Starwood Hotels Q3: Mixed Results

| About: Marriott International, (MAR)

Starwood Hotels and Resorts Worldwide Inc. (HOT) has reported third quarter earnings from continuing operations of 22 cents per share. Excluding special items, the company has earned 14 cents per share. Results are ahead of the Zacks Consensus Estimate of 10 cents. While revenues were down in the quarter, the company continued to benefit from the implementation of the cost reduction initiatives.

However, results were well below the prior-year quarter when the company had earned 71 cents per share, excluding special items.

Income from continuing operations, excluding special items, was $26 million, versus $129 million in the prior-year period. Adjusted EBITDA was $179 million, versus $330 million the year-ago period.

Starwood’s net income was $40 million or 22 cents per share compared to $113 million or 62 cents in the prior-year period.

The results stemmed from significant deterioration in revenue per available room (RevPAR). Worldwide system-wide RevPAR for same-store hotels was down 20.3% in the quarter compared to the year-ago period. System-wide RevPAR for same-store hotels in North America was down 19.7% year-over-year. Management and franchise revenues were down 15.2% year-over-year.

Worldwide RevPAR for Starwood branded same-store owned hotels decreased 23.7% from the prior-year period. RevPAR for Starwood branded same-store owned hotels in North America decreased 24.0% year-over-year. Total vacation ownership reported revenues decreased 31.7% from the prior-year period.

Starwood, however, continued to benefit from its cost reduction measures. Selling, general, administrative and other expenses decreased 9.7% to $102 million compared to the third quarter of 2008. Its cost containment initiatives are expected to yield an annual run rate savings of approximately $100 million.

Margins remain stretched as a result of this revenue decline though the cost-cutting measures provided some relief. Worldwide comparable company-operated gross operating profit margins declined around 400 basis points. International gross operating profit margins for comparable company-operated properties decreased about 260 basis points, and North American comparable company-operated gross operating profit margins declined approximately 560 basis points.

We also expect Starwood to reduce its outstanding debt by year-end. At Sept. 30, 2009, the company had total debt of $3.362 billion, or net debt of $3.207 billion, compared to net debt of $3.626 billion and $3.517 billion as of June 30, 2009 and Dec. 31, 2008, respectively.


The company expects RevPAR at same-store company-operated hotels worldwide to be down 9% - 11% in the fourth quarter, while RevPAR at branded same-store owned hotels worldwide is expected to decline 12% - 14%. With these projections, management expects to post earnings of 17 cents to 21 cents per share in the fourth quarter.

For the full year 2009, management stated that the company expects RevPAR at same-store company-operated hotels worldwide to decline 20% in 2009. Additionally, the company anticipates that RevPAR will decline 25% at branded same-store owned hotels worldwide during 2009. Management expects to report earnings of approximately 67 cents to 71 cents per share for fiscal 2009, with these expectations. The earnings guidance for both the fourth quarter and the full-year exclude the impact of any special items.

The company declined from providing any definitive earnings per share guidance for 2010. The management however said that though group bookings have picked up for 2011 and beyond, booking pace for 2010 has continued to lag below 2009.

Both revenue and margins remain curtailed, reflecting weak demand and a challenged pricing environment in the quarter. Though we believe that Starwood is well positioned for the long-term, we expect that operating conditions will remain challenging in the near term. As such, we have a Neutral recommendation on the shares.