For just over a year now, investors have taken a more cautious approach to Carnival's (NYSE:CCL) business. It's not that the cruise ship leader is having trouble filling its vessels these days. The company hasn't struggled to find growth in key financial metrics, either. Instead, Wall Street has pushed shares lower on the prospect of slower sales gains and the potential for weaker earnings as fuel prices spike.
These are both short-term concerns, but they're still worrisome enough to spook many investors. The challenges impacted Carnival's most recent earnings report -- without knocking the vacation specialist off of its broader growth trajectory.
Sales are up
Carnival cruised past each of its quarterly sales growth forecasts in 2018, but the company is just meeting its more modest predictions so far this year. For the fiscal first quarter, net cruise yields inched higher by less than 1%, or about even with management's December prediction of a flat result. Carnival notched a 4% spike in that metric last year.
The company is carrying more passengers, and its ships' occupancy levels remain strong. Onboard spending is surging, too. However, prices aren't rising at nearly the pace they have been in recent years, and that trend is pressuring revenue growth today.
Check out the latest earnings call transcript for Carnival.
Costs are rising faster
Meanwhile, Carnival is seeing several financial factors combine to pinch profitability. Net cruise costs grew at nearly double the pace of revenue growth, and management said the increase would have been larger still if not for the timing of its spending.
Fuel prices jumped, too, and exchange rate movements also reduced reported profits. Altogether, adjusted net income fell to $338 million, or $0.49 per share, compared to $375 million, or $0.52 per share, a year earlier.
These issues weighed on Carnival's short-term profit guidance, with CEO Arnold Donald and his team now seeing earnings landing at between $4.35 per share and $4.55 per share in 2019, down from the prior forecast of between $4.50 per share and $4.80 per share.
A bright future
Still, the fundamentals of the company's core growth outlook were unchanged. Executives still believe net revenue yields will rise by about 1% for the full year to mark a slowdown from the 4% gain last year and the 3% increase in 2017.
Speaking about the latest demand trends, management said, "Advanced bookings for the remainder of 2019 are ahead of the prior year at prices that are in line with the prior year." The company has also secured more of its bookings than usual at this time of year, so revenue is likely to closely track management's updated prediction. Costs are still on pace to rise at a slower speed than revenue after accounting for those volatile swings in fuel prices and currency exchange rates.
Altogether, Carnival is delivering exactly what management has been predicting: slower but still healthy growth along with continued improvements in key financial metrics like profitability, cash flow, and return on invested capital. With global demand only inching higher, its strategy involves building capacity at a measured pace while doing its best to improve the onboard vacation experience through ship upgrades.
These successes alone won't be enough to spark a return to the 3% or higher sales growth that investors have seen from Carnival in recent years. But they'll strengthen the industry leader's premium position in the cruise industry and set it up for better gains when the market accelerates again.