(Bloomberg) -- The Kentucky Derby is a timeless American affair: A 150-year-old horse race at historic Churchill Downs, with traditions and pageantry that haven’t changed much in a century and a half.

But for Churchill Downs Inc., the Louisville, Kentucky-based company that owns the annual Run for the Roses and the race track that hosts it, transformational change is the only path to survival in a world inundated by gambling — but increasingly uninterested in horse racing.

“We always expected to compete with those other forms of gambling,” William Carstanjen, Churchill’s chief executive officer, said in a phone interview.

Make no mistake, Saturday’s 150th running of the Derby will be a money-maker for its owners. The race is expected to generate record wagers, and receipts should get an added boost from strong advanced ticket sales and increased premium-price seating after $200 million in Paddock renovations, according to Bloomberg Intelligence gaming and lodging analyst Brian Egger. 

And that’s before taking into account the invaluable publicity from the media spotlight generated by the so-called most exciting two minutes in sports. 

After Saturday, however, things change dramatically. 

Once the crowds dissipate, the TV cameras leave and the bunting comes down, Churchill returns to the reality it faces 364 days a year. Horse racing is a dying industry that’s expensive to operate. Meanwhile, other forms of gambling that are more profitable are thriving. To be a player in this environment, the roughly $10 billion company needs to transform itself from the owner of one of the most prestigious sporting events in the world into a multiplatform gaming and entertainment company with properties online and across the US. 

It’s an effort that’s been underway for a while, with Churchill becoming increasingly reliant on contributions from the roughly dozen hotels and gaming properties it owns or has an equity stake in, its online horse wagering app TwinSpires and its historical racing machine unit to drive growth.

“We’ve taken advantage of the expansion of sports wagering because it’s actually improved our distribution,” Carstanjen said. “So we’re able to reach a lot more customers and explain our game to them.”

Sports betting is exploding in the US. Americans wagered a record $120 billion on sports in 2023, up about 28% from 2022, according to the American Gaming Association. Firms like DraftKings Inc. and FanDuel Inc. offer gamblers a bevy of ways to lay money on games and players. State lotteries are also booming, taking another slice of the gaming dollar.

Read More: How US Sports Betting Went From Nowhere to Mainstream: QuickTake

Horse racing, however, is headed in the opposite direction. The amount of money wagered on US races fell to $11.7 billion, down 4% from $12.1 billion in 2022, the biggest annual drop in handle in 12 years, according to Equibase, an industry group. A 2022 study by the Jockey Club in found that attendance industrywide had fallen 30% since 2000. The sport’s fan base is aging and younger gamblers appear less interested. And the danger of racing to horses is getting increasing attention from animal rights activists, particularly after seven horses died during Derby week last year.  

So Churchill has adapted. In 2019, 90% of its pre-tax earnings came in the second quarter, the period that features Derby week, but that share fell to 57% in 2022 and 47% in 2023, according to Bloomberg Intelligence data. The reason is Churchill’s beefed up operations for historical horse racing-machines (HRM) — a form of gambling technology that uses previously run horse races to determine future outcomes. It’s also generating a greater share of profits from the nearly 30 regional casinos and gaming facilities it owns, which stretch from Vicksburg, Mississippi, to Oxford, Maine.

The stock has responded to the transformation. Over the past five years, shares of Churchill Downs have roughly tripled, and its market capitalization has more than doubled, as the company acquired a handful of brick-and-mortar casinos and invested heavily in its HRM operation. 

“I give them the benefit of the doubt on acquisitions,” said Erika Maschmeyer, portfolio manager for the Columbia Acorn fund, which counts Churchill as one of its largest holdings. “No matter the price, they find a way to grow the business and make that purchase worth it. So they’ve built some Street cred.” 

The company’s first-quarter financial results showed record revenues and earnings that exceeded Wall Street’s expectations. The live and historical racing revenue climbed 14%, and adjusted profit jumped 23% from the same period in 2023, reflecting the expanded HRM focus.

Read More: Churchill Downs Jumps Most Since November on Record Quarter (1)

Despite the surge in gambling in the US, the stocks are struggling in 2024. An S&P index of casino and gaming companies has declined 6.9% this year and is down around 16% from its 52-week high hit last July. The drop is creating an opportunity to buy in, according to Wall Street, as 80% of the names in the 10-member gauge have an average analyst rating of buy. 

And even as it diversifies to capitalize on the gaming boom, Churchill remains committed to its crown jewel. Indeed, Carstanjen is adamant that the Derby’s importance to the company extends far beyond its economic contribution.

“Having been at the company for 19 years, back when it was much smaller than it is now, I’ve had the benefit of growing up with these businesses as they’ve developed,” Carstanjen said. “All three of our business units are different, but all of them have had great opportunities over the last five years and are continuing to grow into the future.”

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