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Harrah's Earnings Decline, Miss Estimates

The company blames taxes and new casino costs. The stock slides, but some analysts stay bullish.

Harrah's Entertainment


hauled in record revenue for the fourth-quarter, but profits dropped from last year's levels because of the casino operator's bet on developing new properties.

The casino operator announced fourth quarter net income of $35.4 million, or 32 cents a share, off 34.3% from the net income of $53.9 million, or 48 cents a share, it had a year ago. In reaction to the news, shares dropped $2.97, or 5.5%, to $50.83.

Excluding all items, like $15.9 million in costs related to the early retirement of debt and $6.9 million related to a goodwill write-off, Harrah's announced fourth-quarter earnings of 50 cents a share, missing the 53-cent Wall Street estimate. While the bottom line disappointed, Harrah's top line growth continued. Fourth-quarter revenue came in at a record $1.04 billion, up 3.6% from the year-ago quarter and narrowly topping Wall Street expectations.

But Harrah's said the record fourth-quarter revenue didn't translate into earnings growth because of higher gaming taxes and expenses related to the company's development of new properties. In the last year, Harrah's purchased the Horseshoe casino chain, including the Binion's Horseshoe casino in downtown Las Vegas, while breaking ground on Native American-partnered casinos and expanding into the U.K. with its "Lucky Me" online gaming site.

"The year 2003 was one of transition for our company, as we focused on enhancing our customer-loyalty program and seeking new opportunities to expand our distribution," said Gary Loveman, Harrah's CEO, in a statement. "Bolstered by the casino industry's strongest balance sheet, our acquisition strategy has put us on the threshold of what we believe is a compelling long-term growth story."

Bullish analysts said Harrah's earnings would have been in line with expectations without the charges related to the "Lucky Me" venture, which many were not expecting.

"Reported results impacted by approximately $8 million, 4 cents to 5 cents

a share, of unexpected development costs as well as development of Harrah's Internet gaming site," said Michael Reitbrock, gaming analyst at Citigroup Smith Barney, who rates the stock a buy. "Were it not for these costs, fourth-quarter reported EPS would have been 54 cents to 55 cents

a share."

Within the segments of Harrah's business, results were mixed. Notable growth came from the Western region, which includes Las Vegas and Native American casinos in northern California. Total revenue from the region rose 6.8% from last year, driven by double-digit percentage revenue gains from the Harrah's Las Vegas and the Rio. All told, income from this regional operation jumped 9.8%.

In the South Central region, including casinos in Louisiana and Mississippi, revenue was also up, gaining 13.3% from year-ago levels, boosted by 900 new slot machines at Louisiana Downs racetrack.

But outside of the south and west, Harrah's results were much weaker, sapped by increasing competition and higher tax rates in certain states.

In the Eastern region, which is dominated by Atlantic City, revenue dropped 2% because of weak results from the company's flagship Harrah's Atlantic City property, due to the debut of the Borgata casino. The North Central region, including casinos in Illinois, Indiana, Missouri and Iowa, saw year-over-year revenue weaken slightly, but profits plunged 22%, because of rising tax rates.