Caesars purchase helps lift Harrah’s quarterly earnings

By Liz Benston

Thursday, Aug. 4, 2005 | 11:14 a.m.

Profit at Harrah's Entertainment Inc. rose 17 percent in the second quarter, boosted by the first two-and-a-half weeks of owning Caesars Entertainment casinos in addition to higher gambling activity at the company's Harrah's-brand properties.

But shares of the world's largest casino company fell by more than $1 this morning as quarterly earnings -- which typically beat Wall Street estimates -- came in lower than analysts had expected.

Some analysts said they did not include results from Caesars in their estimates, a deal that could have diluted earnings per share. Others blamed the shortfall on a variety of reasons including higher than expected taxes and corporate expenses as well as lower returns in Reno, which experienced colder than normal weather through June.

"Overall, we think Harrah's results represent one more gaming operator that just met or only modestly surpassed (second quarter) expectations, providing further evidence that the gaming momentum over the last several quarters may be moderating," Goldman Sachs & Co. stock analyst Steven Kent said in a research note today.

Other experts said the benefits of the Caesars deal will take longer to play out and that Harrah's will benefit once its Total Rewards player's club program is rolled out to the Caesars casinos over the next several months.

Harrah's reported profit of $105.8 million or 84 cents per share compared with profit of $90.2 million or 79 cents in the second quarter of last year.

Harrah's executives said the company anticipates saving about $80 million from the combination with Caesars.

Excluding several one-time events unrelated to management performance, Harrah's said earnings rose 25 percent to $112.5 million. The company earned 90 cents per share by this measure, or three cents short of expectations.

One-time events included an after-tax gain of $19.4 million from the sale of two Harrah's casinos, a $10 million donation to the company's charitable foundation and $5.6 million to settle litigation arising from a construction project.

All four Caesars properties in Las Vegas reported a "record quarter," Chief Executive Gary Loveman said.

Revenue rose 19 percent to $164.5 million at Caesars Palace and operating cash flow -- an indicator of casino profit -- rose 48 percent to $44.2 million from a year ago.

Revenue across Bally's and Paris properties rose 7 percent to $191.9 million and operating cash flow rose 15 percent to $62.1 million. At Flamingo, revenue rose 3 percent to $100.5 million and operating cash flow rose 5 percent to $34 million.

Loveman said the company is still weighing a plan to develop a Horseshoe-brand casino at the site of Bally's, which he called a "significant underperformer" given its prime location in the center of the Strip at Flamingo Road.

The site of the Bourbon Street hotel and casino behind the Flamingo, recently purchased by Harrah's along with a small parcel nearby, could be used to build a bridge across Flamingo Road to connect the company's Bally's and Flamingo properties, Chief Financial Officer Chuck Atwood said.

Executives also trumpeted results for its Harrah's brand properties, saying the company achieved its sixth consecutive quarter of record results and the highest revenue growth in nearly five years.

Total company revenue rose 42 percent to $1.5 billion. Revenue at properties open at least a year grew 9 percent, with increases in each of the company's geographic regions nationwide.

More of the company's gambling revenue -- about 78 percent -- is coming from members of the company's Total Rewards player's club program, executives said. Gambling revenue generated by customers who spent money at other Harrah's casinos besides their closest properties rose 18 percent from a year ago.

Performance also improved at each of the three Horseshoe casinos, which were acquired by Harrah's about a year ago. Those properties added about 6 cents per share to second quarter earnings, the fourth consecutive quarter of earnings growth, executives said.

For the past 12 months under Harrah's, revenue at the Horseshoe casinos in Indiana, Louisiana and Mississippi is up 3 percent to $858.7 million and operating cash flow is up 13 percent to $206.6 million.

Executives said table game volume at the Rio rose 50 percent from a year ago during the six-week World Series of Poker tournament that wrapped up in July.

The event drew more than 600 journalists and 32,000 entrants, generating "invaluable worldwide publicity for our company" and introducing it to "millions of potential new customers," Loveman said.

The company will continue to expand the World Series of Poker brand into new markets, he said.