Not Exactly Cruising at Royal Caribbean

By Rick Aristotle Munarriz | More Articles
July 22, 2008 | Comments (1)

I'm a fan of those Royal Caribbean (NYSE: RCL ) ads, with Iggy Pop belting out Lust for Life as families engage in lively rock-wall climbs, watery offshore excursions, and on-board activities. Missing in the vibrant montage, of course, are the cruise executives bellyaching over the margin-crunching spike in fuel prices.

Yes, Royal Caribbean is yet another company stung by the higher cost to get around these days. Cruise ships don't run on sails, you know. The company posted a profit of $0.40 a share for its latest quarter, well below the $0.60 a share in earnings it scored a year ago, but right on target with what Wall Street was expecting.

The popularity of the industry isn't in question. Everything from load factors to pricing are running slightly ahead of last year's performance. Revenue inched 7% higher to $1.58 billion, just ahead of analyst expectations. Surprisingly, on-board revenue actually grew more than passenger ticketing revenue, indicating that guests are having no problem spending more once they get on the ships. That is great news for Rule Breakers newsletter recommendation Steiner Leisure (Nasdaq: STNR ) , which runs most of the Royal Caribbean on-board spas.

Despite the healthy performance on the surface, Royal Caribbean is trying to get its margins in check. The company will take a $0.07-per-share restructuring hit in the third quarter as it eliminates 400 shore-side jobs, a move that will trim $125 million in annual costs.

The company's guidance calls for earnings to hit the dock between $2.55 and $2.65 a share for the year, with a good chunk of that coming during the current seasonally potent quarter. However, that is based on current fuel prices. Anyone watching crude oil commodity prices hop around in recent days knows that volatility will continue, swinging Royal Caribbean's estimates along the way.

That will be the story of the industry for now, as leading players like Carnival (NYSE: CCL ) (NYSE: CUK ) , NCL, and Disney (NYSE: DIS ) go with the wave of fuel prices that have soared 55% on Royal Caribbean over the past year. Figuratively speaking, they're in the same boat.

The positive kicker here is that cost-slashing initiatives today will pay off big once the fuel market stabilizes.

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Royal Caribbean and Disney are Stock Advisor recommendations. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz lives in Miami, where taking cruises is a local ritual. He does not own shares in any of the other companies mentioned in this story, save for Disney. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

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Report this Comment On July 30, 2008, at 7:45 PM, 2foolishme wrote:

That depends on how they cut costs, and if you ask me, they are going about it the wrong way. I just did a 12 night Med cruise on RCCL, and was very disappointed in the food quality. Not only was the food of poor quality, they also cut out the midnight buffet, the 24 hr restaurant service (room service was only stuff like sandwiches), the chocoholic buffet, etc. The only decent food was at their "additional cost" venues, Chops and Portofino, where for $20-$25 per person you could get the food you were supposed to be getting everyday.
I'm headed back to NCL and HA for future cruises. RCCL is circling the drain, in my opinion.

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