Carnival Posts Strong Growth and Boosts Its 2018 Outlook

There's no sign of rough seas ahead in the cruise ship industry. Instead, Carnival (CCL 0.11%) just announced fiscal second-quarter earnings results that sailed past management's guidance for the second straight quarter.

Vacationers booked cruises at higher prices while spending more on onboard offerings like spas and upgraded meal options, and the boost set Carnival up for stronger 2018 gains than management had predicted back in March.

More on that improving 2018 outlook in a moment. First, here's how the latest results stacked up against the prior-year period:

Data source: Carnival's financial filings.

What happened this quarter?

Sales soared past management's target for the second consecutive quarter thanks to healthy vacation demand and increased spending on Carnival's ships. Cost growth was subdued, too, which led to a nice jump in profitability.

Image source: Getty Images.

Highlights of the quarter include:

• Net revenue yields, Carnival's core growth metric, improved 4.8%. That marked an acceleration over the prior quarter's 3.9% spike and also passed the high end of the guidance range of between 2.5% and 3.5% that management provided back in March . The company booked double-digit growth in overall ticket sales and an 8% increase in onboard spending.
• As expected, cost growth accelerated, with expenses rising 3.6% compared to a 1% uptick in the prior quarter. However, that performance was better than management had predicted.
• Operating income expanded by just over 10% to $559 million, and fuel hedges contributed to a spike in net income to $561 million from $379 million a year ago. Adjusting for the volatile fuel charges still left earnings higher by 30% to $489 million.

What management had to say

Executives highlighted progress on both the top and bottom lines during the spring season. "We delivered another strong quarter," CEO Arnold Donald said in a press release, "again achieving record adjusted earnings on record revenues and exceeding the high end of our guidance range."

The management team credited strong operational execution with pushing adjusted earnings higher and said the results "affirm[] the strength of our core strategy to create demand that outpaces measured capacity growth through outstanding guest experience efforts."

Looking forward

Donald and his team still plan to add 18 ships to the fleet over the next five years in hopes of expanding capacity at a pace that doesn't threaten pricing. And so far that strategy is working, given that Carnival's booking trends are holding steady despite higher average ticket prices.

Executives' outlook for the current quarter predicts a slowdown in growth and an increase in costs, and that forecast was likely the key reason why investors sent the stock lower immediately following the earnings release.

Yet the surprisingly strong demand of the last few quarters powered a modest upgrade to the cruise giant's 2018 forecast, as executives now see revenue yields rising by 3% compared to the prior outlook of 2.5%. Carnival still believes costs will expand at a much slower 1% pace this year, which helps explain why the company felt flush enough to boost its dividend and its stock repurchase spending amid healthy demand for its cruises.