Carnival (NYSE:CCL) recently announced earnings results for its fiscal third quarter, which includes some of its strongest sales months of the year. The leading cruise ship operator outpaced management's growth targets for the third straight quarter while posting modest profit gains. Its outlook predicted a slight slowdown in vacation traffic growth, though, as the company works to find and maintain the ideal balance between demand and supply. 

 Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$5.8 billion

$5.5 billion

13%

Net income

$1.7 billion

$1.3 billion

31%

Earnings per share

$2.42

$1.84

32%

Data source: Carnival's financial filings. 

What happened this quarter?

Sales gains edged past the guidance that CEO Arnold Donald and his team had issued back in June, and costs took a surprising, but likely temporary, dip. These metrics kept Carnival on pace to meet, or slightly exceed, its fiscal-year targets.  

A cruise ship at sea.

Image source: Getty Images.

Highlights of the quarter include:

  • Net revenue yields, a core growth metric, rose 2.9% to mark a slowdown from the prior quarter's 4.8% spike. The gain outpaced the target range that executives had predicted of between 1.5% and 2.5%. Carnival hosted 3.56 million passengers over the seasonally strong period, up from 3.44 million a year ago.
  • Ticket spending increased 5.2% while onboard spending, which accounts for about one-quarter of the business, rose 7.6%.
  • Costs came in slightly lower than expected, rising 2.7% compared to the June forecast of an increase of between 3% and 4%.
  • Carnival spent $750 million repurchasing its stock, representing a significant acceleration in its buyback pace, which was $375 million in the prior quarter.

What management had to say

Executives said they were happy with the results, especially since they helped generate funds that the company could direct toward shareholder cash returns. "Strong execution delivered the highest quarterly performance in our company's history," Donald said, "overcoming fuel and currency headwinds."

He continued, "At the same time, we remain committed to returning cash to shareholders as evidenced by the growth in our recurring dividend, currently distributing $1.4 billion annually, accompanied by our recently replenished share repurchase program."

Looking forward

Carnival lifted its full-year growth forecast and now expects gains of about 3.5%, up from the 3% it projected back in June. But investors were more interested in its outlook on demand trends heading into fiscal 2019.

Vacation booking volumes are running higher for the first half next year, management said, but at higher prices. Those trends should translate into additional positive net revenue yields in 2019 that nonetheless are weaker than investors have seen over the last few quarters.

Looking further out, the company aims to expand the capacity of its cruise offerings at a measured pace so that prices continue rising at a slightly faster pace than costs. There are now 20 ships on order set to join the fleet between now and 2020, while a few of its older vessels rotate out of service.

Some regions will always outperform others due to a temporary overcapacity, as investors saw with the Caribbean this quarter. Yet management believes Carnival's overall 5% annual available room growth should support a steady, double-digit return on invested capital while powering healthy earnings gains through a wide range of operating conditions.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.