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Starwood Beats, Outlook Bright

Zacks Equity Research

Starwood Hotels & Resorts Worldwide Inc. (HOT) has reported second-quarter 2012 adjusted earnings from continuing operations of 70 cents, which comprehensively surpassed the Zacks Consensus Estimate of 62 cents as well as the year-ago level of 50 cents.

On a GAAP basis, earnings from continuing operations were 66 cents compared to 77 cents in the second quarter of 2011.

Revenues grew 13.5% year over year to $1,618.0 million in the quarter, with revenue per available room (RevPAR) witnessing strong growth. The revenue also outperformed the Zacks Consensus Estimate of $1,550.0 million. The company continued to experience occupancy gains on the back of a surge in demand for high-end leisure as well as international business travel amidst an uncertain macroeconomic backdrop.

Management and Franchise Revenues

System-wide RevPAR for same-store hotels increased 4.2% (6.9% in constant dollars) year over year all over the world. International system-wide RevPAR for same-store hotels nudged up 0.9% (6.3% in constant dollars). Management fees, franchise fees and other income increased 10.4% year over year to $222.0 million in the quarter under review.

Owned, Leased and Consolidated Joint Venture Hotels

Worldwide RevPAR for Starwood branded same-store owned hotels fell 0.4% (up 3.1% in constant dollars) from the prior-year period. RevPAR for Starwood branded same-store owned hotels in North America dipped 0.1% (up 1.1% in constant dollars).

Canada was a dampener in this segment as RevPAR in Canada was down 6.5% in the quarter hurt by the stronger Canadian dollar. Without Canada, RevPAR at Starwood branded same-store owned hotels in North America increased approximately 4%.

Internationally, Starwood branded same-store owned hotel RevPAR slid 0.8% (up 5.3% in constant dollars). Revenue from this segment in the quarter dropped 5.2% year over year to $453.0 million following the sale of five assets.

Vacation Ownership and Residential Sales and Services

Total vacation ownership revenue was up 2.8% to $148 million. Originated contract sales of vacation ownership intervals fell 5.0%. Total revenue from vacation ownership and residential sales and services increased significantly to $316.0 million in the quarter.

Update on Hotel Rooms

During the quarter under review, Starwood signed 34 hotel management and franchise contracts for approximately 8,300 rooms. These consist of 4 conversion projects and 30 new constructions. The company also opened 14 new properties. Five properties (approximately 1,000 rooms) left the system during the quarter. At quarter end, the company’s pipeline included over 365 hotels, representing almost 95,000 rooms.


At quarter end, Starwood had cash and cash equivalents of $270.0 million (excluding $155 million of restricted cash), while its long-term debt was $1,652.0 million.

Share Repurchase

In the second quarter of 2012, the company bought back 2.84 million shares for about $140.0 million. This leaves the current share repurchase authorization at $110.0 million as of July 25, 2012.


For third-quarter 2012, earnings are expected to be approximately 50 cents to 54 cents per share (including Bal Harbor project). The company anticipates RevPAR growth of 6% to 8% in constant dollars at same-store company-operated hotels worldwide, while growth will likely be 4% to 5% at branded same-store company owned hotels worldwide.

For full-year 2012, the company increased its adjusted earnings guidance to the range of $2.49–$2.56 (previously $2.35–$2.46) per share. In the preceding quarter, Starwood raised its adjusted earnings guidance to the range of $2.35–$2.46 from $2.22–$2.33 per share.

RevPAR growth is expected between 6% and 8% in constant dollars for same-store company-operated hotels worldwide. RevPAR increases at branded same-store company-owned hotels worldwide are expected between 4% and 5% in constant dollars.

Our Take

Starwood is a beneficiary of slower-but-steady recovery in leisure as well as business travel. We remain bullish on the stock given the company’s strong expansion plan compared to many of its peers, significant international exposure, portfolio restructuring and earnings power as well as returns to shareholders.

The raise in earnings guidance amid a faltering business environment reflects the company’s sound business model. However, a negative exchange rate shift will likely play a crucial role and hurt the company’s EBITDA. Additionally, management had previously apprehended a further slowdown in North American lodging recovery in 2012 from 2011.

Starwood, which competes with Marriott International Inc. (MAR), currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.

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