Starwood Hotels & Resorts Worldwide Inc.’s (HOT) third-quarter 2013 adjusted earnings from continuing operations of 71 cents per share beat the Zacks Consensus Estimate of 63 cents by 12.7% and the year-ago level of 58 cents by 22.4%. The company’s margin expansion backed the earnings growth.
Revenues increased 3.6% year over year to $1.51 billion in the quarter, led by increased management fees, franchise fees and other income and solid revenue per available room (RevPAR) growth. Starwood has witnessed higher occupancy in all regions across all brands. Quarterly revenues also surpassed the Zacks Consensus Estimate of $1.49 billion by nearly 1.0%.
Inside the Headline Numbers
Starwood earns a major portion of its revenues from its hotel business. Apart from this, the company derives revenues from its vacation ownership business.
Hotel Business
Owned, Leased and Consolidated Joint Venture Hotels
Revenues at owned, leased and consolidated joint venture hotels declined 6.4% year over year to $398.0 million, following the sale of assets. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 5.2% in constant dollars, led by 8.5% and 2.9% RevPAR growth in North America and overseas market, respectively.
Management and Franchise Revenues
Management fees, franchise fees and other income increased 12.8% year over year to $247.0 million in the third quarter. Worldwide system-wide RevPAR for same-store hotels increased 4.7% year over year with strong RevPAR growth in North America and Asia Pacific. System-wide RevPAR grew 3.3% internationally.
With the gradual economic recovery, RevPAR in North America increased 5.8%. Starwood’s Asia business is divided into two parts — Greater China and Rest of Asia. RevPAR growth in Rest of Asia was 9.3% which was the highest within all the regions.
Starwood’s luxury business performed well during the quarter gaining from higher demand worldwide. Among the company’s luxury brands St. Regis/Luxury Collection recorded the highest RevPAR growth of 7.3%.
Vacation Ownership and Residential Sales and Services
Total revenue from vacation ownership and residential sales and services decreased 3.8% to $200.0 million as a result of a 35.8% fall in residential revenues.
However, vacation ownership revenues were up 11.3% year over year to $157 million benefiting from the higher revenue generation from the company’s resort business.
Margins
Worldwide same-store company-operated gross operating profit margin was up 50 basis points (bps) during the quarter, aided by higher margin gain in North America and international markets. Gross operating profit margins for same-store company-operated properties grew 20 bps internationally and 100 bps in North America.
Update on Hotels
During the quarter, Starwood entered into 36 hotel management and franchise agreements that span over nearly 7,800 rooms. These consist of seven brand-conversions and 29 new constructions projects. Apart from this, Starwood opened 15 properties in the third quarter. On the other hand, the company divested eight properties. At quarter-end, nearly 400 hotels, consisting of almost 100,000 rooms were in the company’s development pipeline.
Shareholder Value Enhanced
During the third quarter, Starwood bought back 2.73 million shares worth $180.7 million. Currently, shares worth nearly $443.3 million remained under the existing share repurchase program.
Guidance
For fourth-quarter 2013, earnings are expected to be approximately 68 cents to 70 cents per share (including the Bal Harbour project). Starwood expects worldwide same-store company-operated RevPAR growth to be within 5%–6% (in constant dollars). RevPAR is expected to be 4% to 6% at branded same-store company-owned hotels worldwide. Management fees, franchise fees and other income are expected to be within 6%–8% in the fourth quarter.
Starwood has raised its earnings guidance for full-year 2013. The company now expects its adjusted earnings per share in the range of $2.93–$2.95, up from prior estimates of $2.81–$2.88.
Starwood has retained its RevPAR outlook for 2013. For same-store company-operated hotels worldwide, RevPAR growth (in constant dollars) is expected within 5%–6%. RevPAR at same-store company-owned hotels will be 4%–6% in constant dollars.
The hotelier also maintained its margin guidance. Worldwide same-store owned hotels’ margin is expected to go up 75 bps–125 bps.
For full-year 2014, Starwood projects worldwide RevPAR for same-store company-operated hotels to be within 5%–7%. Though Bal Harbour will contribute to 2013 earnings, it will have no material impact on 2014 earnings following its sales by 2013-end.
Our Take
Starwood is poised to benefit from the reviving economy and steady rise in the demand for hotels. The raised earnings outlook for 2013 reflects the company’s sound business model. Additionally, the hotelier’s strong developmental pipeline, significant international exposure, asset disposition strategy and shift to a fee-based business model bode well for future growth.
However, owing to the volatile economy in China, the company’s business may suffer in the region.
Starwood holds a Zacks Rank #3 (Hold). Some other hoteliers that are currently performing well include Marriott International Inc. (MAR), Intercontinental Hotels Group plc (IHG) and Orient-Express Hotels Ltd. (OEH). All these companies carry a Zacks Rank #2 (Buy).
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