Carnival Corporation (NYSE:CCL) sailed into multiple headwinds in its fiscal second quarter of 2019, and consequently dialed back earnings estimates for the full year. Shareholders reacted with dismay, pushing Carnival shares down by 10% at midday on Thursday following the earnings release. Let's dive into the quarter's details below, and review the various pressures that have crimped the cruise line's prospects for fiscal 2019. Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter.

Carnival: The raw numbers

Metric Q2 2019 Q2 2018 Growth (YOY)
Revenue $4.8 billion $4.4 billion 9.1%
Net income $451 million $561 million (19.6%)
Diluted earnings per share $0.65 $0.78 (16.7%)

Data source: Carnival Corporation. YOY = year over year. 

What happened this quarter?

  • Increased capacity utilization and higher onboard spending resulted in a near double-digit jump in the organization's top line.
  • Despite the improved revenue, an escalation in operating expenses proved a drag on net income and earnings per share. Notably, the commissions and transportation expense category rose 6% to $613 million, while fuel expense jumped 13.4% to $423 million.
  • The company noted that the higher fuel expense, coupled with the impact of foreign currency translation, decreased earnings per share by $0.09 against the prior-year period.  
  • Net revenue yields (net revenue divided by total available passenger cruise days) improved by 0.6% in constant currency terms, ahead of management's guidance for flat performance.
  • Operating margin slipped by 220 basis points to 10.6% due to the income statement headwinds mentioned above. 
Sunset as seen from the window of a cruise ship.

Image source: Getty Images.

Multiple headwinds compress the earnings outlook

Carnival shared a bevy of internal and external factors on Thursday that caused management to lower full-year per share earnings estimates.  Most visibly, the U.S.'s recent regulatory change regarding travel to Cuba is expected to impact per share earnings by $0.04 to $0.06. This impromptu change in policy in early June left Carnival and its competitors scrambling to reroute customers who were en route to the island nation. 

Of more significant impact are the voyage disruptions faced by the Carnival Vista following a recent technical issue affecting the ship's maximum cruising speed. Carnival has canceled the July 6, July 13, and July 20 departures of the Vista. This disruption is anticipated to drag on full-year earnings per share (EPS) by $0.08 to $0.10.

The company noted that booking trends are under pressure in continental Europe due to "ongoing geopolitical and macroeconomic headwinds," which investors can read as the continuing uncertainty surrounding Brexit. Carnival expects that lower yields in Asia and Europe will offset positive yield performance in its North American and Australian brands.

These headwinds, combined with the fuel and currency impacts discussed above, caused management to reduce full-year fiscal 2019 adjusted EPS to $4.25 to $4.35, versus a previous projection of $4.35 to $4.55.

As for the third quarter, Carnival anticipates that net revenue yields will be flat to slightly down versus the comparable prior-year period. Net cruise costs are expected to rise between 0.5% and 1.5%. However, fuel costs and foreign currency translation will provide a per share benefit of $0.03 in the coming quarter. The company expects adjusted EPS in the third quarter of $2.50 to $2.54, versus $2.36 in the third quarter of fiscal 2018.

Management's perspective

Though investors balked at the change of course regarding Carnival's financial outlook, management stressed that an encounter with suddenly choppy waters doesn't undermine the cruise line's longer-term prospects. To this point, I'll leave you with the perspective provided by CEO Donald Arnold in today's earnings press release:

Over the past five years we have demonstrated our ability to overcome multiple headwinds and deliver strong operational improvement. This year our growth has been hampered by a confluence of events, which we are focused on mitigating. Generating over $5 billion of cash flow and with a robust business model, our business is strong and we remain confident over time we will deliver double-digit earnings growth and growth in return on invested capital.