Leading hotelier Starwood Hotels & Resorts Worldwide Inc. (HOT) posted mixed second quarter 2014 results and increased its earnings guidance for 2014. Earnings from continuing operations of 77 cents per share beat the Zacks Consensus Estimate of 76 cents by a penny. Earnings were higher than management’s expected range of 72 cents to 76 cents. However, earnings declined 2.5% year over year, owing to lower revenues and higher selling, general and administrative expenses.
Revenues decreased 1.5% year over year to $1.54 billion in the quarter, mostly due to a decline in vacation ownership and residential sales and services revenues. Revenues from residential sales mainly dropped due to the sale of The St. Regis Bal Harbour residential project in Jan 2014 and Aloft Tucson University in Tucson, AZ. Also, the top line missed the Zacks Consensus Estimate of $1.55 billion by a meager 0.8%.
Inside the Headline Numbers
Starwood earns a major portion of its revenues from its hotel business. Apart from this, the company derives revenues from its vacation ownership business.
Owned, Leased and Consolidated Joint Venture Hotels
Revenues at owned, leased and consolidated joint venture hotels declined 1.2% year over year to $414.0 million. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 6.0% in constant dollars, led by 4.1% and 7.4% RevPAR growth in North America and overseas, respectively.
Management and Franchise Revenues
Management fees, franchise fees and other income increased 10.2% year over year to $260.0 million in the second quarter, above the higher end of management’s expectation of 8.0% to 10.0% year-over-year increase. Worldwide system-wide RevPAR for same-store hotels increased 5.3% year over year, owing to RevPAR growth in North America.
The company witnessed RevPAR growth of 6.3% in North America, up 110 basis points (bps) year over year.
System-wide RevPAR grew 4.1% internationally. Starwood’s Asia business is divided into two parts — Greater China and Rest of Asia. RevPAR growth in Greater China was 11.1%, the highest among all the regions.
In terms of brands, Starwood’s Aloft recorded the highest RevPAR growth of 12.6% followed by W Hotels that posted RevPar growth of 6.4%.
Vacation Ownership and Residential Sales and Services
Total revenue from vacation ownership and residential sales and services declined 28.5% year over year to $171.0 million due to an 86.2% fall in residential revenues, marginally offset by a 0.6% increase in vacation ownership revenues.
Other Revenues from Managed and Franchised Properties
Other revenues from managed and franchised properties were up 3.9% year over year to $694.0 million in the reported quarter.
Margins and EBITDA Update
Worldwide same-store company-operated gross operating profit margin was up 87 bps during the quarter, aided by higher margins in North America and international markets. Adjusted EBITDA was $324.0 million, down 2.7% year over year. However, it was above management’s expectation of $310.0 million to $320.0 million.
Update on Hotels
During the quarter, Starwood entered into 45 hotel management and franchise agreements that span nearly 8,500 rooms. These agreements include 8 brand-conversions and 37 new constructions projects. Apart from this, Starwood opened 19 new hotels and resorts in the quarter.
On the other hand, the company divested six properties. During the quarter, the company completed the sale of the Aloft Tucson University in Tucson, AZ. As of Jun 30, 2014, nearly 450 hotels, consisting of almost 105,000 rooms, constituted the company’s development pipeline.
2014 Earnings Guidance Upped
The company increased its earnings guidance for 2014 owing to better-than-expected results. It expects adjusted earnings per share in the range of $2.78 to $2.85 compared to its previous expectation of $2.76–$2.83. The Zacks Consensus Estimate of $2.83 for full-year 2014 falls within the current guidance range.
RevPAR growth is expected to be 5%–7% at worldwide same-store company-operated hotels. RevPAR growth at same-store owned hotels is likely to be 4%–6% in constant dollars. Management fees, franchise fees and other income is expected to increase in the range of 8.0% to 10.0%. Worldwide same-store owned hotels margin is expected to go up 75 bps–125 bps.
Guidance for Third Quarter 2014
For third-quarter 2014, earnings are expected to be approximately 62 cents to 65 cents per share. The Zacks Consensus Estimate for the second quarter stands at 67 cents.
Starwood expects worldwide same-store company-operated and same-store company owned hotels RevPAR growth to be within 5.0%–7.0% (in constant dollars). Management fees, franchise fees and other income are expected to be up 2.0%–4.0% in the third quarter.
It seems that Starwood is poised to benefit from the economic revival and a steady rise in the demand for hotels. Moreover, the growth in demand for hotels is expected to exceed supply growth in 2014. This leaves scope for increasing room rate, going forward and thereby improving RevPar.
Additionally, the hotelier’s strong developmental pipeline, significant international exposure, asset disposition strategy and shift to a fee-based business model are expected to bode well for future growth. However, we remain concerned about the company’s declining residential business, which could continue to hurt the top line in the near term. Also, the lingering political uncertainty in Europe, Latin America and in some parts of Africa and an economic slowdown in China are expected to remain a concern for the company.
Starwood presently has a Zacks Rank #2 (Buy). Investors interested in the hotel industry may consider stocks like Home Inns & Hotels Management Inc. (HMIN), The Marcus Corporation (MCS) and Choice Hotels International Inc. (CHH). While Home Inns & Hotels Management and The Marcus Corporation sport a Zacks Rank #1 (Strong Buy), Choice Hotels International carries a Zacks Rank #2.