Marriott Lowers Growth Outlook Ahead of Its Starwood Merger

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With its merger with Starwood Hotels & Resorts (NYSE: HOT) just weeks away, Marriott (MAR -0.84%) posted generally positive second-quarter earnings results this week. Growth was pinched by a decline in travel demand in several key markets, however, the overall profit figures reflected the durability of the hotelier's asset-light business model.

Here's how the headline numbers stacked up against the prior-year period:

YOY = year over year. Data source: Marriott's financial filings.

What happened this quarter?

Marriott benefited from continued growth in its footprint, adding 11,000 rooms to its lodging portfolio. That expansion, plus a 3% boost in revenue per average room night (RevPAR), generated 5% higher sales in Q2.

Here are the key highlights of the quarter:

• RevPAR rose by 3% in the U.S. market, after adjusting for currency changes. That marked a slight uptick from the prior quarter's 2% boost.
• International market growth also improved, with RevPAR ticking up from last quarter's 3% decline to a 1% dip in Q2.
• Marriott added 10,700 new rooms through the launch of 80 new properties.
• Franchise and management fees ticked up to $515 million, but were below Marriott's target thanks to lower-than-expected RevPAR.
• Adjusted earnings rose 18% to $1.03 per share, beating management's April forecast calling for $0.98 per share of profit.

What management had to say

Executives were encouraged by improving RevPAR despite weakness in some key markets. "While hotel performance reflected generally slower economic growth, leisure travel demand remained robust and group business performed well," CEO Arne Sorenson said in a press release. "Attendance at group meetings was on track during the quarter, group cancellations remain low and we continue to see strong future group bookings," he continued.

Regarding the upcoming merger with Starwood that will create the world's biggest hotel company, management explained that Marriott is ready to start the hard work of combining the two businesses. "After months of planning, we are confident that we will hit the ground running and are even more excited about the prospects presented by the combination of Marriott and Starwood."

Looking forward

In its updated 2016 outlook (which doesn't include the impact of the Starwood merger) Marriott dialed back its room growth target on account of several opening delays for new hotels. Executives also lowered their RevPAR forecast to 3%, compared to the 4% they targeted three months ago.

As a result of that slower top-line growth, Marriott sees adjusted earnings coming in weaker than originally anticipated. Executives highlighted the fact that its franchising and management-focused approach minimizes exposure to swings in the economic cycle. However, it doesn't completely protect the company from slower global growth, which is why the company had to downgrade its operating outlook.

Meanwhile, Marriott is likely to incur significant transition costs tied to its Starwood merger in the quarters ahead. Management said that it's impossible to predict those expenses right now, but they do know that the transaction itself should cost the company about $140 million when it closes sometime in the current quarter.