Harrah's Earnings Come In Light

The casino owner misses estimates by 3 cents a share.
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Updated from 9:24 a.m. EDT

Harrah's Entertainment

(HET)

reported solid growth in its first quarterly earnings report since it merged with former rival

Caesars Entertainment

to create the world's largest casino company.

But the Las Vegas-based company missed the Wall Street earnings consensus, ending its recent streak of blowing past estimates, and its shares slumped.

The company reported strong revenue growth at many of its casinos, but cool weather in northern Nevada hurt business there and led to a 5.4% revenue decline. The merger boosted corporate costs, pressuring margins below what some analysts expected. The failure to trounce expectations fanned concerns that the industry's recent boom might be losing a little steam.

"Overall, we think Harrah's results represent one more gaming operator that just met or only modestly surpassed second-quarter 2005 expectations, providing further evidence that the gaming momentum over the last several quarters may be moderating," writes Goldman Sachs analyst Steven Kent, whose own EPS forecast was in line with the company's result.

Harrah's Thursday reported net income of $105.8 million, or 84 cents a share, in the second quarter. That marked a 17% increase from net income of $90.2 million, or 79 cents a share, a year before.

Excluding special items, which is the way Wall Street gauges the company's performance, adjusted earnings were 90 cents a share, 3 cents shy of the consensus from Thomson First Call. A year before, adjusted earnings were 79 cents.

Shares fell $1.69, or 2.2%, at $76.90.

Revenue totaled $1.47 billion, up 42% from $1.04 billion in the second quarter of 2004 and ahead of the $1.42 billion consensus. That included 17 days of sales from Caesars, which Harrah's acquired June 13.

At same-store casinos -- properties that Harrah's owned during the second quarter of 2004 -- revenue increased 8.9% year over year.

"We achieved our sixth consecutive quarter of record results and posted the highest same-store sales growth in nearly five years, both while completing the largest acquisition in gaming history," said Gary Loveman, Harrah's chairman and CEO.

"Our ability to continue generating such positive operating momentum is a tribute not only to Harrah's technological and marketing capabilities, but also to the skill and dedication of a management team and employees who deliver the great service that builds lasting customer loyalty," he added.

During a conference call, executives said the combined company remains on track to meet a previously announced target of $80 million in merger-related benefits during the first year. It might even be able to exceed that goal, they added.

Harrah's is famous for closely tracking the habits of its repeat customers, enticing them with special promotions and luring them to properties away from their "home" casinos. It hopes to apply that strategy to Caesars' customers by integrating the two companies' customer databases by the middle of next year. Combined, they will have a total of 40 million names.

But integrating the two companies also comes with costs. Corporate expenses swelled 38.6% year over year to $21.9 million. On top of that, Harrah's had an additional $16.7 million of expenses related to the initial integration.

During the call, executives said corporate expenses might rise somewhat in the third quarter and would remain near the second-quarter level for the next several earnings periods. They said the added costs were worth the rewards that the merger will yield.

In addition to higher costs, the company also saw its income tax rate rise -- to 38.8% from 36.8% a year before -- to reflect Caesars' traditionally higher income tax provisions.

The higher corporate costs and the bad weather in northern Nevada weighed on one key measure of performance -- earnings before interest, taxes, depreciation and amortization, or EBITDA. The number missed the expectations of at least two Wall Street analysts.