Marriott Q3: Earnings Beat Estimates, Guidance

Marriott International’s (MAR) third quarter earnings of 15 cents per share were two pennies above the Zacks Consensus Estimate. Results were also above the company’s guidance of 9 cents to 14 cents issued at the time of the second quarter earnings release on July 16 but were down 55% year-over-year.

Results reflected higher-than-expected revenue as a result of sustained leisure demand driven by promotional activities such as rate cuts. Combined with this, the company experienced the benefits of several cost-control initiatives implemented over the last few quarters.

Marriott has, however, reported a third-quarter net loss of $466 million, or $1.31 per share, primarily driven by huge impairment charges of $752 million for its timeshare segment. The company had informed of incurring such charges in late September. The company also incurred restructuring costs in the quarter which impacted its earnings. In the prior-year period, the company earned $94 million or 25 cents per share.

Marriott’s total revenue was $2.5 billion, down from $3.0 billion in the prior-year period. The company experienced worldwide declines in revenue per available room (RevPAR) across all its brands. Base management and franchise fees declined 14%, while incentive management fees were down 67% from the prior year. Owned, leased, corporate housing and other revenue decreased 13% and adjusted Timeshare sales and services revenue declined 35%.

Worldwide comparable company-operated properties RevPAR decreased 23.5% (21.1% on a constant-dollar basis), while worldwide system-wide RevPAR fell 21.4% (19.9% on a constant-dollar basis). International company-operated RevPAR fell 28.9% (22.3% on a constant-dollar basis) including a 22.7% decline in average daily rate (15.5% using constant dollars). Results reflected uncertain economic environment, the Olympics in addition to H1N1 flu concerns which significantly impacted the markets outside North America.

Domestic results were weaker as North American company-operated RevPAR decreased 20.6%, with North American system-wide RevPAR down 19.3%. RevPAR at the company's comparable company-operated North American full-service and luxury hotels (including Marriott Hotels & Resorts, The Ritz-Carlton and Renaissance Hotels & Resorts) was down 20.2%, driven by a 14.6% decline in average daily rate.

However, adjusted expenses were down 14.7% year-over-year to $2.4 million. Results reflected the cost reduction initiatives implemented across the organization. Adjusted EBITDA decreased 25% year-over-year.

Marriott currently has a pipeline of 105,000 rooms. During the quarter, the company opened 10,380 rooms, closed 503, and ended with a total portfolio of over 586,000 rooms. The company expects to open over 33,000 rooms in 2009.

Outlook

For the fourth quarter, Marriott expects adjusted EPS from continuing operations of 20 cents to 23 cents per share, with comparable system-wide hotel RevPAR expected to decrease 13% to 16% in North America and 16% to 18% in all the other regions.

Marriott, however, expects the operating environment to remain difficult in 2010, especially regarding pricing in the hotel industry. The company expects the worldwide comparable systemwide hotels RevPAR to be flat to down 5% for the full fiscal 2010. Management, however, expects international markets’ RevPAR to illustrate greater relative year-over-year strength than North American markets.

Marriott also expects to open 25,000 to 30,000 rooms in 2010. Most of the hotels which are expected to open are already under construction or undergoing conversion from other brands. Fee revenue is expected to be between $1.05 billion and $1.11 billion in 2010.

While the company expects its 2010 general and administrative costs to be reasonably higher than in 2009, it expects to reduce its debt levels in 2010. We note that at the end of the third quarter of 2009, the company’s debt level reduced to $2.7 billion down from $3.1 billion at year-end 2008.

While the operating environment in the lodging sector has continued to deteriorate in the recent months and we expect RevPAR to keep falling in the near term, the company’s strong development pipeline is expected to provide some relief and offset the anticipated declines. Also, we note that the declines in RevPAR have moderated of late.

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 continue to have a Neutral recommendation on the shares of Marriott.