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What Royal Caribbean Wants Investors to Know

Demitrios Kalogeropoulos, The Motley Fool

Many investors were worried that a slowdown might be looming for the cruising industry, but Royal Caribbean (NYSE: RCL) just put those fears to rest. The company in early May announced surprisingly strong sales growth thanks to robust passenger volumes and healthy demand for onboard purchases.

Royal Caribbean also took the opportunity to lift its 2019 outlook to reflect the latest vacation booking trends. CEO Richard Fain and his team described some of those encouraging signs in a conference call with Wall Street analysts. I followed up on Royal Caribbean's bullish long-term outlook in a chat with CFO Jason Liberty. Below are a few highlights from that interview and the conference call.

Two couples on a beach in front of a cruise ship.

Image source: Getty Images.

Beating targets

Net revenue yields were up 9.3% for the quarter, which is approximately 150 basis points higher than the midpoint of our previous guidance. The main drivers of the positive variance were continued strength in onboard revenue and better than anticipated close-in demand [booked nearer the time of launch].
-- Liberty (on the call)

Royal Caribbean's net revenue yield, a core growth metric, outpaced management's forecast, and implied market share growth, given that industry leader Carnival announced a less-than-1% increase in its most recent quarter. The pace of growth was a pleasant surprise for investors, and it was driven by onboard spending, which jumped to $730 million from $602 million a year ago.

Liberty said spending is shifting toward experiences like shore excursions, and asserted that Royal Caribbean is doing a better job lately at delivering these in-demand products. The latest launch of its new private resort in the Bahamas fits right in with that strategy.

Geographic hits and misses

It's rare that booking patterns are strong in all regions of the world and like most years, we are seeing some variation this year.
-- Liberty (on the call)

The cruise line operator noted strong demand in the core Caribbean geography that accounts for about half of its global business. Volumes were surprisingly weak in Europe, meanwhile, likely due to economic uncertainty around Brexit.

The company is responding by shifting some assets toward the U.S., and that move highlights a key advantage of Royal Caribbean's diversified approach to deploying its ships. "We've built a business model that can play in the rain," Liberty told me, so sluggish demand in any one area isn't likely to drag down overall results.

Boosting the outlook

I have to stress that we are both delighted and a little bit surprised with this very nice outlook as our initial guidance was already very strong. We think that this is a result of several elements, our superior new buildings, strategic revenue management decisions, our global footprint, very well-positioned brands and an enhanced destination offering.
-- Fain (on the call)

Royal Caribbean now forecasts net revenue yields rising by between 7.5% and 9% in 2019, compared to roughly 4% last year. Executives credit a few positive factors for driving that anticipated acceleration, but among the biggest are the company's business investments. Its upgraded terminals, better technology, and new Bahamas resort appear to be driving higher demand and increased onboard spending by guests.

That's good news for Royal Caribbean and its competitors, which have been struggling to find ways to grow revenues at a robust clip given the capacity constraints involved in shipbuilding. These latest results suggest the cruise giants can add plenty of value to vacation outings, and increase ticket demand and onboard spending in the process. Combined with the steady capacity gains from new vessels coming into service, these trends could produce improving growth rates ahead.

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Demitrios Kalogeropoulos owns shares of Carnival. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.