Heading into its second-quarter report, investors had cause for optimism that Carnival (CCL 3.50%) might announce improving operating trends as it progressed deeper into fiscal 2019. Sure, the cruise ship giant reduced its outlook in the first quarter as ticket demand worsened in key areas like Europe. However, rival Royal Caribbean (RCL 3.00%) announced surprisingly strong gains in early May and boosted its outlook for the full year, suggesting industry trends were improving.
Carnival did indeed beat sales and profit expectations for the quarter that just closed. However, in its earnings report out Thursday the company said that demand trends moved sharply lower in a few key markets recently, and that this shift convinced management to reduce its growth outlook for the second straight time in 2019.
Let's dive right in.
The Carnival Elation cruise ship is shown here docked on Grand Turk island. Image source: Carnival
Solid results
The second-quarter results were just a bit better than management had predicted back in late March. Carnival's net revenue yields rose by 0.6% to modestly outperform executives' flat forecast. That trailed Royal Caribbean's 9% spike by a wide margin, but it also showed Carnival had no problem packing its ships with guests. Once on board, meanwhile, those customers spent freely on activities, food, and entertainment. With currency exchange shifts accounted for, cruise revenue rose 5% to $3.8 billion.
Expense growth was more muted than expected, too, with gross cruise costs falling 1.3% rather than rising 1%. These successes, plus the timing of a few key expenses, led to adjusted earnings per share of $0.66, or about $0.08 per share above the outlook that CEO Arnold Donald and his team had issued.
A sinking outlook
The modestly positive second-quarter results were overwhelmed by a tough outlook for the remainder of fiscal 2020. Management said that, since late March, prices have drifted lower as cruise demand weakens in Europe. Executives cited geopolitical and macroeconomic factors as the main driver behind that slowdown. At the same time, new restrictions on travel to Cuba are shifting vacations away from that profitable destination.
All told, mostly negative developments over the last few months have management now expecting net cruise yields to be flat this year after rising by 4% in 2018. They had recently predicted a 1% uptick in that core growth metric.
Carnival also lowered its earnings outlook for the second straight quarter and now sees profits ranging between $4.25 per share and $4.35 per share, down from the prior target of between $4.35 and $4.55. At the midpoint, that guidance implies 5% growth compared to a 12% spike last year.
Management's confidence
Executives still expressed confidence that the business will navigate through these challenges and achieve better long-term financial results, just as it has over the last five years. Donald says management feels good about its ability to quickly return to the double-digit earnings growth pace it has targeted over the long term. "This year our growth has been hampered by a confluence of events, which we are focused on mitigating," he explained.
Investors will have to be patient in waiting to learn about the timing of any potential rebound, though, since Carnival expects pricing and demand trends to remain weak through the second half of fiscal 2019.
