Global hotel operator Choice Hotels International (CHH +1.10%) reported third-quarter 2018 results on Thursday and supplemented accelerating sales with an earnings-outlook revision. Below, we'll uncover the relevant details of the last three months after reviewing a capsule summary of headline metrics:
Choice Hotels: The raw numbers
| Metric | Q3 2018 | Q3 2017 | Growth (YOY) |
|---|---|---|---|
| Revenue | $291.5 million | $269.9 million | 8% |
| Net income | $79.9 million | $57.2 million | 39.7% |
| Diluted EPS | $1.41 | $1.01 | 39.6% |
Data source: Choice Hotels International. EPS = earnings per share. YOY = year over year.
What happened with Choice Hotels this quarter?
- Hotel franchising revenue increased by 9% year over year, to $135.4 million.
- Marketing and reservation system revenue of $152.4 million improved by 7% against the third quarter of 2017.
- Domestic systemwide RevPAR (revenue per available room) dipped by 1.4%, to $59.52, versus the comparable period. Management attributed the decline to hotel renovations in the Comfort brand, weather-related factors, and the timing of holidays.
Image source: Getty Images.
- Average daily rates (ADR) dropped 0.9% versus the prior-year quarter, and occupancy declined by 1.6 percentage points (both measures are used in determining RevPAR).
- Operating margin rose 3.7 percentage points year over year, to 38.1%, primarily due to the leverage provided by a healthy top-line increase.
- The company introduced "Clarion Pointe," which management describes as a "midscale select-service brand extension" of its popular Clarion brand hotel chain.
- The company reported that over 1,000 Comfort brand hotels are either undergoing lobby and room renovations or have completed the process, which is ahead of the scheduled pace.
- Choice Hotels' opening of 76 new domestic hotels during the third quarter exceeded the prior year tally by 27%.
- Similarly, the organization's domestic development and construction pipeline at the end of the quarter stood at 968 hotels, an increase of 29% over the prior-year's quarter-end number.
- Choice Hotels refinanced its senior unsecured credit facility with a new five-year facility, raising the total amount available for borrowing from $450 million to $600 million.
- The company purchased $39 million of its own shares during the last three months, bringing its year-to-date total through Sept. 30 to $109 million.
Management's perspective
Choice Hotel's strategy of largely staying out of the owner/operator model and instead franchising brands across several tiers -- from economy flags such as Econo Lodge to the upscale Cambria chain -- appears to be paying dividends in the form of double-digit year-to-date revenue growth and enviable operating margin. CEO Patrick Pacious summarized management's perspective in the company's earnings release:
Our year-to-date development success and strong financial metrics prove our strategy is working, positioning us for further growth ... As an asset-light franchisor, we excel at helping our owners run profitable hotels by providing them with best-in-class tools, including a proven and expanding brand portfolio, award-winning revenue-enhancing resources, and industry-leading technology systems. We are extremely pleased with the initial reception received by Clarion Pointe, and are optimistic that we'll end the year on a high note with another successful quarter, taking us into 2019 with strong momentum."
Looking forward
As it did last quarter, Choice Hotels raised its full-year expectation for adjusted EBITDA. Management tweaked the previous range of $333 million to $339 million to a new band of $335 million to $340 million. The company also bumped up its adjusted diluted 2018 EPS target of $3.71-$3.77 to an anticipated result of between $3.79 and $3.86.
For those like myself who prefer GAAP numbers, Choice looks to close out the year with between $210 million and $214 million in net income, which will translate into diluted EPS of $3.68 to $3.75.
