Although Penn Entertainment’s acquisition of the outstanding shares of Barstool Sports closed last month, J.P. Morgan analyst Joseph Greff saw it as a mere formality. “From an operational standpoint, not much has changed, as the two companies were already very integrated,” he wrote after meeting with Penn CFO Felicia Hendrix.
As for Penn’s controversial relationship with Barstool founder Dave Portnoy, Greff reported, “Management noted that Dave’s and [Dan “Big Cat” Katz’s] employment contracts are done through a loan-out company, which removes their requirements to hold a gaming license.” This obviates an issue that created headaches for Penn in Massachusetts (where Barstool was granted temporary licensure) and New York state, where it was passed over entirely.
Greff noted that Barstool was seeing growth from two key revenue streams, advertising and commerce. “The former is benefiting from shows, social, personalities, and the latter is benefiting from its loyal following.” Portnoy’s contract runs through 2025, while those of Katz and Barstool CEO Erika Nardini expire at the end of 2026.
“Effectively, the two of them are consultants,” Greff explained of Portnoy and Katz, “though Penn made it clear that all three are involved and invested in Barstool and Penn.”
Although low marketing costs have been one of Barstool’s selling points, Greff added that Penn expects to accelerate spending and investment in sports betting ahead of the next NFL season, hoping to increase its market share into the low teens, perhaps doubling the five to seven percent it tends to enjoy now.
Don’t expect to see Barstool ads on your television set, however. “This increased marketing spend will not be in the form of TV advertising, but more so through digital and social channels.”
Penn also foresees its 2022 return on investment in the digital sphere swinging from a $75 million loss in 2022 to a $25 million positive ROI return this year.
Continuing to emphasize Penn’s digital operations, Hendrix told Greff the company’s transition onto its wholly owned theScore platform will yield greater market share, higher hold, improved retention, and easier cross-selling of its digital assets. Penn, Greff noted, “should be able to focus on more efficient marketing spend, while enhancing search capabilities and parlay product offerings.”
As for brick-and-mortar gambling, the company is still experiencing resilient consumer behavior, despite what Greff characterized as “inflationary headwinds. The younger demographic continues to represent a higher proportion of mix versus pre-pandemic,” propelled by Barstool, “enhanced digital offerings,” and entertainment offerings. “The older demographic,” Greff said of Baby Boomers, “continues to have depressed visitation levels, which management feels may help margins, considering some of their lower-profitability profiles.”