Mandalay sees no threat from Palms

David Strow

Friday, Aug. 24, 2001 | 11:11 a.m.

As expected, Mandalay Resort Group of Las Vegas on Thursday reported a significant decline in net income for the quarter ending July 31.

Mandalay reported net income of $30.5 million, or 40 cents per share, for the second quarter of its fiscal year. That's down 20 percent on a net income basis, and 17 percent on a per-share basis, from the year-ago quarter.

The earnings report fell in line with the 40 cents to 42 cents per share Mandalay told investors to expect on Aug. 6. At that time, analysts had been expecting 51 cents per share.

Operating cash flow from the Las Vegas-based gaming giant's properties fell 8 percent to $168.8 million, while revenues rose 1 percent to $639.5 million.

The causes of the shortfall were two-fold, said Mandalay President Glenn Schaeffer. First was a "slumpish" July that had one less weekend as July 2000, and saw the Fourth of July fall in the middle of the week. Second was a $5 million jump in utility costs.

"If you normalize the July calendar, and utility costs rose with inflation, we probably would have matched (earnings per share) quarter-to-quarter," Schaeffer said. "July was something of an oddball month, if you compare to a year ago."

Mandalay Bay was the bright spot in Las Vegas for the company, with cash flow of $33.3 million, up 8 percent. Revenue per available room was up 11 percent to $162 per night at the resort, and casino revenue was up 10 percent as well.

"The trends showed Mandalay Bay continues to separate itself from many competitors as a leading brand," Schaeffer said. "We see, so far in the third quarter, a rising demand for room reservations here."

This wasn't the case at the other Mandalay properties in Las Vegas. Luxor reported cash flow of $28.7 million, down 5 percent; Excalibur reported cash flow of $23.3 million, down 10 percent; Circus Circus Las Vegas posted $18.4 million in cash flow, down 13 percent; and Monte Carlo, a joint venture with MGM MIRAGE, reported cash flow of $21.1 million, down 10 percent.

Yet Schaeffer told analysts and investors Thursday afternoon that it appears things are improving, and that convention business looks solid in the coming months.

"I can't tell you the reasons, but the third quarter started rather well," Schaeffer said. "The month of August, at least at our company, across the board on the Las Vegas Strip, has shown pick-up, and we see pick-up going into the fall."

Much of Mandalay Bay's increase in the second quarter, however, came from accounting changes. Mandalay Bay reduced the size of certain estimated liabilities at the property, and as a result, operating cash flow increased by "several million dollars" during the quarter, Schaeffer said.

"Without that, we'd have been flat, even (at Mandalay Bay)," Schaeffer said. But this must be considered in context of the higher utility costs and the calendar quirks of July, Schaeffer added.

"(A flat quarter) is still pretty good," he said.

Performance at the property, and at nearby Luxor, should be boosted further by the opening of a 1.8 million-square-foot, $225 million convention center at Mandalay Bay next August, Schaeffer said. "We'll have higher spenders there mid-week," he said.

Nor does Schaeffer see much threat from the opening of the Palms hotel-casino on Flamingo Road in December. That property is aiming squarely at a younger crowd, the kind of crowd that now patronizes Mandalay Bay. Schaeffer was asked by one analyst if the Palms would steal away some of that business.

Not likely, Schaeffer replied.

"A younger crowd at Mandalay Bay is basically in their 30s and 40s," Schaeffer said. "If someone wants to go after people in their early 20s, they can have them, because they don't spend much money. Mandalay Bay is only gaining momentum, and we don't expect that opening (of the Palms) to change that at all."

Mandalay's Nevada properties outside of Las Vegas struggled, a trend the company blamed on Indian gaming in California. Mandalay's Reno casinos posted $15.5 million in cash flow, down 17 percent, while its Laughlin casinos reported $4.8 million in cash flow, down 39 percent.

"We believe the bulk of the change (from California gaming) is behind us," Schaeffer said.

The Midwest was friendlier to the company. The MotorCity Casino in Detroit, of which Mandalay owns 53.5 percent, reported $24.2 million in cash flow, up 6 percent. And Mandalay's 50 percent-owned Grand Victoria in Elgin, Ill., was Mandalay's top cash producer for the quarter -- its $33.7 million in cash flow was up 9.4 percent.

Mississippi was a weak spot; the Gold Strike in Tunica reported $7.4 million in cash flow, down 28 percent. Mandalay blamed this on increased competition and a marketwide slowdown.

Schaeffer also said Mandalay has been continuing its aggressive share repurchase activity. Since March 31, Schaeffer said, Mandalay has repurchased nearly 3.5 million shares of its own stock -- 4 percent to 5 percent of its outstanding shares -- at an average price of about $25 per share. That suggests Mandalay spent about $87.5 million on buying back its own stock over the last five months.