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Jennifer Robison

Harrah's Endures Challenges

4 November 2005

LAS VEGAS -- In the past five months, Harrah's Entertainment has experienced the highest of highs and the lowest of lows.

In June, the company subsumed gaming giant Caesars Entertainment, in the process becoming the world's largest gaming company.

But just as the company began the months-long process of folding Caesars into its everyday operations, hurricanes Katrina and Rita raked the Gulf Coast, damaging and closing four of the company's casinos in Louisiana and Mississippi.

The company showed growth in the third quarter despite those challenges, according to financial results released Thursday.

Harrah's reported third-quarter net income of $169 million, up 42.3 percent from $118.8 million in the same quarter last year. The company's earnings per share fell to 91 cents, down 14.2 percent when compared with $1.06 a year ago. Adjusted to exclude losses from the hurricanes, costs of integrating Caesars and expenses related to property openings and demolition, the company's earnings per share in the most recent quarter were $1.05, beating the 99 cents a share analysts predicted in a Thomson First Call survey.

Largely because of the $9 billion Caesars acquisition, Harrah's posted record revenue of $2.3 billion, up 78.2 percent from $1.3 billion a year ago.

Property earnings before interest, taxes, depreciation and amortization rose 77.1 percent, from $374.2 million a year ago to $662.8 million in the most recent quarter. Property earnings before interest, taxes, depreciation and amortization in the company's Harrah's West division, which encompasses its Nevada operations, were $254.4 million, up 113.2 percent from $119.3 million a year ago.

In a Thursday conference call to discuss the company's earnings, Harrah's Chairman and Chief Executive Officer Gary Loveman said the challenges posed by the Caesars merger and hurricanes have made the company "a stronger organization in every respect."

Harrah's executives also revealed gains in two key measures it uses to gauge customer loyalty: same-store sales growth and cross-market play.

Same-store sales growth was 3.8 percent in the third quarter over the quarter a year ago; that number is 7.3 percent when properties that are offline due to Katrina and Rita are excluded.

Cross-market play -- gaming by customers at Harrah's properties outside their "home" casino -- rose 13.5 in the third quarter year-over-year, a performance that jumps to 14.7 percent when hurricane-affected casinos are excluded.

Analysts said the results surpassed their expectations.

"All-in, we expected a messy quarter, and results came in slightly above our expectations," said Marc Falcone, a gaming analyst with Deutsche Bank, in a report following the conference call.

Steven Kent, an analyst with Goldman Sachs, called the results solid and said performance of the company's west and east divisions were "modestly better than expected."

"Results suggest consumer discretionary spending on gaming in most markets remains robust," Kent said in a report. Kent added that Goldman Sachs analysts "continue to view (Harrah's) as one of the more attractive names in the operator space" based partly on the potential for additional benefits from the Caesars acquisition and the increase in spending among core consumers of Harrah's.

Joe Greff, an analyst with Bear Stearns, said Harrah's should continue to outperform the market as a whole because of its "attractive relative valuation," opportunities to improve the efficiencies of Caesars properties and "an underappreciated development pipeline."

Harrah's executives touched on some of those factors in their conference call.

Tim Wilmott, the company's chief operating officer, said Harrah's has shed more than 300 salaried workers at Caesars properties, cuts that should result in savings of more than $30 million a year.

And Loveman pointed to the company's Las Vegas property holdings -- which include 115 contiguous acres in the center of the Strip's east side and 143 acres combined between the Rio and Caesars Palace -- as areas ripe for fresh master plans. Company officials will announce the initial findings of what Loveman called their "Las Vegas master-plan exercise" in mid-2006.

Loveman said Harrah's is also waiting for the government of Singapore to issue a request for proposals to build a hotel-casino in the country's Marina Bay. Harrah's will partner with architect Daniel Libeskind, who helped create the master plan for a new World Trade Center in New York, to bid for "an integrated resort ... that will set a new standard of opulence, luxury and first-class service," Loveman said.

He said that the company is considering development options in Europe as well, and will focus on gaming jurisdictions "where our future is largely in our own hands as opposed to jurisdictions characterized by unreasonable regulatory strictures or excessive taxation."

Loveman said "it was too early to tell" what the company's plans for reconstruction of hurricane-damaged casinos in Mississippi would be. However, he said Harrah's officials are "very enthusiastic" about the Biloxi market, while Gulfport "is a market we have to look at a little harder and understand a little bit better."

Shares in Harrah's rose $1.15, or 1.88 percent, to close at $62.25 Thursday on the New York Stock Exchange.

Harrah's Endures Challenges is republished from