Harrah’s casinos generate strong profit growth

Wednesday, July 17, 2002 | 11:04 a.m.

Harrah's Entertainment Inc. today blew past Wall Street's earnings estimates for the second quarter, reporting strong earnings and record revenues driven by the acquisition of Harvey's Casino Resorts last year and improved performance for the quarter at the company's Rio All-Suite Hotel & Casino in Las Vegas.

The Las Vegas company reported earnings of $86.2 million, or 75 cents per share, on revenue of $1 billion. That compares to earnings of $47.9 million, or 40 cents per share before special items, on revenue of $873.4 million for the second quarter of last year. Analysts had estimated the company would earn 70 cents per share.

Company shares jumped by about 4 percent in early trading today but were barely changed by late morning, at $43.75.

The results come as casino companies are still recovering from the devastating decline in tourism following the Sept. 11 terrorist attacks. The industry has rebounded strongly since then, industry observers say. Harrah's also was less affected than most because of its relatively small presence in Las Vegas, which is dependent on air travel.

Harrah's also is the first major gaming company to announce its second quarter financials amid a series of accounting scandals that have rocked the financial markets. On a conference call with analysts today, Harrah's Chief Executive Officer Phil Satre reassured investors that the company's results are beyond reproach.

"Harrah's is not one of those companies," Satre said, referring to recent scandals that have leveled firms such as Enron and WorldCom.

The company has a 65-year history of regulatory scrutiny by state governments intent on obtaining their share of industry gaming revenues, and the company's annual report has been rated as one of the most accessible and transparent in corporate America, Satre said.

Satre revealed some new developments at the company during the earnings call. The company is starting a hotline for employees to anonymously report illegal or unethical behavior in the workplace. It also expects to reveal a nationwide survey this week showing that consumer demand for casinos continues to grow.

"Casino supply hasn't kept pace with demand, one reason some states are considering legalization of casino gaming," Satre said. The company has the "strongest balance sheet in the industry" and is positioned to take advantage of growth opportunities in new and existing markets, he added.

One Wall Street analyst backed up that statement today. Joyce Minor, a gaming analyst with Lehman Brothers, said the balance sheet at Harrah's remains stronger than its biggest competitors.

The company has a significantly lower ratio of debt to cash flow than fellow Las Vegas Strip operators MGM MIRAGE, Park Place Entertainment Corp. and Mandalay Resort Group, meaning the company is less leveraged, Minor said. The company's debt rating also remained strong following Sept. 11.

"When MGM MIRAGE and Park Place lost their investment grade rating, Harrah's did not and remained the only big-cap gaming company to retain its investment grade debt rating partly due to Harrah's diversification," Minor said in a recent research note.

Cash flow -- typically defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of financial performance at individual casinos, fixed assets that often carry large interest and depreciation costs.

Lagging performance at the Rio has dogged the company in previous quarters. This quarter, however, the property reported cash flow of $25.5 million, an increase of more than 160 percent from the same quarter last year. That's primarily due to exiting the high-roller business and an increase in slot machine revenues, executives said. The company expects the Rio to produce $80 million in cash flow this year.

Harrah's Las Vegas produced a 3 percent increase in cash flow from the same period last year. The company wouldn't disclose actual figures for that property. The company's strategy of lowering room rates for its better customers has resulted in higher revenues on the casino floor, executives said. Including the company's casino in Laughlin, Nev., hurt by a deadly shooting incident involving motorcycle gangs, cash flow in Southern Nevada was flat for the quarter.

Outside of Las Vegas, Harrah's Atlantic City produced cash flow of $42.9 million, a 13.2 percent jump from last year. A mid-May opening of a 452-room hotel addition and placement of 450 new slot machines helped produce record second quarter results there, the company said. Showboat Atlantic City -- despite ongoing construction of a 544-room hotel expansion -- yielded an 18.4 percent increase in cash flow, to $29 million.

The company's Midwest casinos were hurt by dramatic tax increases recently authorized by state legislatures there. Still, Harrah's President Gary Loveman said the increase in Illinois -- which now has the highest taxes on gaming revenues in the nation -- is "by no means a crippling blow" for the company's casinos in Joliet and Metropolis.

The company has so far projected that higher taxes will cost its Joliet property $11 million in revenues and nearly $1 million at the Metropolis.

A separate tax hike in Indiana will cost the company at least $3 million in revenues at its East Chicago, Ind., casino.

Even with the tax hikes, the Midwest region reported record cash flow of $129.8 million in the second quarter, a 20.4 percent increase from last year.

Two Iowa properties acquired in last year's Harvey's transaction, the consolidation of a bigger stake in Harrah's New Orleans and capital investments at Indiana, Illinois and Shreveport, La., casinos boosted returns, the company said.

Harrah's expects to permanently dock its Indiana riverboat casino sometime next quarter, a move that should help offset higher taxes in the long run by appealing to customers who prefer to board the casino at any time, Loveman said.

Same-store sales, which compares revenues at casinos open more than a year, rose 7.9 percent for the quarter.

Further expansions are expected to fuel same-store sales growth this year, despite a faltering economy nationwide, the company said. That includes the expected launch Aug. 8 of Harrah's Rincon, a 201-room hotel-casino near San Diego that marks the company's first presence in California, executives said. Also under way are new hotel and casino facilities at the company's Harrah's Atlantic City and Harrah's Cherokee, an Indian casino in North Carolina.