Starwood Hotels & Resorts Worldwide Inc. (HOT) reported first-quarter adjusted earnings from continuing operations of 30 cents, which surpassed the Zacks Consensus Estimate of 26 cents and improved from the year-earlier quarter’s earnings of 13 cents. The earnings also topped the company’s guidance range of 22 cents to 26 cents.
On a GAAP basis, including loss on asset dispositions and income tax benefit associated with the disposition, Starwood recorded earnings of 15 cents per share compared with 16 cents in the year-ago quarter.
The quarter’s better-than-expected earnings were aided by an increase in demand. Revenues jumped 9.1% year over year to $1,295 million in the quarter, with revenue per available room witnessing a considerable growth in the quarter. The quarter’s revenue also outperformed the Zacks Consensus Estimate of $1,277 million.
Inside the Headline Numbers
The company continued to experience occupancy gains on the back of economic recovery and a surge in demand for leisure. Average daily room rate also posted impressive results. Management fees, franchise fees and other income increased 15.7% year over year to $177 million.
System-wide RevPAR for same-store hotels increased 10.4% (9.1% in constant dollars) year over year all over the world. System-wide RevPAR for same-store hotels in North America rose 11.1% (10.4% in constant dollars). RevPAR in Asia-Pacific shot up 17.7% (11.3% in constant dollars) and 16.7% in Latin America (same in constant dollars).
Worldwide RevPAR for Starwood branded same-store owned hotels spiked 11.9% (10.2% in constant dollars) from the prior-year period. RevPAR for Starwood branded same-store owned hotels in North America climbed 9.6% (7.9% in constant dollars). Internationally, Starwood branded same-store owned hotel RevPAR increased 14.9% (13.3% in constant dollars).
Total vacation ownership revenues were up 12.2% year over year at $147 million. Originated contract sales of vacation ownership intervals increased 6.5% primarily attributable to improved sales performance on existing owner channels and increased tour flow from new buyer preview packages.
The increase in RevPAR along with cost control resulted in improved margins. Worldwide same-store company-operated gross operating profit margin was up about 90 basis points (bps), driven by a flat performance in the International segment and a 200-bp rise in the North American division. Performance at the International segment was hurt by the political unrest in the Middle East and North Africa as well as the earthquake followed by tsunami in Japan.
Update on Hotel Rooms
During the quarter, Starwood signed 29 hotel management and franchise contracts with approximately 8,700 rooms. The company also opened 21 additional hotels and resorts with approximately 5,200 rooms.
Financials
At quarter end, Starwood had cash and cash equivalents of $675.0 million (excluding $73 million of restricted cash) while its long-term debt was $2,845.0 million.
Outlook
Starwood expects its second quarter 2011 earnings to be within 42 cents to 46 cents, with RevPAR increasing 7% to 9% in constant dollars for same-store company operated hotels. Adjusted EBITDA is expected to range from $245 million to $255 million.
For full-year 2011, the company expects earnings in the range of $1.60 to $1.70 per share with an increase in RevPAR between 7% and 9% in constant dollars for same-store company operated hotels. Adjusted EBITDA is expected to range from $975 million to $1.0 billion.
Our Take
We believe Starwood Hotels is poised to benefit from a recovery in the economy. Starwood is aggressively expanding its footprint in the Asia-Pacific region particularly in China and India as well as in Latin America, where demand is high and the pace of economic recovery is fast. In the developed market, the company should benefit from limited supply. Pricing power is also returning to the hotel owners. Moreover, the company is experiencing a solid booking momentum.
Starwood has embarked on an asset-light and more fee-based business model. Asset sale remains a long-term strategy to strengthen financial flexibility, which would help companies grow through management and licensing arrangements instead of direct ownership of real estate. A higher concentration of management and franchise fees reduces earnings volatility and provides a more stable growth profile.
On the flip side, a still-high unemployment rate and heavy public/private debt burden in the developed market will likely limit demand growth in an industry marked with high supply growth. In the developing countries, Starwood is facing stiff competition from domestic as well as international peers.
One of Starwood Hotels’ primary competitors, Marriott International Inc. (MAR) has reported first quarter 2011 earnings of 26 cents per share, a penny below the Zacks Consensus Estimate.
Starwood currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
STARWOOD HOTELS (HOT): Free Stock Analysis Report
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