Starwood Hotels & Resorts Worldwide Inc. (HOT) reported its third-quarter adjusted earnings from continuing operations of 25 cents, ahead of the Zacks Consensus Estimate of 22 cents and the year-earlier quarter’s earnings of 14 cents. The earnings outpaced the guidance range of 15 cents to 19 cents.

On a GAAP basis, including a loss of $56 million from asset disposition, Starwood incurred a loss of 3 cents per share compared with the year-ago gain of 20 cents.

The quarter’s better-than-expected earnings were aided by an increase in demand for hotels. Revenues jumped 8.6% year over year to $1,255 million in the quarter, with revenue per available room witnessing a considerable growth in the quarter. However, the quarter’s revenue missed the Zacks Consensus Estimate of $1,262 million.

Inside the Headline Numbers

The company continued to experience occupancy gains on the back of a recovering economy and surging demand for leisure. Average daily room rate also posted impressive results. Management and franchise revenues went up 6.1% year over year to $173 million.

System-wide RevPAR for same-store hotels increased 10.0% (11.1% in constant dollars) year over year all around the globe. System-wide RevPAR for same-store hotels in North America rose 10.6% (10.0% in constant dollars). RevPAR in Asia-Pacific and Latin America registered strong growth and shot up 20.5% (15.8% in constant dollars) and 28.2% (same in constant dollars), respectively.

Worldwide RevPAR for Starwood branded same-store owned hotels increased 10.8% (12.5% in constant dollars) from the prior-year period. RevPAR for Starwood branded same-store owned hotels in North America climbed 12.5% (11.2% in constant dollars). Internationally, Starwood branded same-store owned hotel RevPAR increased 8.3% (14.5% in constant dollars).

Total vacation ownership revenues also upped 3.2% year over year to $129 million. However, there was a 4.8% drop in originated contract sales of vacation ownership intervals due to lower tour flow and a lower average price.

The increase in RevPAR along with cost control resulted in improved margins. Worldwide same-store company-operated gross operating profit margin was up about 140 basis points (bps), driven by a 130 bps improvement in International and a 160 bps rise in the North American division.

Update on Hotel Rooms

During the quarter, Starwood signed 20 hotel management and franchise contracts with approximately 4,500 rooms, of which 15 are new builds and five are conversions from other brands.

Financials

At quarter-end, Starwood had cash and cash equivalents of $357.0 million (excluding $48 million of restricted cash) while its long-term debt was $2,852.0 million.

Outlook

Starwood expects its fourth quarter earnings per share before special items to be within 36 cents to 38 cents, with a RevPAR increasing 7% to 9% in constant dollars. Adjusted EBITDA is expected to range from $230 to $235 million.

For full-year 2010, the company expects earnings to remain in the range of $1.09 to $1.11 per share with an increase in RevPAR between 8% and 9% in constant dollars. Adjusted EBITDA is expected to range from $840 to $845 million.

For full-year 2011, earnings expected to range from $1.44 to $1.55 per share while Adjusted EBITDA is guided between $950 and $980 million.

Our Take

We believe Starwood Hotels is poised to benefit from the reviving economy. Starwood is aggressively expanding its footprint in the Asia-Pacific region particularly China and India, where demand is high and the pace of economic recovery is fast. Pricing power is also returning to the hotel owners.

Additionally, Starwood’s strong pipeline, fee-based business model and a less capital-intensive timeshare business are expected to augur well for its business. On the flip side, a high unemployment rate and heavy public/private debt burden in the developed market will likely limit new demand growth in an industry marked with high supply growth.

As a point of reference, one of Starwood Hotelsprimary competitors Marriott International Inc. (MAR) reported its third-quarter 2010 earnings of 22 cents on October 7, in line with the Zacks Consensus Estimate.

 
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