Harrah’s earnings rise, but Rio still disappoints

David Strow

Wednesday, July 18, 2001 | 11:09 a.m.

Harrah's Entertainment Inc. today reported a 22.5 percent increase in earnings for the quarter ending June 30 -- but said continued disappointing results at the Rio helped keep that growth from being even higher.

Harrah's reported adjusted earnings of $58.1 million, or 49 cents per share, for the quarter. Analysts, until early this month, had expected Harrah's to earn 55 cents per share -- but reduced that outlook after Harrah's warned investors July 5 to expect 46 cents to 50 cents per share in earnings for the quarter.

It marked the sixth time in the last seven quarters that the Rio has hurt company earnings. Harrah's responded today by telling analysts that it is all but abandoning the high-end business at the off-Strip property.

"That segment of the business (high-end business) has been unfortunate for us," said Gary Loveman, Harrah's president.

"The most fundamental change you'll see there is a significant de-emphasis (on high-end play)."

Frustration, though, was evident this morning from some corners of the investment community, particularly since Harrah's had previously told investors it was moving away from high-end play at the Rio, and yet the problem still plagued the property.

"Many of us came away (from previous quarters) feeling these changes had been implemented, and $10 million (the cash flow reported by the Rio during the quarter) was out of the realm of possibility," complained Michael Rietbrock, gaming analyst with Salomon Smith Barney.

"Changing the orientation of the operation from a handful of high-end international players to (lower-end) players, particularly slot players, is a significant task ... you're trying to change the culture of a property that's been established for 10 years," Harrah's Chief Executive Phil Satre responded.

Harrah's reported actualnet income of $47.9 million for the quarter ending June 30, a 3 percent increase over the year-ago period.

On a diluted basis, this equated to 40 cents per share, or an increase of 2.6 percent over last year.

However, Harrah's emphasized adjusted net income, which was $58.1 million, or 49 cents per share. That's up 22.5 percent over the year-ago period. The adjusted earnings excluded $16.5 million in one-time expenses that aren't usually included in analyst expectations.

This morning, Harrah's stock rose 51 cents to $30.30.

Both revenues and cash flow showed strong gains despite the struggles at the bottom line. Revenues increased 4.3 percent to $914 million, a second-quarter record, while cash flow rose 1.3 percent to $234.7 million, another record.

Because of hits taken at the high-end at the Rio, cash flow at that property was $9.7 million for the quarter. That's a huge improvement over the $800,000 in cash flow reported in the year-ago quarter, but still well below the property's historical performance of roughly $25 million per quarter.

The relatively low cash flow came despite improvement in practically every business segment at the Rio, including slot and low-end table game play, hotel business, restaurant business and entertainment.

"We had in place a series of high-end gaming offerings that had a razor's edge economic to them," Loveman said. "In cases where we hold at or above (the predicted hold for the game), the game could be mildly profitable. When we held even modestly below, the business was significantly unfavorable to our income statement."

No official word was available this morning on the impact the roll-back on high-end play would have on Rio employees. It is believed it will result in cutbacks in the property's international marketing division, though the actual number of layoffs is expected to be below 50.

The story was remarkably different at Harrah's Las Vegas and Harrah's Laughlin, which combined reported cash flow of $30.9 million, up 10 percent.

But the drop-off in business was severe at Harrah's two Northern Nevada casinos, which posted cash flow of $17.8 million, down 18 percent from the year-ago period. Harrah's officials blamed a number of factors, including higher gasoline costs and a slowing northern California economy, and said they are increasing marketing efforts in an attempt to increase non-tracked play at its casinos in Reno and Lake Tahoe.

"Northern Nevada is under siege," Satre said.

Despite the struggles of the Rio, Reno and Lake Tahoe, Harrah's Western Division posted $58.4 million in cash flow, up 16 percent. That was the largest increase of any Harrah's division.

Elsewhere, growth was more modest. At the company's two Atlantic City properties, cash flow increased 2 percent to $62.4 million, while Harrah's Central Division reported cash flow of $107.8 million, up 4 percent.

In some markets, performance was quite strong. Harrah's two Missouri casinos saw cash flow increase 19 percent, primarily because of expansions. Shreveport, La., also saw cash flow rise 13.5 percent from expansions. But cash flow fell 5.6 percent at Harrah's properties in Chicago, primarily because of growing competition between casinos in the Chicago area.

Harrah's also took a hit at Lake Charles, La., after that casino was shut down for several days by a tropical storm, and after Louisiana gaming taxes rose.

Harrah's also noted it took advantage of the plunge in its share price caused by its earnings warning earlier this month. In its earnings report, the company said it acquired 3.3 million shares of its own stock for $98 million, or an average price of $29.71 per share.

The company is authorized to purchase an additional 1.2 million shares of its own stock under current repurchase plans.