Hospitality giant Choice Hotels International (CHH -1.18%) achieved decent revenue growth, if lower net income, in the second quarter of 2019. Results released Tuesday before the markets opened illuminated a stabilization of revenue per room as the international hotel franchisor continued its brisk pace of unit expansion. As we dive into the quarter below, note that all comparative numbers refer to those of the prior-year quarter.

Choice Hotels: The raw numbers

Metric Q2 2019 Q2 2018 Change
Revenue $317.7 million $295.4 million 7.5%
Net income $74.4 million $79.8 million (6.8%)
Diluted EPS $1.33 $1.40 (5%)%

Data source: Choice Hotels International. EPS = earnings per share.   

What happened with Choice Hotels this quarter?

  • Domestic RevPAR (revenue per available room) declined by 0.1%. This is an improvement over the 0.7% RevPAR decrease in Choice's first quarter of 2019, and it's also in line with the company's full-year expectation of 0% to 1% RevPAR growth.
  • The company relayed to investors that its multiyear, $2.5 billion upgrade of its flagship Comfort Hotels brand is nearly complete, and that just one-third of Comfort units will be under renovation in the second half of 2019. Management stated that Comfort-branded properties with completed renovations are enjoying higher business and leisure travel, and outperforming competitors in RevPAR by 60 basis points.
  • Royalty fees revenue improved by 3% to $106.4 million.
  • Marketing and reservation system fees expanded by 10% to $172.5 million. However, marketing and reservation system costs rose at a rate of 17%, to $160.1 million. The decreased profitability in marketing and reservation system services was the key factor behind Choice's lower net income during the quarter.
  • Procurement services revenue rose 17% to $20.8 million. Though still a small portion of the company's overall top line, procurement services in support of franchisee groups is the company's fastest-growing revenue stream.
A leafy, semi-tropical hotel courtyard.

Image source: Getty Images.

  • Choice recorded a $4.6 million loss on sale from the disposition of a subsidiary unit that provides European vacation rental companies with software-as-a-service (SaaS) technology. The company had recorded an impairment charge of $10.4 million related to this business in the first quarter. 
  • The organization continued to develop its upscale segment, increasing the number of rooms under the Cambria and Ascend brands by 16%.
  • Domestic franchised hotels and rooms expanded by 2% and 2.1%, respectively, while international franchised hotels and rooms expanded by 4.1% and 5.4%, respectively.
  • Choice's domestic hotel development pipeline widened by 4% to 988 properties, and impressively, its international hotel pipeline jumped 63% to 123 properties.
  • After quarter-end in July, the company bought out the remaining equity interest of a partner in a joint venture that held "four key Cambria hotels." Choice Hotels' increased presence in the upscale market is part of an initiative to diversify its base into more midscale and higher-end portfolio brands. The buyout of the joint venture partner brings Choice's total investment in the Cambria brand to $553 million.
  • The organization completed share repurchases worth approximately $10 million during the quarter, bringing total repurchases year to date to $42.4 million.

Management's perspective

As it seeks to refresh its image among travelers, Choice Hotels will continue to direct resources to renovation and upper-tier brand extensions in the near future. CEO Patrick Pacious discussed the impact of this brand enhancement and diversification strategy in the company's earnings press release:

We're pleased to report another quarter of excellent financial performance and a positive outlook for the remainder of the year. We're especially pleased that the transformation of our flagship Comfort brand is progressing on schedule and paying off: renovated hotels are outperforming the segment and capturing more business travel while developer demand remains strong. Additionally, our strategic investment in the upscale Cambria brand is propelling its rapid growth across the country -- this summer alone, seven Cambria hotels are expected to open their doors in top-tier markets, which, together, represent more than 1,200 upscale rooms that will join our upscale portfolio.

Looking forward

After trimming full-year 2019 estimates last quarter, Choice Hotels revised its earnings outlook again -- in a positive direction -- at the midpoint of the year. The company now anticipates net income of $200 million to $206 million in 2019, against a previous band of $186 million to $196 million. Similarly, diluted EPS are expected to fall between $3.58 and $3.68, versus the earlier outlook for $3.31 to $3.49.

Full-year adjusted EBITDA is estimated at $358 million to $363 million, or roughly $2 million higher than previous guidance at the midpoint of the range. The company is targeting adjusted EPS of $4.16 to $4.22, or $0.07 higher than the estimate from last quarter at the midpoint of the range. 

For the third quarter, domestic RevPAR growth should land between 0% and 2%. As for earnings, Choice is targeting adjusted EPS of between $1.25 and $1.29 for the current three-month period, on which it will report to shareholders in early November.