Lately, a booming U.S. economy has helped to bolster the health of the travel industry. Hotel giant Marriott International (NASDAQ:MAR) has been one of the biggest beneficiaries of that trend, and its acquisition of Starwood Hotels & Resorts two years ago grew its exposure to industry at what turned out to be a great time. However, the travel business is also cyclical, and some investors have wondered whether Marriott will be able to ride out an economic downturn whenever it comes.
Coming into Monday's third-quarter financial report, Marriott investors were hoping that the hotel company would stay on course with solid and consistent growth. Although the quarter was a good one for Marriott, its projections for 2019 suggested that a long-feared slowdown could be right around the corner.
How Marriott did
Marriott's third-quarter results showed the extent to which the hotel leader has been able to make the most of its opportunities in the industry. Gross fee revenue of $932 million was higher by 13% from year-earlier levels, although total revenue actually fell by a fraction of a percent due to pressure on cost reimbursements. Adjusted net income soared 51% to $598 million, and that resulted in adjusted earnings of $1.70 per share, easily topping the consensus forecast among investors for $1.31 per share.
Not all of Marriott's fundamental measures of performance were quite as encouraging. The hotelier managed to boost comparable systemwide revenue per available room, or RevPAR, from year-earlier levels, but the overall 1.9% growth rate was only half what Marriott achieved in the second quarter of 2018. North America was especially slow, with comparable RevPAR climbing just 0.6% and holding back solid international growth of 5.4% outside North America. Incentive fee growth slowed to just 9%, with Europe and the Asia-Pacific region being the biggest contributors to the gains in the number.
Even so, Marriott did see some positives. Base management and franchise fees climbed at a 14% pace during the quarter, up two percentage points from its results three months ago. Unit growth and higher credit card and branding fees helped to add to the impact from higher revenue per available room. Moreover, the hotelier kept expanding, with 106 new properties adding more than 18,000 rooms to its network during the quarter. Marriott has just under 1.3 million rooms available to customers, and its development pipeline has another 471,000 potential rooms at almost 2,800 properties worldwide.
CEO Arne Sorenson was happy with how things have gone, especially on the acquisition front. "It's been just over two years since the completion of the Starwood acquisition," Sorenson said, and "we are in the home stretch on integrating the companies and are pleased with the results." The CEO also noted that the joining of the two legacy loyalty programs into a single unit has been able to reward its top customers for their commitment to Marriott during the transition.
What's next for Marriott?
One of the most impressive things that Marriott has accomplished is the breadth of its hotels. Its namesake Marriott remains a stalwart among its stable of brands, with nearly 200,000 rooms in buildings carrying the Marriott name. Yet other brands like Sheraton and Courtyard also have more than 100,000 rooms in the network, and niche concepts like the upscale Ritz-Carlton and Le Meridien properties appeal to discerning travelers with disposable income to spend.
Yet what disappointed some investors was Marriott's outlook. Fourth-quarter RevPAR for North America will climb just 1%, as the company got a boost last year from hurricane relief efforts that led to higher occupancy rates. International growth of 5% to 6% should lead to roughly 2% gains across the global network. Gross fee revenue will likely rise just 4% to 6%, and earnings of $1.37 to $1.41 per share would be disappointing compared to investor expectations of $1.50 per share.
Full-year projections also raised some concerns. For 2018, gross fee revenue of $3.628 billion to $3.638 billion and earnings of $6.15 to $6.18 per share would be mixed in most investors' eyes. Marriott issued its initial 2019 guidance, and with just 1% to 3% growth in RevPAR in North America, the hotelier could see systemwide comps growth slow to 2% to 3% despite reasonable gains of 3% to 5% internationally.
Marriott investors weren't happy with the possibility of a slowdown, and the stock fell 6% in premarket trading Tuesday following the late-Monday announcement. Marriott has the capacity to outdo itself and beat its own guidance, but shareholders don't seem ready to see that as a foregone conclusion without seeing how the next few months play out.