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Marriott Vacations Rides on ILG Buyout Despite Cost Issues

Zacks Equity Research

Marriott Vacations Worldwide Corporation VAC continues to enjoy synergies from the ILG acquisition and drives revenues through various digital efforts. However, high expenses and debt pressure remain potential concerns.

Nevertheless, a robust top line continues to impress investors, which is evident from the company’s share price movement. So far this year, Marriott Vacations’ shares have gained 40%, outperforming the industry’s 27.9% rally.

Let us delve deeper into factors that are currently shaping this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Impressive Top-Line Growth & Digital Innovations

Marriott Vacation 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 MAR, which will allow users of Marriott.com to receive attractive offers and promotions.

Notably, despite not owning an online marketing presence, Marriott Vacation’s tour package pipeline increased 5% year over year in the first quarter of 2019, following 9% gain in the preceding quarter. It is also venturing opportunities in other social media and digital advertising platforms. Management is excited to further integrate data analytics into the company's marketing strategy.

Meanwhile, in first-quarter 2019, its revenues grew 85.6%, following 87.2% gain in the preceding quarter. This upside can be attributed to revenue growth across segments. Also, consolidated Vacation Ownership contract sales, rental, financing, and resort management and other services’ revenues increased 74%, 98%, 89% and 79%, respectively, in the quarter. For 2019, the company expects consolidated contract sales to be $1,530-$1,600 million.

ILG Acquisition Aids

Marriott Vacations completed the acquisition of ILG, Inc. in 2018. Post the completion of the acquisition, Marriott Vacations’ pipeline expanded to more than 100 resorts. The company expects to realize greater cost synergies from the ILG acquisition in 2019.

In fact, management expects to realize merger cost synergies of $100 million in the long run. Overall, the company expects to recognize $35-$40 million in savings in 2019 and end the year at $50 million synergy run rate. Notably, the final $50 million of synergies include leveraging and consolidating technology applications, HR and payroll platforms, and financial & analysis integration. Additional savings will derive from sales and marketing.


Despite cost synergies from the ILG acquisition, the company has been bearing the brunt of high expenses. In 2018, total expenses rose 39.4% year over year, thanks to an increase in the cost of vacation ownership products as well as high rental, financing and administrative costs. Increased marketing and sales expenses along with management and exchange costs too affected total costs. Total expenses in the first quarter amounted to $969 million, up 87.1% year over year.

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 quarter was roughly $3.9 billion, primarily consisting 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. Owing to a higher debt burden, Marriott Vacations might fail to finance the upcoming projects. Moreover, any downturn in macroeconomic and credit market conditions would make it difficult for the company to pay or refinance debt moving ahead.

Meanwhile, the hotel industry is highly competitive as major hospitality chains with well-established and recognized brands are continuously expanding global presence. Marriott Vacations is continuously facing intense competition from large hotel chains like Hilton HLT and Hyatt H, and smaller independent local hospitality providers.

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