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Starwood (HOT) Beats Q1 Earnings on Solid RevPAR Growth

Leading hotelier Starwood Hotels & Resorts Worldwide Inc.’s HOT first-quarter adjusted earnings of 70 cents per share easily beat the Zacks Consensus Estimate of 58 cents by 20.7%. Earnings were also above management’s expected range of 56 cents to 59 cents. Moreover, reported earnings climbed 7.7% year over year mainly on the back of higher margins.

Revenues, on the other hand, decreased a marginal 0.8% to $1.40 billion mostly due to a decline in contribution from owned, leased and consolidated joint-venture hotels, and lower vacation ownership revenues. These were offset by a rise in other revenues from managed and franchised properties, and higher management fees, franchise fees and other income.

However, revenues beat the Zacks Consensus Estimate of $1.35 billion by 3.7%.

Inside the Headline Numbers

Starwood earns a major portion of revenues from its hotel business. Apart from this, the company derives revenues from the vacation ownership business.

Hotel Business

Owned, Leased and Consolidated Joint Venture Hotels

Revenues at owned, leased and consolidated joint venture hotels plummeted 16.1% year over year to $265 million. However, worldwide RevPAR for Starwood’s same-store owned hotels grew 5.3% in constant dollars, led by a 5.4% and 5% increase in North America and overseas RevPAR, respectively.

Management and Franchise Revenues

Management fees, franchise fees and other income increased 6.7% to $265 million. Worldwide system-wide RevPAR for same-store hotels went up 1% (in constant dollars) backed by 2% RevPAR growth in North America.

System-wide RevPAR dipped 0.2% internationally, mainly due to RevPAR declines in Latin America, and Africa and the Middle East.

Starwood’s Asia business is divided into two parts – Greater China and Rest of Asia. RevPAR in Greater China inched up 0.5%, while that in the Rest of Asia rose 5%. Europe also performed decently, with RevPAR growth of 1%.

In terms of brands, Starwood’s Westin brand recorded highest RevPAR growth of 7.5%, followed by Aloft, which recorded RevPAR growth of 2.8%.

Vacation Ownership and Residential Sales and Services

Total revenue from vacation ownership and residential sales and services slipped 1.1% year over year to $185 million as vacation ownership revenues declined.

Other Revenues from Managed and Franchised Properties

Other revenues from managed and franchised properties increased 3.9% year over year to $698 million.

Margins and EBITDA Update

Worldwide same-store company-operated gross operating profit margin was up 15 basis points (bps), due to higher margins in international gross operating profit margins. Adjusted EBITDA was $281 million, up 2.6% year over year.

2016 Guidance

Starwood expects 2016 EPS within the $3.00–$3.06 band. The Zacks Consensus Estimate stands much lower at $2.79. Foreign exchange is expected to have a negative impact of approximately $1 million on 2016 earnings.

Earnings from the company’s vacation ownership and residential business are expected to be $65 million to $70 million. This consists of approximately $59 million of vacation ownership earnings and approximately $6–$11 million of residential earnings in the first four months of 2016.

RevPAR at same-store system-wide hotels worldwide is expected to be 2–4% in constant dollars.

RevPAR growth at same-store owned hotels is likely to be 2–4%.

Management fees, franchise fees and other income are likely to increase about 6–8%. Core fees are expected to rise roughly 5.5–7.5%.

Further, the company continues to expect selling, general and administrative expenses to decline 3–5% compared to the prior expectation of flat to down 2%. Also, worldwide same-store owned hotels margin is likely to go up 100–150 bps, up from the prior guidance of 50–100 bps.

Guidance for Second-Quarter 2016

For the second quarter, earnings per share are expected to be 69–74 cents. The Zacks Consensus Estimate of 72 cents lies within the guided range.

Starwood expects worldwide same-store system-wide hotels RevPAR to grow 2–4% (in constant dollars). RevPAR at same-store company-owned hotels is expected to grow 2–4% in constant dollars. Management fees, franchise fees and other income are projected to rise roughly 6–8%.

Earnings from the company’s vacation ownership and residential business are expected be to $15 million to $20 million. Additionally, adjusted EBITDA is likely to be in the $275–$285 million range.

Other Events

On Apr 29, 2016, Interval Leisure Group, Inc. and Starwood announced a brief delay in the  closing of Interval Leisure’s acquisition of Vistana, Starwood’s vacation ownership business, due to certain tax-related issues. The acquisition was previously expected to close on Apr 30, 2016, and is currently scheduled in May.

On Apr 8, 2016, and Starwood and Marriott International, Inc. MAR announced that their stockholders have approved the proposed acquisition at their individual shareholders meet. The deal is expected to close in mid 2016. Per the deal, Starwood’s shareholders will receive 0.8 shares of Marriott, along with $21.00 in cash for each Starwood share. In addition, they will receive a separate consideration from the spin-off of the company’s timeshare business – Vistana Signature Experiences. The deal was announced last November and would create the world's largest hotel company.

Our Take

Starwood is expected to benefit from the economic revival and steady rise in demand for hotels. Moreover, demand growth is expected to exceed supply growth through the rest of the year, allowing hoteliers to increase room rate and thus improve RevPAR.

Additionally, Starwood’s strong developmental pipeline, significant international exposure, asset disposition strategy and shift to a fee-based business model are expected to bode well over the long run.

However, we are concerned about the company’s declining residential business revenues, which could continue to hurt the top line in the near term. Also, the lingering political uncertainty in Europe, Latin America and some parts of Africa, and an economic slowdown in China remain headwinds.

Starwood presently has a Zacks Rank #4 (Sell).

Better-ranked stocks in the same industry are Marriott Vacations Worldwide Corp. VAC and Hyatt Hotels Corporation H. Both carry a Zacks Rank #2 (Buy).

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STARWOOD HOTELS (HOT): Free Stock Analysis Report
MARRIOTT INTL-A (MAR): Free Stock Analysis Report
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MARRIOT VAC WW (VAC): Free Stock Analysis Report
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