Shuffle Master (Nasdaq: SHFL) had a very good business building table games and entertainment products for casinos. Then it decided to increase the company through an acquisition and things began to go bad.

Nice Year, Maybe
Last year, Shuffle Master's revenue grew 45% to $154 million but net income fell 52% to $21 million. The company said rising expenses and the firm's purchase of a company called Stargames were to blame. Of course, the company said that once the transaction had been integrated into its operations, things would get better. The stock was $27 then, and now it is just above $16.

Not Better Off
By late February, Shuffle Master had more bad news. It would miss its quarterly earnings forecast. Analysts were looking for $49 million in revenue. The company reset the range at $35 million to $38 million. The Stargames deal was already a bust. Revenue was coming in short of expectations at the new division, and expenses were moving up. Company management indicated it knew the problems had to be fixed as CEO Mark Yoseloff said in a press release, "We expect to implement certain changes in our product mix and operations as a result of this evaluation and will be discussing these once the analysis has been completed."

The Stargames problem was only a piece of the negative news. The company also said it has misstated some of its profits and would have to delay filing its results. The class action lawyers began to line up.

And, in its fiscal quarter ending April 30, revenue was basically flat from the year before. Gross margins were poor "primarily due to product sales mix, namely the contribution from lower margin sales of Stargames slot product." To make matters worse, to buy its new division, the company had increased long-term debt from $159 million in the period a year ago to $223 million. (For related reading, check out Surprising Earnings Results.)

New Business Model, Another Excuse?
Along with the disappointing margins in the last quarter, Shuffle Master said that it was changing is business model. It hoped that its customers would lease machines from the company instead of buying them. There is, of course, no guarantee that the new program will work. Research firm Stifel Nicolaus warned that investors may not have the patience to watch the company try one more new angle.

Shuffle Master had a pretty good thing going from mid-2002 to mid-2006, the stock ran from $8 to $39. But from late 2006 to now, it has lost half of its value. Even in the casino gaming business, you have to stick to the knitting.

For further insight, see Playing The Sleuth In A Scandal Stock.

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