Why China Lodging Shares Tumbled

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Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of China Lodging Group (NASDAQ: HTHT  ) were getting abandoned today, dropping as much as 14% after the hotelier reported quarterly results last night.

So what: Sales grew at a brisk clip, up 35.7% in the fourth quarter, to $141.8, and China Lodging finished with $2.9 million in net income for the period, or $0.29 per ADS when adjusted for non-recurring costs. Analysts had expected EPS of $0.56, however, and the sales figure actually represented a 1.2% sequential decline. Earnings were also down from a year ago as costs outpaced sales, which seems to have alarmed investors. Despite the sequential decrease, management still expects strong growth in 2013, seeing a 26% to 29% increase in top-line sales for the year, and 30% to 32% in the first quarter, ahead of analyst expectations.

Now what: Investors seem to be scared about the drop in net income that China Lodging delivered, which management blamed on cost inflation and the impact of opening 77 leased hotels in the second half of the year. Those hotels did not have the opportunity to contribute normal revenue levels. China Lodging's business has seasonality, and makes most of its money in the second and third quarters. Despite the drop, signs seem to indicate the long-term business is on track, and I expect the drop in profits to be a one-off event.

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