Harrah’s profit falls on higher revenue

By Liz Benston

Tuesday, July 22, 2003 | 11:15 a.m.

Higher gaming taxes in the East and Midwest, poor weather in certain parts of the country and the overall weak economy contributed to an 11 percent drop in profits for Harrah's Entertainment Inc. of Las Vegas.

Harrah's Chief Executive Officer Gary Loveman said the company also was "disappointed with this year's legislative sessions," which yielded higher taxes for casinos in many states and fewer opportunities for expansion than expected.

The industry needs to do a better job communicating its economic benefits, including the billions of dollars casinos generate in wages and state taxes, "or we will continue to be vulnerable to states looking for tax proceeds," Loveman said.

Record economic benefits for states have coincided with a record increase in public opposition to casinos, he added, noting that fiscal 2003 also was a "year of political vulnerability."

Given the uncertain state of casino expansion in the United States, Harrah's is examining company acquisitions as a desirable alternative, he said.

Loveman also said the company hasn't yet decided whether it will issue a cash dividend. Dividends have been thrown in the spotlight in recent weeks following a move by competitor Mandalay Resort Group to issue its first-ever dividend. Some analysts had predicted that other casino giants would follow suit in order to bolster investor confidence in the sector and attract new shareholders -- though last week MGM MIRAGE said it won't immediately pay a dividend.

Harrah's board of directors will examine the dividend issue when it meets in Atlantic City this week, though it may not emerge with a final decision, Loveman said.

Harrah's today reported second quarter earnings of $76.7 million, or 69 cents per share. That compares to earnings of $86.1 million, or 75 cents per share, for the same quarter of last year.

Excluding one-time charges, the company earned 74 cents per share, in line with analysts' average estimates. That compares to 77 cents last year.

Analysts generally anticipated lower results in the wake of nationwide tax hikes.

But Steve Kent, a casino analyst with Goldman, Sachs & Co., said he expected performance at Las Vegas and Atlantic City casinos would offset poor returns in the Midwest.

"We continue to expect the shares to trade in line with the rest of the (industry) as investors continue to be concerned about the modest growth that has been exhibited and is expected in the near term," Kent wrote in a research note to investors today. "We do not expect management to be overly optimistic about the second half of the year as increased taxes in Illinois and New Jersey, as well as competitive pressures in the regional markets, including Atlantic City, may put pressure on operating performance ..."

Revenue rose 6.9 percent, to $1.1 billion. Same-store revenue -- or sales at casinos open at least a year -- rose 0.6 percent.

The company's marketing linchpin -- its Total Rewards slot club loyalty program -- continues to offset business declines, executives said.

Gambling activity tracked by the Total Rewards program increased by 7 percent in the quarter. Cross-market play -- gambling by players who visited casinos outside their home markets -- increased 15 percent, to $296 million.

Harrah's revamped its slot club, now called Total Rewards II, in June. Players have been accumulating credits under the new program, a hopeful sign that more gamblers will see value in the program and sign up, Loveman said.

The new program, unlike the previous version, allows high-frequency visitors who didn't gamble much per trip to accumulate points, executives say. All players may also accumulate points over several trips and redeem them for a wider variety of perks such as vacations and consumer products, also a change from years past, they said.

"As players become comfortable with the new rewards program, we anticipate some market share gains to be realized in coming quarters," Deutsche Bank Securities casino analyst Marc Falcone wrote in a research note.

Revenue at Southern Nevada properties -- including Harrah's Las Vegas, the Rio and Harrah's Laughlin casinos -- increased 5.2 percent, to $221.4 million. Cash flow -- defined as earnings before interest, taxes, depreciation and amortization -- increased 8.2 percent, to $61 million. Strong cross-market play, new restaurants and entertainment at the Rio fueled traffic at both Las Vegas properties and helped offset declines in Northern Nevada, which was hit by bad weather, executives said.

"We are moving into the traditionally busy summer season, which should benefit our Northern Nevada operations," Tim Wilmott, chief operating officer, said in a statement today. "Meanwhile, our Las Vegas properties continue to outperform the market, demonstrating the benefits of our customer-loyalty program."

The company reported an additional $11.6 million in gaming taxes during the quarter due to higher tax rates in Illinois and Indiana. Revenue in the North Central region, including Iowa and Missouri, declined 4.3 percent, to $343.4 million, while cash flow plummeted 24.4 percent, to $74.5 million.

The company anticipates reducing its hours of operation at its Joliet, Ill., casino to offset higher taxes, executives said. Also under consideration are table game reductions and a new admissions charge to help offset the tax increases -- moves underway at other Illinois casinos, executives said.

In addition, Harrah's is analyzing ways to improve performance at properties that haven't met expectations, including properties in St. Louis, Indiana and Iowa.

Simply spending more money on a property "is not always the answer," Loveman said.

Harrah's has maintained among the highest bond ratings in the casino business despite the earnings decline, Loveman said. The company's balance sheet is strong enough to allow it to spent money on new projects as well as return some cash to investors in the form of share repurchases, he said.

"Very few companies have the capacity to do both," he said.

Harrah's casinos so far haven't been hurt by competition from either the Thunder Valley tribal casino near Sacramento nor the Borgata, a luxury megaresort by MGM MIRAGE and Boyd Gaming Corp. that opened in Atlantic City this month.

Gambling revenue at the company's Atlantic City properties has been "about flat" with their strong performance last year, results in line with what the company expected after Borgata's debut, Wilmott said.

Analysts are watching both new casinos in anticipation of how they will affect established gambling markets.

Shares of Harrah's rose about 1.7 percent in early trading today, to $40.15.

Riviera Holdings

Separately, Riviera Holdings Corp. today reported a quarterly loss of $2.4 million, or 70 cents per share. That compares to a loss of $1.1 million, or 32 cents, in the year-ago quarter. Revenue of $48.3 million was down $1.3 million. The company said its Riviera Black Hawk casino in Colorado generated cash flow of $3.5 million, a decrease of $239,000 or 6.4 percent from the second quarter of 2002

Riviera Las Vegas cash flow decreased $1.1 million, or 14.7 percent, to $6.4 million due to lower casino revenue. Riviera Las Vegas occupancy declined 2.4 points to 93.4 percent in the quarter but the average daily rate increased $3.74 to $60.44.

Revenue at the resort fell 2.7 percent due to a 9.3 percent decrease in casino revenues, the company said. Increases in room, food, beverage and entertainment revenues partially offset the decline.

Slot machine volume decreased 7.6 percent for the quarter. Convention rooms increased from 28.7 percent to 34.5 percent of total occupancy, while occupancy by gamblers decreased from 17.6 percent to 14.3 percent.

"We overcame some of the impact created by global events because we had a very strong convention base and we were able to fill in rooms with our Internet room campaigns," Riviera Las Vegas President Bob Vannucci said in a statement.

The company started to feel the effects of the war with Iraq in late April, while its Asian and Canadian group business was "severely impacted" by the travel restrictions imposed due to the SARS virus, he said.

"Those segments are rebooking and the summer looks stronger for overall bookings," he added. "Citywide visitor volumes, occupancy and convention attendance which were down in April and May, have started to rebound in late June and have continued strong in to July."