Harrah’s profit up despite problems

Wednesday, Oct. 18, 2000 | 11:21 a.m.

Harrah's Entertainment Inc. of Las Vegas shook off a subpar financial performance from its Rio hotel-casino to post record third-quarter revenues, the company said today.

Las Vegas-based Harrah's reported revenues of $953.4 million, up 17.1 percent from the $814.1 million reported in the third quarter of 1999.

Third-quarter property cash flow -- earnings before interest, taxes, depreciation and amortization (EBITDA) -- were $267.8 million, up 12.4 percent from the $238.3 million reported in the same quarter a year ago.

Profit from operations rose to $74.5 million or 64 cents per share from $67.7 million or 52 cents, exceeding analyst expectations of 61 cents.

Investors reacted favorably. This morning, Harrah's stock was up $1 from Tuesday's closing price, to $25.50. Of 16 analysts covering the stock, 14 recommend "buy" or "strong buy" positions today.

"The industry-leading marketing and information-technology capabilities we've built powered the company to record revenues at nearly every one of our Harrah's brand properties during the quarter," Phil Satre, Harrah's Entertainment's chairman and chief executive officer, said in a statement this morning.

But properties that have lagged continued to be a drag on the company's performance.

The company said a decline in the Rio's high-end table game volume and lower profits in its entertainment operations resulted in a drop in earnings for the property from the third quarter of 1999.

"The good news at the Rio is that the table-game hold percentage improved, though it was still lower than normal," Satre said. "However, there was a decline in high-end table-game volume due to measures we took to reduce volatility in that segment of the Rio's business."

The Rio's third-quarter cash flow EBITDA was $10.1 million, down 65.1 percent from the $28.9 million reported in third-quarter 1999. Revenues for the period were down 13.5 percent, at $98.3 million compared with $113.7 million a year ago.

But analysts say the company is taking steps to turn around the Rio's fortunes.

"The transition from an entrepreneurial to a corporate entity has been difficult at the Rio," said Andrew Zarnett, a gaming analyst for Deutsche Bank Alex. Brown. "The challenge over the next 12 months is to see how Harrah's positions the property to move EBITDA back north."

The company cut about 100 jobs at the Rio's restaurants in August.

Zarnett said the long-term plan is cater less to high rollers and more to the middle-income market, Harrah's specialty. Harrah's acquired the property in 1998.

And, the company plans to take a big step in that direction later this year when it introduces its nationwide loyalty program to the Rio. The company said it would integrate its Total Rewards customer tracking program into its Rio and Lake Charles, La., properties in the fourth quarter.

Harrah's also reported losses from the Harrah's New Orleans, in which the company owns a 43 percent interest. The company said the JCC Holding Co., the casino's majority owner, reported modest increases in revenues and is continuing to seek tax reductions and operational restrictions from the state of Louisiana.

Harrah's has guaranteed the New Orleans property's annual $100 million tax payment to the state, a condition of its acquisition of the property from bankruptcy. But that arrangement expires March 31 and the company has indicated it plans to re-evaluate its position.

"Without a fundamental change in the economics of the casino, I foresee that we will not be in a position to extend the guaranty beyond March 31, 2001," Satre said in a conference call with JCC Holding last month.

The company is restricted from building hotel rooms and restaurants on the New Orleans property -- a formula that Harrah's capitalizes on in its other markets.

The company's diversification of markets is its biggest strength, analysts said.

"Our thesis all along is that Harrah's is a diversified operator and any weakness in the company, such as the Rio or New Orleans, is made up for with the strength in other markets," said CIBC World Markets gaming analyst Adam Steinberg.

"Clearly, the diversification of assets and the strategy of data base marketing has really positioned Harrah's as a leader in the gaming industry," Zarnett added.