Royal Caribbean Q3 FY2021 Earnings Report Preview: What to Look For

Royal Caribbean Group Ltd. (RCL), the global cruise vacation company, suffered $5.8 billion in net losses last year as the COVID-19 pandemic spread around the world. The company's revenue nearly evaporated as passenger vacation travel plunged, and costs soared as the company's giant ships were docked in port. Now, Royal Caribbean executives see the seeds of a turnaround in 2021 as the company's cruise ships begin to relaunch and revenue rebounds.

Investors will watch to see how fast Royal Caribbean's recovery is progressing when the company reports earnings for Q3 FY 2021 before market open on Oct. 29, 2021. Analysts expect narrowing adjusted losses per share on a year-over-year (YOY) basis as revenue rises dramatically YOY, though still far below pre-pandemic levels.

Investors will also be focused on Royal Caribbean's occupancy rate, a measure of the amount of available passenger capacity, or cabins, being utilized. The company's occupancy rate fell precipitously due to the pandemic, but is expected to rise sequentially compared to the most recent three quarters. The rate still will be down sharply from the same quarter a year ago, Q3 FY 2021.

Despite the company's weak financial performance, Royal Caribbean stock has outperformed the broader market for most of the past year, though it has seen dramatic advances declines during that period. The stock staged a significant advance in late October 2020, then again in February and June 2021. It then pulled back sharply and briefly underperformed the market in late July before advancing through late September. Since then, the stock has slipped. The company's stock has provided a 1-year trailing total return of 45.5%, ahead of the S&P 500's return of 34.2%.

Royal Caribbean Earnings History

Prior to the start of the pandemic, Royal Caribbean posted at least 11 consecutive quarters of positive adjusted earnings per share (EPS). However, starting Q1 FY 2020, Royal Caribbean has lost money for six straight quarters. The company's adjusted losses per share were widest in Q2 FY 2020, when it reported -$6.13 a share. The losses have modestly narrowed YOY since that time. The one exception is Q2 FY 2021, when the company reported an adjusted loss of $5.06 a share. That loss was lower than the same quarter a year earlier, but it was sequentially bigger than the losses in Q1 FY 2021 and Q4 FY 2020. For Q3, analysts expect Royal Caribbean to report adjusted EPS of -$4.15 a share, which would be a smaller loss than the same quarter a year ago, and also smaller Q2 FY 2021.

Royal Caribbean's revenue history is similar. After a long streak of YOY quarterly revenue improvements, the company began to see revenues decline in Q1 FY 2020. These declines were dramatic, as Royal Caribbean saw negative revenue for Q3 FY 2020. In the three most recent quarters, revenue has been a fraction of what it was prior to the pandemic. Analysts now predict that revenue will make a significant leap upward for Q3 FY 2021. Still, revenue is expected to be just about 20% of Royal Caribbean's revenue in Q3 FY 2019, before the pandemic.

Source: Visible Alpha

The Key Metric

As mentioned above, investors will also be focused on Royal Caribbean's occupancy rate, or occupancy percentage, which the company refers to simply as "occupancy." It is calculated by taking the number of passengers carried during the measurement period, multiplying that by the number of days of the passengers' respective cruises, then dividing by the available passenger capacity, as measured by available passenger cruise days (APCD).

The measure of capacity assumes double occupancy per cabin, which is why occupancy rates greater than 100% are possible—sometimes cabins are occupied by more than two passengers. The entire cruise industry has suffered from a decline in occupancy amid the pandemic. Occupancy is now expected to rebound as the health risks related to the coronavirus subside, although the spreading of the Delta variant could slow that recovery.

Royal Caribbean reported occupancy rates of over 100% for each quarter from Q2 FY 2017 through Q1 FY 2020. That figure dipped to 84.5% in Q2 FY 2020 before sliding to 42.9% in Q4 of that year. It has since dropped even further, falling to just 27.5% last quarter. Analysts expect a sequential improvement to 48.5%, although this is still down significantly YOY and compared to pre-pandemic levels.