Earnings drop at Harrah’s, cost cuts to continue

By Liz Benston (contact)

Published Friday, Nov. 7, 2008 | 10:35 a.m.

Updated Friday, Nov. 7, 2008 | 10:48 a.m.

Third quarter results at Harrah's Entertainment swung from a year-ago profit to a loss of $129.7 million as the economic downturn worsened and the company closed Gulf Coast casinos in advance of Hurricane Ike.

Earnings, before deducting certain expenses, fell 19 percent in the third quarter as consumers further tightened spending amid the Wall Street meltdown, the company reported today.

“While we’re hopeful the federal government’s recent actions to restore order to the financial markets may lead to an eventual economic recovery, there is no certainty as to its timing,” Chief Executive Gary Loveman said during an earnings conference call.

“We don’t see it getting any better anytime soon (but) we don’t see it getting much worse,” Loveman said of the consumer downturn.

In the second and third weeks of September and after the meltdown on Wall Street, more frequent, higher-worth gamblers who hadn’t previously cut back much on their gambling reduced spending and the frequency of their gambling sessions, Loveman said. The fallout continued in October.

These customers represent the largest chunk of the company’s profits, which is why earnings fell faster than revenue during the quarter, he said.

Harrah’s has cut expenses, including jobs, because of the economic downturn since at least February. The company is also reducing spending to upgrade and maintain its hotels. Loveman said that wouldn’t put the company at a disadvantage because other companies also are cutting costs.

Third quarter revenue fell 7 percent from the same quarter a year ago and earnings before the deduction of certain expenses fell 19 percent.

Revenue at the company’s Las Vegas properties fell 12 percent and earnings before certain expenses fell 17 percent. The hotels’ occupancy rate fell 3 percentage points to 94 percent and average daily room rates declined 5 percent to $110.

Loveman said the company’s market share and profit margins are still incrementally better than competitors in many markets because of the company’s Total Rewards gambler loyalty program.

Harrah’s is one of the industry’s most highly leveraged companies and has a relatively small cushion of cash after making its debt payments.

But executives said they are watching costs closely and have bank money available to draw upon in spite of the credit crunch, which has some banks going bust and others curtailing lending.

Cost cuts will continue as long as revenue declines, Loveman said. The largest expense, the Octavius hotel tower and convention space at Caesars Palace, continues unabated for a July opening, he said.

“We are scrutinizing every dollar of capital spending,” Loveman said.