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Marriott Vacations Banks on Strategic Initiatives for Growth

Zacks Equity Research

Marriott Vacations Worldwide Corporation’s VAC digital expansion, robust top-line growth, digitization, cost synergies and share repurchase program bode well. However, high debt and concerns pertaining to third-quarter 2019 results remain worrisome. Let’s delve deeper.

Key Catalysts

Marriott Vacations continues to impress investors with robust top-line performance. In second-quarter of 2019, the company’s revenues grew 79.5%, following an 85.6% gain in the preceding quarter. The upside can be attributed to revenue growth across its segments. Also, consolidated Vacation Ownership contract sales, rental, financing, and resort management and other services revenues grew 66%, 90.5%, 91.7% and 71.8%, respectively, in the quarter. For 2019, the company expects consolidated contract sales to increase 6-9%.

Furthermore, hoteliers are adopting innovative technologies to sustain competition and meet the changing nature of consumer demand. Marriott Vacation is no exception. It has been focusing on digital expansion and innovation of latest techniques. By the end of the third quarter of 2019, the company expects to launch its digital marketing program with Marriott, which will allow users of Marriott.com to avail attractive offers and promotions.

In September 2018, Marriott Vacations completed the acquisition of ILG, Inc. — a provider of professionally delivered vacation experiences. On completion of the buyout, Marriott Vacations’ pipeline expanded to more than 100 resorts. The company expects to realize greater cost synergies from the ILG acquisition this year. By the end of 2021, management expects to realize merger cost synergies of $100 million.

Overall, the company expects to recognize $45-$50 million in savings in 2019 and a $60 million synergy run rate by the end of the year. Notably, the final $50 million of synergies include leveraging and consolidating technology applications, HR and payroll platforms, and financial & analysis integration. Additional savings will be derived from sales and marketing.

Meanwhile, the company’s share repurchase program continues to drive shareholder value. In the second quarter of 2019, Marriott Vacations repurchased an additional 4.5 million shares. The company also paid out dividends worth $20 million.

For 2019, it expects adjusted free cash flow to be $440-490 million. Further, it continues to expect cash flow generation during the same period to support sales growth.

Concerns

Marriott Vacations, which shares space with Choice Hotels International, Inc. CHH, Hilton Grand Vacations Inc. HGV and InterContinental Hotels Group PLC IHG, issued an update on the anticipated impact of Hurricane Dorian on its operations. The company further stated that all of the resorts that were impacted by the hurricane were re-opened.

Hurricane Dorian had minimal impact on the company’s resorts and sales centers. However, shutting down of resorts and sales center at different locations, flight disruptions as well as cancellation of reservations have hurt Marriott Vacations’ sales.

In the third quarter of 2019, the company anticipates contract sales to be negatively impacted by nearly $6-$8 million. Adjusted EBITDA in the same quarter is expected to be affected by roughly $3-$5 million. The company’s Vacation Ownership rental and ancillary operations, and its Exchange and Third-Party Management business are also likely to be hurt.

Moreover, as Marriott Vacations is highly capital intensive, it faces a lot of debt burden. The company’s total net debt outstanding at the end of the second quarter was roughly $3.9 billion, consisting primarily of $2.2 billion of corporate debt, most of which resulted from the ILG acquisition and $1.7 billion associated with non-recourse securitize notes receivable. Due to a higher debt burden, the company might fail to finance the upcoming projects.

These apart, any downturn in macroeconomic and credit market conditions would make it difficult for Marriott Vacations to pay or refinance debt, moving ahead.

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