Troubled investments will cost Harrah’s $259 million

David Strow

Friday, Jan. 19, 2001 | 11:26 a.m.

Harrah's Entertainment Inc. of Las Vegas warned investors Thursday that the bankruptcies of National Airlines and its New Orleans casino would result in the company taking a loss of roughly $160 million for the quarter ending Dec. 31.

The Las Vegas-based gaming giant said it expects to post a net loss of between $1.36 and $1.40 per share for the quarter; the consensus analyst estimate had been net income of 32 cents a share. The company will officially report earnings on Feb. 7.

Harrah's had earlier signaled that big write-offs could be coming, including at least $200 million from the New Orleans casino bankruptcy. Thursday's announcement spelled out the details of those write-offs. In all, they totaled $275 million for the quarter.

Yet in a conference call with investors and analysts this morning, Harrah's executives emphasized that they believed the worst was behind the company.

"A few issues overwhelmed that strong performance (at most Harrah's properties)," said Phil Satre, Harrah's chairman and chief executive. "We strongly believe that will not be the case in 2001. We currently believe we will be able to meet or exceed analysts' consensus estimate in 2001."

The consensus for 2001 now stands at $2.02 per share. When asked if he believed Harrah's could make $2.15 per share in 2001, Satre responded, "I feel pretty comfortable with the kind of number you're talking about."

By midday today, Harrah's stock traded at $26, down 13 cents, after trading up for most of the morning.

"From an investment perspective, we've been waiting for Harrah's to clear the decks of these underperforming investments," said David Anders, gaming analyst with Merrill Lynch. "That's what occurred today. Obviously we're not happy with the fact that the writeoffs had to occur, but to some degree, that's water under the bridge.

"It's a step in the right direction, to get investors to focus on the real fundamentals. The fundamentals still sound reasonable."

Harrah's announced it is writing off $220 million of its investment in JCC Holding Co., operator of Harrah's New Orleans, in connection with that company's proposed restructuring plan. That reduced earnings by $1.25 per share. Another $39 million was written off for Harrah's 48 percent investment in National Airlines, reducing earnings another 23 cents per share. Another $16 million, or 9 cents a share, was allotted to other write-offs, project openings and depreciation.

Satre minced no words about National, calling it "a bad investment for Harrah's." The company had not previously given an estimate for how large its write-off would be.

"We admit to you that National was an investment that in hindsight does not look good, and we're not going to make investments of that kind in the future of that magnitude," Satre said. "There's a real likelihood we will not be involved in National beyond the first quarter."

On New Orleans, Satre was cautiously optimistic that city and state officials would give final approval to a restructuring plan that would slash the casino's state tax by $40 million to $50 million a year and allow it to operate hotel rooms and restaurants. The restructuring plan must still be approved by March 31 if the casino is to survive.

"Based on the plan you've seen, this (New Orleans) will be a modestly profitable operation, and will have a modestly positive impact on us in the remaining three quarters of 2001," Satre said.

If JCC goes under, however, Harrah's will likely have to report an additional $70 million in writeoffs, Satre said.

A nagging problem -- poor performance at the Rio resort in Las Vegas -- continued to plague Harrah's during the quarter, though Harrah's officials said the situation improved in December. Poor hold at the property will reduce Harrah's earnings by 4 cents per share, but the company said a greater emphasis on slots over table games is helping to reduce volatility.

"The trends (at the Rio) are very favorable," said Chief Operating Officer Gary Loveman. "December was the first month performance of that business significantly increased over the year-ago comparison. As we look forward to 2001, we feel quite comfortable the Rio will at least meet or exceed the expectations you have for that business."

Harrah's officials said they expect the Rio to record $70 million to $80 million in cash flow in 2001, up from $13 million in 2000.

Severe winter weather, which has plagued other casino operators in the quarter, also hurt Harrah's, shaving 7 cents per share from earnings. An additional 3 cents per share was lost because of losses in the stock investments of Harrah's insurance plan.

Harrah's, however, noted it would have earned 31 to 35 cents per share without the writeoffs or effects from the Rio or weather. That would have put it in line with expectations. The company said it was also seeing strong same-store sales growth trends continuing at many properties, driven by its "Total Rewards" slot club program.

Results at several Nevada properties, including Harrah's Las Vegas and Laughlin, "were truly stellar," said Chief Financial Officer Colin Reed.

"We continue to see the core trends (of same-store sales growth) that have been so important to us for so long," Loveman said. "We see no signs of economic weakness impacting our core market."

With many issues now apparently in the past, Harrah's must deliver on those bullish statements in 2001 to restore investor confidence, analysts say.

J. Cogan, gaming analyst with Banc of America Securities, wasn't as willing to factor out problems from weather or the Rio from Harrah's earnings. On an operating basis, he noted, Harrah's earned about 20 cents per share, still missing consensus analyst expectations by 12 cents per share.

"2000 sure has been a hell of a year for them," Cogan said. "I think everyone expected Harrah's to miss to some degree. Having said that, it's a new year, and clearly the New Orleans issue is getting resolved, and it sounds like they have decent momentum out there."