Mandalay expects to meet analysts’ estimates

Friday, Dec. 6, 2002 | 10:55 a.m.

Room rates at most of Mandalay Resort Group's Las Vegas casino resorts remain weak, but the company expects to achieve analysts' profit estimates for the fourth quarter, company executives said during a conference call with investors and analysts Thursday.

Mandalay's flagship Mandalay Bay resort on the Las Vegas Strip proved a bright spot for the company and helped boost third quarter earnings by nearly 50 percent, in line with expectations.

Earnings jumped to $33.2 million for the quarter ended Oct. 31 compared to $23.3 million for the same period a year ago.

On a per-share basis, the third quarter profit was up 47 percent to 47 cents for the quarter compared to 32 cents in the same quarter last year. Like other major companies that reported earnings this season, Mandalay attributed the increase to a recovery in business compared to the period after last year's devastating terrorist attacks.

Excluding one-time items, earnings were 50 cents per share compared to 33 cents per share for the year-ago quarter.

Prior to a Nov. 20 earnings pre-announcement, analysts had expected the company to earn 52 cents per share.

Some analysts expressed disappointment at the company's results and concern about the company's presence in the mid-market hotel segment, which has been susceptible to price wars in the still-uncertain economy. Upscale hotels and those catering to convention customers have tended to perform better, they say.

"While management likes to focus investor attention on Mandalay Bay -- which continues to post strong results and should continue to improve, in our view -- the rest of the portfolio remains a drag on earnings," Goldman, Sachs & Co. bond analyst John Kempf wrote in a research note to investors today.

During the earnings call, Mandalay officials relayed the growing importance of technology upgrades to future performance.

"As we go forward, the Internet will pervade every aspect of our business," Mandalay's Senior Vice President of Marketing John Marz said.

The upgrades include a Web-based application for the company's upcoming convention center that convention planners and attendees can use to book, plan and even design their own events.

The company also is increasing the number of its hotel rooms booked by customers online. About 15 to 20 percent of rooms are now booked over the Internet -- a segment that may also be the source of the company's highest retail room rates.

Mandalay continues to roll out its "One Club" slot player loyalty club card to its casinos nationwide, a program with a heavy technology component to track player rewards.

The company is also introducing a system that allows marketers to get a more comprehensive look at customer spending patterns, Marz said.

"How much a customer spends in our hotels and our restaurants and our spa and entertainment facilities is just as important to us as the time they spend on the slot machine," he said.

In last month's earnings pre-announcement that the company would miss expectations, Mandalay blamed the 2-cent difference from earlier estimates on sub-par table game "win percentage" -- the amount won from gamblers -- for the third quarter as compared to higher than normal hold for the same quarter last year.

The company also bore the full impact of higher taxes on casino revenues authorized by regulators in Illinois, affecting the company's 50 percent-owned Grand Victoria riverboat casino in Elgin.

Illinois' new tax rate, which jumped from 35 percent to 50 percent of casino revenues at the top level, cut Mandalay's earnings by about 7 cents per share for the third quarter and is expected to hurt next year's profits by about 20 cents per share, the company said.

At Mandalay Bay, the company's strongest performer, operating cash flow grew from $30 million a year ago to $38 million in the third quarter. The company's neighboring Luxor casino reported a decline in operating cash flow, from $27 million to $25.2 million for the quarter.

Its adjacent Excalibur property also fell short, from $21.1 million last year to $19.1 million. Circus Circus Las Vegas, the company's family-theme casino at the north end of the Las Vegas Strip, posted $13.6 million in operating cash flow compared to $14.7 million a year ago. Monte Carlo, a resort owned in partnership with Strip competitor MGM MIRAGE, produced $18.9 million compared to $19.6 million last year.

The first half of last year's third quarter in Las Vegas, before Sept. 11, was particularly strong, which challenged comparisons to this year's quarter, when prices still lagged, the company said.

Revenue per available room -- a key indicator of performance in the hotel industry -- is flat with last year at the company's five resorts on the Las Vegas Strip.

In Reno, Mandalay's Circus Circus Reno and half-owned Silver Legacy recorded $14.2 million in operating cash flow compared to $13.6 million last year. The Grand Victoria in Illinois generated $21.6 million against $33.5 million. In Detroit, the company's half-owned MotorCity Casino reported $31.8 million against $29.5 million.

The company anticipates a revenue boost next year with the debut of its convention center Jan. 2 at Mandalay Bay and its nearby hotel tower set to launch in fall. The convention center should help improve room rates at the company's neighboring casinos, which will start to see overflow traffic, Chief Financial Officer Glenn Schaeffer said. Mandalay Bay could see more than 30 percent of its rooms filled by convention customers next year, he said.

Also at Mandalay Bay, the company is following similar moves by MGM Grand and Caesars Palace by launching a private high-roller salon. The salon, coupled with efforts to hire hosts catering to Chinese players, will help increase the company's 8 to 10 percent market share of high-roller play on the Las Vegas Strip, he added.

An aggressive share repurchase program also will help the company's earnings per share, he said. Mandalay repurchased 3 million shares of stock for $92.7 million during the quarter and had bought back an additional 1.1 million shares to date in the fourth quarter. By March the company will have repurchased about 50 percent of its outstanding shares over about the past five years, he said.

The company's stock was off slightly this morning at $28.67.