Mandalay posts record profit in third quarter

By Liz Benston (contact)

Thursday, Dec. 4, 2003 | 10:52 a.m.

Profit at Mandalay Resort Group rose 22 percent in the company's fiscal third quarter as hotel room rates soared to records and the company reported a return to healthy growth patterns seen before the Sept. 11 terrorist attacks two years ago.

The company reported earnings of $40.6 million, or 63 cents per share, for the quarter ended Oct. 31 -- the best quarterly performance in company history, executives said. That compares to earnings of $33.2 million, or 47 cents per share, for the same period last year.

Mandalay stock rose about 66 cents, or 1.5 percent, in early trading today, to $43.38.

Mandalay Resort Group expects to open its 1,122-room hotel tower at the Mandalay Bay resort Dec. 17 and said the property will be booked solid in January. Over the next several weeks it will open the remaining 15 or so shops at Mandalay Place, a walkway connecting Mandalay Bay with the company's adjacent Luxor resort featuring about 40 boutiques and restaurants.

The company also announced approval of a 2-cent increase in its quarterly dividend to 27 cents. The company doesn't anticipate starting construction on a second as-yet-unnamed resort south of Mandalay Bay until at least mid-2005 -- the year Steve Wynn's luxury Wynn Las Vegas resort opens to the public, Mandalay Chief Financial Officer Glenn Schaeffer said during a conference call Wednesday.

Increasingly profitable hotel rooms are now driving performance, illustrating the company's dramatic transformation from slot giant to hotel-centered company over the past five years, said Schaeffer, who often compares Mandalay Resort Group to upscale hotel chains rather than casino peers.

"This will be a repeatable performance. There is no fluke involved," he said. "We've got a lot more rooms than we have slot machines."

Revenue per available room -- a key performance indicator in the hotel business -- grew 19 percent compared to last year and reached record levels across the company's five Strip properties, he said.

"There is not another sizable hospitality company in the country that is growing its (hotel revenue) in its core operations at a composite rate of almost 20 percent," he said.

After spending about $500 million on a convention center, retail mall and hotel tower, the company anticipates reeling in capital expenditures in future years and will instead concentrate on reducing debt, he said.

The Mandalay Bay Convention Center, which opened in January, has boosted room rates and occupancy at Mandalay Bay and also is helping rates at nearby Luxor, he said. Luxor charges higher rates for spillover customers who can't stay at Mandalay Bay when it's booked with convention-goers, he said. About 30 percent of Mandalay Bay rooms are sold to conventioneers, a number that is expected to reach as high as 45 percent next year, he said.

The convention center doesn't entirely explain profit increases at the company's other Strip properties including Excalibur, Circus Circus Las Vegas and Monte Carlo. Improvements there reflect the stronger Las Vegas market, he said. The Monte Carlo is jointly owned with MGM MIRAGE.

Fulcrum Global Partners gaming analyst Joe Greff -- who has a "buy" rating on the stock -- still attributed some of the improvement to the convention center as well as the ability to raise room rates through "effective hotel-yield management."

"We are encouraged by the recent performance by Luxor, a property that we have viewed as one that could swing overall results, " Greff wrote in a research note to investors Wednesday. The Mandalay Place mall linking Luxor and Mandalay Bay is expected to increase foot traffic to the less-expensive resort, he said.

Excluding one-time gains and expenses, third-quarter profit totaled $43.6 million, or 66 cents per share, compared to earnings of $36.9 million, or 50 cents per share, the same period a year ago. Analysts, on average, expected the company to earn at least 62 cents per share during the third quarter.

The company reported a 5 percent increase in revenue to $625.6 million. Occupancy rates and room prices rose across all of the company's Strip resorts compared to last year.

Profit fell 10 percent at Mandalay Bay to $12.1 million. Revenue rose 10 percent to $162.8 million and casino revenue rose 2 percent to $48.5 million. Average daily rate jumped 8 percent to $186 and occupancy rose to 90.1 percent from 79.5 percent.

At Luxor, profit rose 30 percent to $15.6 million and revenue rose 6 percent to $100.2 million. Profit rose 53 percent at Excalibur to $14 million and revenue rose 11 percent to $79.4 million. Circus Circus Las Vegas reported a 32 percent increase in profit to $7.1 million and a 5 percent increase in revenue to $66.2 million.

Absent during the company conference call was any discussion of the massive share selloff by Mandalay Chief Executive Michael Ensign and company Director William Richardson. The pair have sold about 5 million shares over the past several months, yielding about $250 million in gross proceeds. Richardson unloaded all of his remaining stock, while Ensign retains several thousand shares. Both still have stock options.

The sales took analysts by surprise and led to unanswered questions about executives' motives. The company hasn't disclosed reasons for the sales.

Schaeffer participated in the conference call from New Zealand, where he was recently discharged from the hospital after suffering from a ruptured appendix. He maintains a home in that country. The company's corporate accounting officer and corporate counsel also participated in the call.