Health care costs weigh on Mandalay

By Liz Benston (contact)

Friday, Sept. 3, 2004 | 10:52 a.m.

Mandalay Resort Group reported a 38 percent increase in profit in the second quarter as the company charged higher prices for rooms and occupancy rates improved. But earnings missed analysts' estimates in part because of slowed business in July as well as higher health care costs and taxes, the company said.

President and Chief Financial Officer Glenn Schaeffer said the earnings increase was impressive given a 20 percent increase in health care costs, a string of luck by gamblers at Mandalay Bay and higher than expected taxes in the quarter compared with a year ago. The company's convention schedule also wasn't as strong as last year, he said.

"Mandalay still performed impressively, delivering all-time record results for its second quarter by a distance," Schaeffer said.

Those increases cost Mandalay more than 10 cents per share in earnings during the second quarter, he said.

The company reported profit of $58.2 million, or 85 cents per share, in the quarter ended July 31. Analysts expected the company to earn $1.03 per share. That compares with company earnings of 67 cents per share for the same quarter a year ago.

Revenue rose 11 percent to $713.8 million, and cash flow increased 10 percent to $188.7 million.

A shift in the company's convention schedule and slowed business in July hurt room revenue at Mandalay Bay but room revenue at the company's Luxor, Excalibur and Circus Circus properties came in better than expected, UBS Warburg analyst Robin Farley said.

"Following the solid June quarter that we heard from other Las Vegas operators like MGM, it sounds like (Mandalay's) month of July showed a consumer slowdown in bookings, which was likely felt by other operators," Farley wrote in a research note today.

Schaeffer said the company's rates on the Strip -- including the new hotel tower at Mandalay Bay -- have gone up more than the competition this year. The hotel tower, which opened in December, is running an occupancy percentage in the mid 80s and averages more than $220 per night, he said.

Convention attendance is expected to run higher than last year for the remainder of the company's fiscal year, Schaeffer said.

Schaeffer declined to comment on the pending merger with MGM MIRAGE other than to say that Mandalay will be devoting excess cash this year to reduce debt in preparation for closing the deal.

The company has reduced debt by about $200 million so far this year and expects to reduce debt by another $150 million over the remainder for a total reduction of about 12 percent, he said.

Farley said the less than stellar results from Mandalay Bay won't likely affect the pending merger with MGM MIRAGE.

"We still believe the cost savings from the deal will be a positive for (MGM MIRAGE) as it faces high-end competition from Wynn Resorts in '05," Farley wrote.

Both companies are expected to show increased room revenue through the rest of the year, though the growth rate won't be as impressive as earlier quarters, she said.

Profit at the company's Mandalay Bay flagship rose 28 percent to $22.6 million. Casino revenue rose 10 percent to $51.5 million. Average daily rates rose $20 to $200.71 but occupancy fell 9.2 points to 84.6 percent.

At Luxor, profit rose 26 percent to $17.6 million and casino revenue rose 14 percent to $28.8 million. The average daily rate rose $8.24 to $105.80 and occupancy was relatively flat at 90.3 percent.

At nearby Excalibur, profit rose 30 percent to $16.5 million and casino revenue rose 4 percent to $30.1 million. Average rates increased $8.26 to $79.36 and occupancy rose 1.5 percentage points to 95.2 percent.

Profit at Circus Circus Las Vegas rose 37 percent to $11.2 million and casino revenue rose 4 percent to $29.1 million. Average rates rose $6.74 to $60.01 and occupancy increased 1.7 percentage points to 92.8 percent.

Mandalay shares fell 38 cents or less than 1 percent to $42.21 in early trading today.