Marriott Lodges Earnings Gains

By Greg Sushinsky | July 13, 2011 AAA

Hotel chain operator Marriott International (NYSE:MAR) posted improved year-over-year earnings for its second quarter, but offered lower guidance, which helped propel the stock downward. Shares fell in intraday trading in their worst one-day decline in a year.

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Solid Numbers ... Mostly
Marriott reported earnings of 37 cents per share, on net income of $135 million, compared to an EPS of 31 cents a share on net income of $119 million in last year's second quarter. Profits rose 13% while earnings per share were up 19%. Total revenue was up 7% to $2.97 billion, attributable in part to strength in the international market. Management and franchise fees were $269 million, an increase of 12% year-over-year.

Revenue per available room (revPAR), which is the occupancy rate times room rate and a key measure for the lodging industry, grew 6.8% during the quarter, including currency exchange. The actual dollar figure for growth was 7.7%. Profit margin for North American properties grew 100 basis points, while profit margin for international properties grew 160 basis points.

While North American revPAR grew 6.6%, in the hotel industry across the United States this year it grew 9.8%. The lower revPAR compared to the industry average in the top U.S. markets is part of why the stock was sent down 7% by midday the day after the report. The EPS may have looked better than it actually was, as fewer shares, a lower tax rate and lower costs contributed to it.

Guidance Disliked
The other part of the report greeted unhappily by the market was the lowered guidance. Marriott lowered its revPAR guidance for North America for the rest of 2011 from its original 6-8% to 5-7%. It marginally lowered its earnings guidance as well. Another troublesome part of the report was on Marriott's timeshare business, which accounts for 13% of its revenue and is due to be spun off this year. Timeshare revenue declined to $163 million from $167 million in the second quarter of last year. Several analysts considered Marriott's quarter weak despite the profit increase, given what they feel was a more promising operating environment.

Other Hotels
Chains such as Hyatt (NYSE:H) and Starwood Hotels & Resorts Worldwide (NYSE:HOT), which are more upscale than Marriott, should do better in their upcoming earnings reports, as they have weaker comparable numbers to go up against. On the other hand, Choice Hotels International (NYSE:CHH) and Wyndham Worldwide (NYSE:WYN) aren't expected to post numbers as robust as the more upscale chains.

The Bottom Line
Marriott warned earlier in the year of softening demand in the United States, but noted its international demand was growing. China, India, Brazil and even Russia represent areas of continued growth opportunity for Marriott. In the second quarter, Marriott had 635 properties under development in the international markets. While the market reacted negatively to Marriott's report, some observers feel the quarter was not indicative of a trend, and that the chain would do fine in upcoming quarters. But even with Marriott's mid-scale niche, the economy continuing to falter could hurt performance. (Internal return on investment helps determine a stock's ability to propel shareholder returns. See Earnings Power Drives Stocks.)

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