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Mandalay Resort Group to Miss Estimates

LAS VEGAS, Nevada –- A generally disappointing earnings season took another bad turn Monday afternoon, when Las Vegas-based gaming giant Mandalay Resort Group announced it would badly miss analyst earnings expectations for the second quarter.

Mandalay said it expected to earn between 40 cents to 42 cents per share for the quarter ending July 31, down from 50 cents per share in the year-ago quarter. Analysts had expected 51 cents per share.

Using Mandalay's 74.7 million shares outstanding as of May 31, the new earnings number translates into $29.9 million to $31.4 million in net income, compared to the $38.1 million analysts expected. The company earned $38.1 million in net income in the year-ago quarter.

However, Mandalay has been aggressively buying back shares, so the actual net income number could be lower if Mandalay has repurchased shares since May 31.

Operating cash flow, Mandalay said, was down 8 percent from the year-ago period.

"Mandalay was the last one to go," said Robin Farley, gaming analyst for UBS Warburg. "It's not completely unexpected, giving that Harrah's (Entertainment Inc.), Park Place (Entertainment Corp.), MGM (MIRAGE) and Station (Casinos Inc.) have all lowered their guidance for the rest of the year."

As Mandalay buys back more of its stock, there's less shares across which earnings can be spread. This means that smaller earnings misses translate into bigger swings on the earnings per share line -- and explains why Mandalay is either beating or missing analyst expectations by fairly significant margins on a regular basis. In the first quarter of this year, for example, Mandalay beat analyst expectations by 9 cents per share.

"You're talking about $5 million to $10 million (less) in cash flow, is all it is," Forst said. "It isn't that big of a deal."

Still, frustration is growing with the string of earnings misses by Mandalay.

"There's more skepticism toward this company than the other majors (in the gaming industry)," Forst said. Forst has a "neutral" rating on the stock.

Mandalay's stock was down just 8 cents to $24.12 this morning. MGM MIRAGE, by comparison, lost 3 percent to trade at $28.38. The other major Las Vegas operators -- Harrah's, Park Place and Station -- were all down slightly.

There were a number of culprits in Mandalay's missed quarter. Of the most concern for Strip-watchers could be the fact that Mandalay's five Strip properties were among the laggards.

Mandalay said operating cash flow of the five properties -- Mandalay Bay, Luxor, Excalibur, Circus Circus and Monte Carlo -- trailed last year's results, though it didn't say by how much. Mandalay blamed the fact that July 4 fell on a Wednesday this year and didn't create a long weekend. This July had one less weekend as well, the company said, and soaring energy costs added more than $5 million in expenses.

That could translate into trouble for other operators. Most gaming companies ended their second quarter on June 30, and so did not include July results in their last earnings reports. If other operators had a poor July, it wouldn't be seen until they reported third quarter earnings in October.

"I'm hearing July was not a good month," Forst said. "My understanding is that the upper-end properties did relatively well in July, and the more middle-market properties didn't do as well."

Despite cash flow declines, Mandalay said revenues per available room rose at all five Las Vegas properties, led by a 10 percent gain at Mandalay Bay.

Also dragging on earnings were downturns at Laughlin, Reno, Jean and Tunica, Miss., Mandalay said. Mandalay's MotorCity casino in Detroit and Grand Victoria in Elgin, Ill., were both up on the quarter, the company said.

So far this earnings season, the only major Las Vegas operator to beat analyst expectations for the quarter was MGM MIRAGE, which beat analyst expectations by 5 cents per share. It reported $324.8 million in cash flow, up 63 percent form the year-ago period. However, MGM MIRAGE also warned analysts they should lower their expectations for the third quarter.

The other major operator on the Strip, Park Place, missed analyst expectations by 1 cent per share. Though its net income was up 55 percent to $48 million, Park Place's cash flow fell 7 percent to $310 million.

Harrah's and Station also missed estimates. Harrah's reported cash flow was $234.7 million, up 1.3 percent for the quarter, but missed expectations by 6 cents per share. Station's cash flow was down 18 percent to $58.5 million, and it missed expectations by 2 cents per share.

"The mid-market properties, the Circuses, Excaliburs, Flamingos, Tropicanas, are not holding up as well as the MGMs, Bellagios and Mandalays of the world," Forst said. The economic downturn, California Indian gaming and high gasoline prices in California have all played a role, Forst said.

"The middle-market properties are going to struggle until the economy turns around," Forst said. "I don't know if the upper-end properties will or not. I don't know if they'll skate through this cycle."

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