Marriott International (MAR) is a leading worldwide hospitality company primarily focused on property management and franchising.
Marriott generates substantial interest from full-service lodging property owners, who manage their properties and benefit from the Marriott branding. The company’s brands also offer substantial geographic reach worldwide and benefit from 20 million plus members through its frequent travel program. Therefore, due to its strong portfolio of well-known brands, the company commands a premium room rate relative to the overall lodging industry, which has helped it stand firm against the recent economic downturn.
Further, the company has a substantial development pipeline of approximately 110,000 rooms, with two-thirds already under construction. The company also has ample capacity in its line of credit, which should ease any challenges posed by the current credit markets.
Marriott is aggressively working on its cost containment initiatives. The company has reduced centralized cost allocations and staff expenses by adjusting employee hours and delaying the filling of open positions. It is also focused on enhancing its property-level house profit margins by modifying menus and restaurant hours besides reviewing and adjusting room amenities. As a result, the company could achieve a significant reduction in its expenses in the quarter. Longer term, we expect such initiatives to help improve its bottom line.
However, despite its strong position, Marriott’s financial results have been more towards the downside relative to the broader lodging industry. This was in part due to the company’s timeshare business. The economic downturn in the U.S. has led to reduced consumer spending, and sales of timeshare units have fallen substantially in the recent past. Moreover, the recent declines in the credit markets have impaired the timing, volume and financial terms of the timeshare units that Marriott sells. We don’t expect the situation to reverse very soon, as the credit market turmoil is likely to continue for some time.
In addition, we expect that the forecasted revenue per available room (RevPAR) declines will lead to additional margin compression in the near term. The company expects its third quarter RevPAR at North American system-wide hotels to decline by between 20% and 23%, while RevPAR is expected to decline between 22% and 24% at system-wide hotels outside North America.
For the full year, the company expects a decline of 17% to 20% in RevPAR of both comparable system-wide hotels in North America and elsewhere. Besides the forecasted decline in the RevPAR, we think that rising lodging costs, which had somewhat offset steady pricing and occupancy in recent quarters, should place increasing pressure on profit margins given a more challenging top-line outlook.
Business and leisure travel have decreased significantly in the past two quarters due to economic turbulence, as both businesses and consumers cut back on traveling expenses to generate savings. Though with the recent rebound in the economy we expect business and leisure travel to increase, this would not be sufficient to offset the other negative effects of the recession.
Therefore, since the operating environment in the lodging sector has continued to deteriorate in the recent months, we expect RevPAR to continue to fall in the near term. However, the company’s strong development pipeline is expected to provide some relief and offset the anticipated declines in RevPAR.
Also, with some early signs of economic recovery, we believe that Marriott is better positioned to command a premium room rate relative to the overall lodging industry. Hence, we are upgrading our recommendation on Marriott from Underperform to Neutral.
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