Marriott International (NASDAQ:MAR) topped analyst profit estimates in the second quarter, with 3% earnings growth over Q2 2015, but it cut its guidance for the rest of 2016. Marriott CEO Anne Sorenson said during the earnings call that multiple headwinds were to blame for the lowered guidance, and she laid out risks that could hurt earnings even more.
Here are three risks that Marriott faces.
1. Slowing U.S. economic growth
Of Marriott's 4,500-plus properties and nearly 780,000 rooms, about 60% of those are in North America, mainly in the United States. The U.S. economy's sluggish GDP, which grew just 1.2% in Q2, is starting to take a toll on Marriott's business travel growth prospects.
During the past three quarters, room sales from Marriott's largest 300 corporate customers slowed from 4% year over year in Q4, to 2% in Q1, and just 1% in Q2. Business travel could continue downward if U.S. economic growth remains slow or retreats.
Said Sorenson during the conference call: "We would continue to expect that leisure travel is going to be stronger than business travel. ... you might say that we're bearing some of the consequences of the incredibly pessimistic mood that corporate America had as 2016 began ... we're essentially forecasting a kind of steady-state weak corporate transient demand, not falling off a cliff in any respect but just sort of continuing to bump along."
It's not all bad news. Marriott management noted that group travel, such as for conventions, remains strong, as does the discounted leisure business segment, which has "picked up the slack," according to Sorenson. Revenue per available room (RevPAR) remains strong and rose 3.2% during the quarter, thanks to those other segments. Still, continued sluggish U.S. economic growth could stunt future growth in these segments.
2. Terrorism and political unrest
International growth is an important aspect of Marriott's long-term plan, especially given what it's seeing in the U.S. Marriott has been aggressive about adding to its portfolio around the world both with new hotel construction and by acquiring local brands, such as the Protea Group, which Marriott acquired in 2014 along with its 116 properties across Africa.
The devastating violence in places like France and Turkey in the past few months have had a meaningful negative impact on international RevPAR, according to management. International RevPAR was down 1% in the quarter year over year. Part of that international RevPAR decline is due to the strengthening U.S. dollar, which makes foreign sales look weak when translated back to greenbacks, but even when adjusting for currency swings, international RevPAR growth was just 2%, dragged down by a 7% decline in the Middle East and Africa region.
Marriott is still very focused on growing its total number of rooms worldwide, with more than 285,000 rooms in the pipeline, more than a third of which are outside North America. Sustained or increased terrorism attacks would probably continue to negatively affect non-essential travel to areas perceived as higher risk, which could continue to hurt Marriott's international RevPAR growth prospects.
3. China's review of the Starwood merger
The merger between Marriott and Starwood Hotels and Resorts Worldwide (NYSE:HOT) will make the largest hotel company in the world by market cap and total number of rooms, beating out current leader Hilton Worldwide (NYSE:HLT). "The big news this year for Marriott is the Starwood acquisition," Sorenson said during the call.
Marriott got the necessary clearance for the merger in most markets within a few months of the planned merger's announcement. However, in China, the last market needed to sign off, the regulatory approval process has not been completed. While Marriott management said during its July 28 conference call that it was confident a decision would be made in the coming weeks, on Monday, the company said the China review process had entered phase 3, which could last up to 60 days.
Marriott won a bidding war for Starwood against Chinese investment company Anbang and there is a risk that the Chinese government could reject the merger within China.
Regardless of risks, Marriott still looks strong
Even facing headwinds, Marriott posted better-than-expected earnings per share of $0.96 in the second quarter, a 10% increase from the prior year. While RevPAR was just under guidance at 2.9% growth, the forecast for the third quarter remains at an expected 3%-4% growth year over year. Additionally, Marriott stock looks cheap compared with the kind of EPS growth it's posting. The stock currently trades at 21 times earnings and just 16.9 times times 2017 earnings estimates.
Marriott is continuing to thrive in the U.S. market with group sales, is doing what it can to ensure its guests are safe in its hotels throughout the world, and is confident in its team in China that regulators there will approve the Starwood merger deal. Regardless of the risks, Marriott looks well-positioned for more future growth.