May 11, 2024 - ACEL

Accel Entertainment: Is This Distributed Gaming Giant Silently Winning the Recession?

Hidden within Accel Entertainment's Q1 2024 earnings transcript lies a story most analysts seem to be overlooking: a potential resilience to the much-anticipated economic downturn. While whispers of recession loom large and even titans of the gaming industry brace for impact, Accel's "local gaming" model may just be the life raft players and investors are seeking.

Sure, the transcript acknowledges some headwinds. Unfavorable weather, particularly a brutal January, contributed to negative same-store sales growth in Illinois, Accel's bread-and-butter market. But here's where things get interesting. Despite this dip, Accel managed to grow its overall revenue thanks to a strategic combination of new locations in Illinois and expansion into Nebraska.

Accel seems to be threading a needle, skillfully balancing its core market dominance with targeted growth in emerging regions. It's a delicate act, but one that suggests a keen understanding of shifting consumer behavior. As anxieties about a looming recession tighten wallets, players might be opting for Accel's convenient, low-stakes, close-to-home gaming experience over pricier alternatives.

"CEO Andy Rubenstein hints at this shift, noting that Accel provides "the gaming entertainment that is closest to home." He highlights the low barrier to entry, stating, "You don't have to drive very far. You don't have to fly anywhere. You don't have to have a large commitment in terms of the play." This accessibility, coupled with a "regular experience" of daily or weekly entertainment, could be attracting players seeking respite from economic uncertainty without breaking the bank."

The numbers support this hypothesis. While some markets experienced significant weather-related setbacks, Accel's revenue growth outpaced expectations. This suggests a strong February-March rebound, potentially driven by players re-engaging as weather conditions improved and seeking out Accel's familiar, low-cost offerings.

Terminal and Location Growth

Accel Entertainment has steadily increased its number of terminals and locations, indicating consistent expansion. Here's a visual representation of this growth:

But Accel's resilience doesn't stop at revenue. The company's highly variable cost structure, which Mat Ellis, CFO, calls "easy to forecast," allows them to react quickly to changing market conditions. This agility, combined with a strong balance sheet and low leverage, positions Accel not only to weather the storm but to capitalize on opportunities created by a potential economic downturn.

Further evidence of this proactive approach can be seen in Accel's M&A strategy. While acknowledging a persistent gap between buyer and seller expectations in the current environment, Rubenstein confidently predicts multiple acquisitions outside Illinois in the next 12 to 18 months. He attributes this to Accel's financial strength and anticipates favorable pricing as over-levered competitors feel the heat of a slowing economy.

Accel's focus on "developing markets" like Nebraska, where location growth propelled the market into EBITDA-positive territory, further underscores its strategic foresight. As the company continues to expand geographically and refine its offering in these emerging markets, it's creating multiple avenues for growth, even if its core Illinois market experiences temporary headwinds.

Here's the potential bombshell: could Accel be on the verge of becoming a recession-proof gaming powerhouse? Their local, distributed gaming model, combined with a sharp focus on operational efficiency and disciplined M&A, sets the stage for potential outperformance in a challenging economic climate. While traditional casinos fret over declining destination travel and high-stakes spending, Accel may be quietly positioning itself to attract a wave of budget-conscious players seeking convenient, affordable entertainment close to home.

One thing is certain: Accel Entertainment's Q1 2024 earnings call isn't just another routine update. It's a glimpse into a potentially winning strategy for navigating a turbulent economic future, a strategy that may soon be turning heads on Wall Street.

"Fun Fact: Accel Entertainment's business model is based on a revenue-sharing agreement with its location partners. This means that Accel installs and maintains gaming terminals in locations like bars and restaurants, and then shares a percentage of the revenue generated by those terminals with the location owner. This mutually beneficial partnership is a key driver of Accel's success."