isle to increase its investment in the community with a larger casino. McDowell says the company declined because the market is already saturated. A company has been designated to replace the Isle in that market, and now has 60 days to negotiate a deal that Isle finds acceptable.
“The mayor and city council there have a vision for what they want out of that market,” she says. “When we first began having these discussions a few years ago, we pointed out that based on the expansion of gaming in Iowa, it was already a declining market, especially when Jumers expanded across the river. As a publicly traded company, we didn’t feel like we’d get a return on our $150 million investment in a land-based facility. The time to do that would have been 20 years ago, when we jumped in to help the city when the President riverboat left town. We saved the jobs and infrastructure at that time. We believe we’ve been a good corporate citizen. And we have reinvested in the property, but $150 million would just not be a good investment. We’re willing to transact our property at a commercially reasonable multiple if they find someone to take our place.”
In Florida, where talks are under way to potentially allow integrated resorts in tourist destinations around the state, McDowell feels the company is in good shape with its racino operation at Pompano Park. It all started with the state’s negotiations with the Seminoles over the tribe’s gaming compacts.
“I give our corporate legislative team and our lobbyists for the parimutuel coalition a tremendous amount of credit,” she says, “for making the legislators in Florida realize how important the parimutuel industry is to the state, to get the tax rate down to a much more competitive level. It makes for a healthier industry.”
Now that more gaming is being considered, McDowell believes Isle is still sitting pretty.
“The dialogue that started in the last legislative session continued into this year’s session,” she explains. “And the relationships we developed in the last session allowed us to make our points on parity. To the extent that these resorts will be introduced in the state—and that could be a long way off—we would have parity in our county. Assuming that a $2 billion investment would mean a tax rate of 10 percent, we would get the same deal and get full parity in terms of games. That is helpful. But who knows how likely that is, given the state’s relationship with the Seminole tribe and a lot of other factors.”
Isle will likely not be a factor in the development of any gaming expansion in Massachusetts, she says, because of the high price tag for any potential casino operation there.
“We’re probably not a candidate to build a $1 billion or $2 billion resort in Massachusetts,” she says. “But we could be a candidate to manage one. We have a deep and broad management team, and our professionals at the corporate level have run or managed very large-scale destination resorts in Las Vegas or Atlantic City. We have our management division at the corporate level where we look for management contracts. This could be one of them. We could bring a lot to the table.”
McDowell says that expansion is certainly not off the table for Isle, however.
“Our sweet spot is between the Alleghenies and the Rockies,” she says. “There are about 100 properties in that region that can be converted to Lady Lucks. A lot of companies don’t do this because it’s not sexy or glamorous. But the average Lady Luck property has an EBITDA in the $8 million to $12 million range. If we pick up a handful of these, it really gives us the ability to add properties at a reasonable price, but also to build a nationwide distribution network. A brand is shorthand for ‘I know what I’m getting and I like it.’”
Friends and Family
The legacy of Bernie Goldstein continues to thrive at Isle of Capri, and always will if McDowell is in charge.
“I was very fortunate to join a company—and it was one of the reasons I decided to join this company—with values,” she says. “Bernie Goldstein formed this company based on honor, ethics and integrity. Isle has always been a good corporate citizen, not only giving back to the communities where we do business, but also creating a culture where your employees truly feel they are part of the family. Bernie embodied that.”
The recent flooding in the Midwest closed down several Isle properties, and employees have been involved in relief efforts.
“We’ve shown Bernie’s legacy in the aftermath of Hurricane Katrina and most recently in the flooding,” she says. “We were impacted in three states where our facilities closed. But we paid our employees and kept them on the payroll. We also made them available to assist in any way they could.”
A program developed two years ago has turned into a major employee initiative for Isle, says McDowell.
“The most important part of our culture is our ‘See, Say, Smile’ program,” she says. “We introduced this as a proprietary courtesy program a couple of years ago. We view courtesy as being very different from service. We believe that employees are not always in total control of the service they provide. For example, if two people call in on a very busy Saturday night, there are going to be lines; there’s no way around it. The question is when you finally get to the front of the line, is the employee going to be sitting there growling at them, or will she be apologizing for the long wait? It totally defuses the situation. With this program, we empower the employees to earn bonuses by applying simple courtesy.”
Through the program, employees are recognized with bonuses for going above and beyond.
“We’ve spent several million dollars reinvesting in our employees through this program,” McDowell points out. “Our baseline was to reward employees at least six out of 10 times they show the requisite behavior. Now it’s over 90 percent. Our employees have embraced this. They tell us they not only employ this program at work, but they take it home into the community.”
Social networking is also a big part of the relationship that Isle builds with its employees.
“We also use Twitter to communicate with our employees,” says McDowell. “For the ‘See, Say, Smile’ campaign we have a very active dialogue on Facebook. Employees from all 15 properties can post on our wall. We’re using social media to promote our two big charitable efforts. Our properties compete with each other to raise money and have fun.”
It is the social media strides that have identified Isle and Lady Luck properties over the last two years. Instead of throwing money at something that has mystified companies in the gaming industry and beyond, McDowell says her corporate marketing team has driven the initiative.
“We have a very talented corporate marketing team, and they just get it,” she says. “Being social is an opportunity for you to interact with your customers. And it doesn’t have to be expensive. When we had our social media debate, it started with, ‘What is your return on investment?’ That’s very hard to measure and equally hard to quantify. Well, that’s true if you spend a lot of money getting there. We did not. We just incorporated social media into the campaigns and promotions already planned.”
With the properties all involved, McDowell says the benefits have been tangible.
“Social networking is a way for us to integrate our messages and continue to build relationships with our customers,” she says. “But we also sell tickets, buffets, rooms as well. We believe this is just the tip of the iceberg.”
But Twitter and Facebook are just the start for Isle. McDowell says mobile platforms are next in line for the Isle style.
“We’ve just finished some upgrades to our corporate website that will give us the ability to go mobile,” she says. “We believe that’s the wave of the future.”
Likewise, McDowell sees online gaming as a potential opportunity, but one that won’t be immediate.
“Gary Loveman and Caesars have done a great job in framing that discussion,” she says. “But if you look at what our elected officials in Washington are grappling with every day, this is not a priority. Hopefully, when we get on the other side of this economic situation, probably not until after the 2012 election, will it be considered? No one is willing to risk political capital on this at this time. Maybe a bit of the intrastate variety, but probably not at the federal level. If something happens in Iowa or Florida, we’ll probably take a look at it.”