Harrah’s profit improves

Tuesday, Oct. 22, 2002 | 11:11 a.m.

Harrah's Entertainment Inc. today reported a jump in third quarter earnings driven by an easy comparison to the year-ago quarter as well as returns on casino improvements, contributions from acquired properties and enhanced customer marketing programs.

The company reported earnings per share of 89 cents before one-time items such as pre-opening expenses, up from 54 cents a year ago when business was hurt by the tourism slowdown after the terrorist attacks.

Analysts had expected the company to earn an average of 88 cents per share. Actual earnings rose 63 percent, from about $62 million last year to $101 million.

Pro-forma earnings, which include the addition of amortization expenses to the prior year's third quarter, were 59 cents last year compared to this year's 89 cents.

Revenue increased from $1.01 billion to $1.13 billion for the quarter and cash flow -- a key indicator often used to determine performance in the casino industry -- increased 22.7 percent, from $269.1 million to $330.3 million.

"These results again proved the value of geographic diversification," Harrah's Chairman and Chief Executive Officer Phil Satre said. "The increases were realized despite competition and higher gaming taxes in certain markets in the 2002 third quarter."

Harrah's continues to use data collected from slot club card players to improve returns, executives said.

For example, the company has revised the mix of slot machines at its Rio hotel and casino in Las Vegas, removing underperforming games and adjusting the placement of more popular ones. The changes helped boost the amount won from slot machines by 12 percent during the quarter despite 400 fewer slot machines on the floor, Chief Operating Officer and incoming Chief Executive Gary Loveman said. Slot win per unit jumped 45 percent for the quarter.

"We've just scratched the surface with this tool," Loveman said.

Harrah's recently introduced a system in Nevada that allows preferred customers to redeem coupons by sticking them directly into slot machines rather than going to the cashier cage. The company aims to introduce the system elsewhere. And this quarter, it expects to test another "cashless" system that lets gamblers play slots entirely with tickets rather than coins or bills.

The company also reported a 23 percent quarterly increase in "cross market play," or business driven by customers who visit other Harrah's casinos after typically gambling at just one facility. That number, now more than $700 million through the third quarter, is on track to reach $1 billion for the year, or roughly what the entire company's gaming revenue would be in a year when the strategy was conceived in the 1990s, executives said.

The company's first California casino, the tribal-owned Harrah's Rincon Casino and Resort, also opened during the quarter. Its effect on earnings was slim because marketing expenses used to promote the opening of the casino were charged against management fees due Harrah's from the tribe, the company said.

Hotel occupancy at the San Diego region property, the first Southern California casino managed by a major Las Vegas gaming company, has been greater than 95 percent.

Harrah's now has four management agreements with tribes and aims to seek additional tribal alliances, Loveman said.

Adding slots at racetracks presents another fortuitous opportunity to expand the Harrah's brand, he added.

In the third quarter, the company signed a letter of intent to acquire Louisiana Downs, a thoroughbred racetrack in Bossier City, La, where it intends to install slot machines.

"With many states facing budget shortfalls ... it's increasingly clear that a form of gaming expansion will be slots@tracks," Loveman said.

Cash flow across the company's western region grew about 60 percent, to $94.5 million. Despite a weak Reno market, Northern Nevada casinos benefited from the addition of three months' results from the acquired Harveys Lake Tahoe. The company's two Las Vegas casinos also posted improved results compared with last fall's losses.

Cash flow in the eastern region increased 26 percent, to $90.1 million, driven by record returns at both Harrah's Atlantic City and the Atlantic City Showboat.

And in the central region, including the Midwest and South, cash flow improved by about 2 percent, to $131 million.

Increased gambling taxes against riverboat casinos and new competitive pressures hurt potential returns there, Satre said.

"We will continue to press for equitable tax treatment, review our cost structure and use our financial leverage and strong diagnostic marketing capabilities to counter competitive pressures" and align performance with more profitable regions in the west and east, he said.

Lower returns in the central region were expected and well publicized, Deutsche Bank Securities analyst Marc Falcone said.

"We like Harrah's long-term outlook although the next quarter could be choppy due to increased competition and challenging comparisons in the central region," said Falcone, who maintains a "buy" rating on the stock.

Separately, Riviera Holdings Corp., which owns the Riviera hotel-casino on the Las Vegas Strip, today reported cash flow of $7.9 million for the third quarter ended Sept. 30, up 7.3 percent from the third quarter of 2001.

Revenues for the quarter were $48.6 million, down 4.8 percent from the $51 million reported in the same period of 2001. Income from operations was $3.5 million, up 16.5 percent from a year ago.

For the 2002 quarter, net income was affected by the loss on extinguishment of debt totaling $11.2 million, or $3.28 per share.

That loss and higher interest costs because of the debt retirement contributed to a quarterly loss of $16.9 million or $4.89 per share versus a loss in the year-ago quarter of $2.5 million, or 68 cents per share.

At the Riviera in Las Vegas, cash flow -- measured as earnings before interest, taxes, appreciation, rents and corporate expenses -- increased 21.9 percent to $5.8 million and occupancy was 92.5 percent, compared with 93.2 percent in the third quarter of 2001. The average daily room rate increased $4.11 to $59.98.

Bob Vannucci, president of Riviera Las Vegas, said slot volume was down about 10.9 percent as the Strip experienced lower volumes in the third quarter and increased Riviera convention room nights -- up 33.3 percent, or 16,000 room nights for the quarter -- altered its occupancy mix compared to the prior year.