War distraction cuts into Station Casinos’ revenue

By Liz Benston

Wednesday, April 30, 2003 | 11:11 a.m.

Station Casinos Inc. today reported a decline in first-quarter revenue as business was temporarily disrupted by the war in Iraq. But profits were up as business rebounded as the conflict ended, the company said.

The company earned $12.6 million in the first quarter compared to a loss of $257,000 during the same period last year. On an earnings per share basis, profit rose to 21 cents compared to zero profit last year.

The current quarter's results included $1.3 million in costs related to a patent litigation suit filed by Harrah's Entertainment Inc. over Station Casinos' slot player loyalty program and a $1.4 million impairment loss primarily related to new slot product development, the company said.

Operating earnings totaled $14.3 million, or 23 cents per share, in line with analysts' expectations.

The company expects second-quarter cash flow from Nevada operations of about $63 million to $64 million and earnings per share from 19 cents to 20 cents. These figures don't include contributions from Thunder Valley and fall below analysts' estimates of 22 cents per share for the quarter.

Net revenue for the first quarter was about $199.6 million, down 1 percent from the prior year's quarter.

Cash flow for the quarter was $66.2 million, a 4 percent increase.

Same-store net revenue was flat with last year, at $225.9 million, while cash flow at those properties increased 3 percent, to $81 million.

Same-store sales account for revenues at properties open at least a year.

During the first two months of the quarter, before the war broke out, same-store revenue increased about 2.4 percent from the prior year, the company said.

"The war in Iraq clearly resulted in a short-term slowdown in our business as our customers stayed home to watch the war coverage," Station Casinos Chief Financial Officer Glenn Christenson said. "Business levels continued to be soft for the first week of April, but have rebounded since then."

Strong returns at the company's upscale Green Valley Ranch Station casino-resort in Henderson weren't enough to offset weaker-than-expected performance at other Las Vegas properties, analyst Todd Jordan of Buckingham Research Group said in a research note to investors today.

Jordan today downgraded Station Casinos stock from "accumulate" to "neutral," saying "it does not appear that Station is experiencing the same strength as other local Las Vegas operators."

"While Station's long-term story remains intact, our accumulate rating was predicated on near-term strength in the local Las Vegas market and potential (earnings) upside, which did not materialize."

Still, the company's earnings per share met analysts' predictions, a sign of strength during a "difficult period," Goldman Sachs & Co. analyst Steven Kent said in a research note.

"We think investors will look through this reduction in near-term momentum, as the real focus remains on the opening of the Thunder Valley Casino outside Sacramento in June," Kent wrote.

Some analysts downgraded Station Casinos earlier this month on concerns that the local gambling market is sluggish and that investors already have bid up the stock.

Thunder Valley Casino is Station Casinos' newest project. It will be managed for the United Auburn Indian Community and feature nearly 2,000 slot machines. The company last week announced it has signed an agreement to develop and manage a casino about 50 miles northeast of San Francisco for the Federated Indians of Graton Rancheria, a tribe that doesn't yet have a gaming compact with the state or federal land in trust on which to build a casino.

The company earned $5.8 million in the first quarter from its Green Valley Ranch Station joint venture. That includes Station Casinos' management fee plus 50 percent of the resort's operating income. The property is half owned by the Greenspun family, which also own the Las Vegas Sun.

The property generated $14.2 million in cash flow in the quarter, a 33 percent increase from the year-ago quarter. Net revenue at the property was $33.4 million, a 10 percent increase.

"The strong cash flow growth and return on investment at this property confirm why we are confident in our next property being designed for the Las Vegas market," Christenson said.

The company expects to break ground on its next locals' casino, Red Rock Station in Summerlin, at Charleston Road and Interstate 215 around this time next year.

Station Casinos stock fell more than 7 percent before noon trading today, to $21.04.

Separately, Station Casinos executives said today the company will begin an investigation of all of its properties following a report that required financial forms weren't filed with the federal government.

The company discovered this month that cash transaction reports required of large cash transactions had not been filed at Santa Fe Station. Nevada regulators launched their own investigation after Station Casinos alerted the Gaming Control Board this month about the filing problems.

Christensen said the company is "embarrassed" by the discovery and will ensure that "we do not have this problem in the future."

An investigation could take up to six months, he said.